Heightened awareness of the environmental impact of passive energy use are contributing to a changing climate in the energy sector in more ways than one, but what role will smart meter billing play in an energy market that rewards the efficiency of utility companies, rather than their profligacy, ponders Karl Wills?

By Karl Wills, Abacus Billing, UK

In recent years sustainable, environmentally-friendly energy production, supply and usage have rapidly assumed top priority for governments and many others around the globe. Green energy is an essential element of any modern political agenda, while specific policies and strategies for securing cleaner energy supplies now and into the future are of paramount interest to utilities and consumers alike. But what incentives do our energy suppliers, distributors and generators really have to keep a more accurate watch on energy usage patterns and help reduce overall consumption by businesses and residential consumers?

The challenges ahead

This year in particular has seen many governmental and intergovernmental organizations repeatedly state their commitment to ensuring competitive energy markets while achieving safe, secure and sustainable energy supplies and, ultimately, a low-carbon economy. So why would our utilities executives and engineers look to improve efficiency and lower emissions through innovative technology?

One fundamental issue to understand is that more efficient energy production and supply coupled with lower usage by consumers will not mean less revenue for energy companies. As energy becomes scarcer, there is no reason why suppliers cannot charge premiums for high volume users or peak supply, protecting their revenue while lowering costs. Unlike many other commodities, energy need not be cheaper the more we consume.

Harnessing technology that allows energy consumption to be monitored and managed is understandably top of political and environmental agendas. Overall energy consumption continues to rise, making the introduction of technology that can help reduce energy consumption vital for arresting climate change. Utility suppliers can lower their surplus energy production by more closely matching the amount of energy supplied and when to generate it with consumer demand. These efficiencies can only be derived from more accurate insights into end user usage habits.

The same incentives that are driving consumers will also ultimately benefit energy providers – meeting carbon reduction ambitions and save a heap of money into the bargain. In the UK, former Environment Secretary (now Foreign Secretary) David Miliband said: “We are proposing that energy companies will have to double their efforts in promoting efficiency measures. This will in turn reduce emissions and fuel bills.” For utility companies in reality, environmental targets can only be realistically met if they allow energy production to remain competitive.

The most recent Energy White Paper published by the UK government demanded climate change action through the reduction of carbon dioxide emissions by some 60 per cent by 2050 (showing progress by 2020), while ensuring secure, clean and affordable energy. But it also enforced the message that we must maintain the reliability of energy supplies by continuing to promote competitive markets in the UK and beyond.

A smart move

A smart meter replaces the function of a traditional utility meter – predominantly measuring total gas and electricity consumption locally at customer sites – while adding numerous additional functions that provide more intelligence and insight to usage patterns. This information is securely communicated back to the utility companies, where accurate, granular and preferably graphic bills can be generated online in real-time.

Smart meters provide utility companies with invaluable market intelligence and functionality
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Half-measures, such as the recent government proposal that ‘bolt-on’ tools showing energy consumption and cost must be fitted to new traditional electricity meters from May 2008, simply pander to concerns over reduced profits. This need not be the case, especially in the longer term. As a strategic tool, genuine smart meter billing provides utility companies with far superior market intelligence and functionality, enabling the acceleration of carbon reducing behaviour change through incentives, such as flexible tariffs.

The Energy Retail Association, a body that represents UK’s domestic electricity and gas suppliers, estimates that currently 200 million energy bills are sent to people’s homes across the country each year. These infrequent, often inaccurate paper bills tend to be the primary point of contact between the customer and energy supplier. But now energy suppliers can use smart metering data to reduce their carbon footprint by proactively monitoring and managing where energy supply is surplus or inefficient, and changing provision accordingly. Real-time billing information quickly becomes a visible, practical tool for making energy demand more predictable.

On the supply management side, smart meter billing complements predictive energy supply management, delivering immediate environmental and economic benefits. If a supplier can predict spikes in demand, it can use price as an incentive for changes in usage patterns, potentially creating huge carbon savings by bringing supply online and offline more intelligently. Compared to this emerging model, traditional estimates and quarterly paper bills certainly seem very clunky and old-fashioned indeed, but how will a widespread rollout of smart metering be funded?

Paying the price

Smart metering offers benefits for generators, distribution companies and retailers alike, but who ought to pay for this new technology? Should customers pay for meters with the cost clawed back through increased energy efficiency? Should the government regulate smart meters? Or can the competitive market deliver?

Smart meter bill details each day’s usage, broken down by standard and economy rate (kWh)
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If consumers were required to buy their meters, possibly on an annual fee, they could be given incentives to save energy and effectively cover this outlay on hardware. For example, they could recoup money by using energy during spare capacity periods with smart meter technology itself (such as two-way metering involving alerts sent to mobiles, PDAs and PCs to during cheap charging periods) facilitating this change in habits. Of course, there is money set aside to promote smart metering. UK regulator Ofgem administers a £9.75 million ($20 million) government grant to fund trials, but has so far proven reluctant to back mandatory smart metering. It claims the utility industry must work with consumers to help them discover the best solutions for themselves.

In fact, energy users already pay for their traditional meters themselves as part of the current tariffs. This charge amounts to about £20 a year per residential household or around £70 a year for a small-to-medium sized enterprise. It does not take much calculation to realize that meter installed for an average 20 years could earn the supplier £400 in its lifetime in a house or £1400 in business. There was a time when the meter charge was even itemized on customer bills, although this habit faded after the broad privatization of utility companies.

As Allan Asher, chief executive Independent gas and electricity watchdog Energywatch confirms: “Standing changes still exist and companies still have to pay third parties to perform meter maintenance and meter readings. Some suppliers have chosen to replace standing charges with two-tier pricing systems where the first part of usage is charged at a higher rate. Suppliers can choose how they bill consumers and standing charges in a particular format are not a requirement.” Perhaps a return to a more transparent and honest method of charging for smart meter costs might go some way to giving consumers the kind of honesty over charging many crave before accepting the introduction of new technology.

Overcoming obstacles

The Carbon Trust, an independent body funded by the government to help the UK move to a low carbon economy, believes the energy sector is stalling on widespread smart meter adoption purely because direct financial benefits to suppliers are not significant. One statement by Petter Allison, head of metering at British Gas, typifies the short-sighted attitude that some figures in the industry are still clinging on to. In response to the government energy review’s backing of smart meters he recently said: “The cost implications of replacing every single meter across the country mean they are not really viable for the mass market.”

Thankfully other major players are beginning to see the bigger picture. One of the world’s largest utilities, National Grid, is very much open to progress through technical innovation, as long as it receives the incentives to move forward as it would like. Indeed it welcomes smart metering, applauding its many advantages including better budget management for consumers, environmental benefits and of course more accurate automated billing.

In the company’s outline principles on a low carbon energy market, the National Grid’s chief executive, Steve Holliday recently said, “We have set our sights on reducing emissions by 60 per cent across all our business operations well before 2050. We also believe that markets need to create the climate for change by incentivizing utilities to help customers reduce energy demand, whilst delivering a reliable supply – this will reduce bills for customers and benefit the climate. National Grid is committed to playing its part and working with governments, regulators and industry to look at a variety of ways in which to help address these challenges.”

It can be argued that deregulation of the industry has meant there is no longer a monopolistic player able to take a long-term view of recovering the cost of stranded smart meter assets. However, if the government really wants to manage our carbon emissions and save energy, it could even establish a separate company (or more likely help create a company through private equity funding) that could supply meters across the country as a monopoly, and then lease (charge) the supplying energy company. This would put the cost of meter acquisition and installation in one place, but might easily reduce innovation by cutting competition. On the other hand, it is a route that would allow each energy company to present billing information however they like, offering some competitive differentiation.

The current barriers are all about energy companies balancing this investment risk. The cost of infrastructure change and the lack of economic incentives for energy suppliers are precluding adoption. Installing and maintaining the technology required negates some of the benefits to the supplier. But these same barriers were levelled at mobile phone providers only a few years ago. As we know, those barriers were not just broken down; they helped to create whole new market opportunities stemming from technology development through sophisticated value added services.

Powering forward

This technology is available today. It is not in development, it is already here and is available to energy consumers packaged and managed to suit bespoke private business models or public sector planning. Smart meters take time to roll out however and published information pertaining to large-scale deployments is light at this stage. But, successful trials are running all over the world, such as the installation by Country Energy in Canberra, Australia, while Italian energy companies are now a considerable way through the lengthy process of rolling out 30 million genuine smart meters to consumers across their country.

The Carbon Trust is right to assert that the long-term gains of smart metering and smart billing hugely outweigh the short term concerns of utility providers over the cost of deploying and managing IT equipment. Technology that can deliver accurate costed data to end users and allow more predictability in energy production for suppliers should not be hamstrung because some areas of the energy industry are unable to see past the immediate financial price of widespread deployment. But if more predictable, efficient, low-carbon energy production and usage is going to be a reality in the relatively short term – demonstrably by 2020 if the government’s ambitions are to be met – then it is absolutely vital that the concerns of our energy companies are heard and addressed as well as politicians and consumers.