A vision for metering in 2001 and beyond
The de-construction of the UK energy industry arose as a government initiative to introduce real effectiveness, efficiency and economy through the application of market forces. Other energy markets around the world are likely to follow a similar path, either government inspired or as a business imperative1.
Recent publications from the regulator imply that the structure of the industry in the future will appear as shown in Fig. 1.
The public gas transporters (PGTs) and local electricity distributors are likely to remain as ‘local’ monopolies. What may change is the scope of ‘local’. In the UK there are 12 local distribution zones for gas (all currently operated by Transco) and 14 electricity distribution regions (based on the original nationalised industry regional structure) plus the National Grid Company. Some of the distribution regions are now in common ownership, e.g. Scottish and Southern, and Scottish Power Group. It is reasonable to expect that in some instances common ownership could become full merger to achieve economies of scale.
Looking to the future, there is a strong possibility that the developer of, or an operating partner in a substantial housing or industrial development may take responsibility for the power/fuel distribution within that estate. This is not a new model. Slough Estates Limited own and run an electricity generating and distribution station on the Slough Trading Estate, and there are other examples, including the district heating schemes which are common models in Europe. In the latter example the energy ‘distribution’ is often a by-product of generation2.
At present there is no equivalent of the National Grid for water supply, and therefore these distribution and supply operations will also continue to be local monopolies.
The other elements of the model represent areas where competition and market forces will drive the market. It is, however, important to recognise that with the exception of metering (because of the increasing deployment of water meters) there is little or no growth in the size of the market. This is determined by the number of households and commercial premises. It is also of note that the volumes consumed are reducing as energy and water efficiencies increase.
Key factors in the UK market are as follows:
- There is potential for growth from 55 million (domestic) meters to 72 million.
- There is potential for innovation – intelligent meters, remote and automated meter reading.
- Unbundling is the 1999 and 2000 agenda for both gas and electricity.
- The de-constructed industry will rely on an information infrastructure for the efficient operation of the new supply chains. Indeed, information3 is a ‘product’ in the supply chain.
THE METERING INDUSTRY SUPPLY CHAINS
Meters are an enabler in the energy supply chain, in that they provide the basis of trading between the stakeholders.
- Between the consumer and the supply company for consumption.
- Between the supply company and the distributor/transporter for ‘carriage’.
- Between the supply company and the generator/shipper or the spot market for energy trading.
The provision of meters is another supply chain (see Fig. 2) which in addition highlights each of the key roles in the supply chains.
The impending discontinuity in the industry offers an ideal opportunity for new entrants to the market place, or for current players to move up or down the value chain. Examples of this could be:
- Meter manufacturers moving upstream to be meter operators, both to protect their existing market share and to acquire the base for technology improvement.
- Meter works operators buying themselves out from their existing parent and offering a geographic niche service.
- A national network operator (for example British Telecoms when their licence allows) offering home gateway services, including automated meter reading.
Each of these elements has a unique value adding capability in the chain.
Critical capabilities are:
- Asset (lifecycle) management
- Work scheduling
- Inter-organisation process (or problem) management
- Information transmission.
In addition – since payment will most likely be on a transaction basis – SLA and performance monitoring must be reliable and transparent for each contract, but secure from the other parties in the supply chain. However the regulator and consumer councils may have a statutory right to all the performance information on all contracts.
THE METERING OPPORTUNITIES
It is not presently possible to accurately predict how this market will evolve. Our research indicates that metering is no longer seen as ‘Cinderella’; on the contrary, it is receiving a lot of attention in all organisations. However, thus far no-one appears to have committed to a definite policy, being unable to decide if metering is ‘Princess’ or ‘Ugly Sister’. Within the utilities industry, metering appears to be a ‘grudge purchase’ rather than a basis for competitive advantage. This has been demonstrated by the low take-up and promotion in the water industry.
ICL believes that size (number of meters installed/market share) will be essential for meter operations, in order to get the full benefits of economies of scale both in operations and procurement. This implies that meter operations will operate on a UK-wide basis, rather than the current regional basis. It could also lead to innovation in metering technology which aims to reduce lifetime costs of meters. Indeed some recent innovations in metering could accelerate the creation of these new businesses if the costs of replacement are lower than the costs of retaining existing equipment.
It will be vital to understand the process and technology issues associated with the new structure of the industry – particularly information technology – before firm decisions can be made. ICL believes that information technology will play a major role if the implementation of the new regime is to achieve the regulatory goals and enable these ‘connected’ businesses to operate safely and successfully.
There are three primary service opportunities in the new metering market where information technology is a critical enabler:
- Management of the meter assets4.
- Inter-organisation process management5.
- Provision of managed services on a ‘shared service’ basis between several parties6.
And a fourth – automated meter reading7 – which is technically possible but not immediately economic.
It is clear, therefore, that metering businesses will be subject to radical change in the next few years, and that information technology will have a fundamental role to play in the success of that change.
1 This concept is discussed in “Unbundling the corporation” by John Hagel III and Mark Singer, Harvard Business Review March-April 1999. They identify three elements to every industry; Customer Relationship Management, Infrastructure Management, and Product Innovation. Their assertion is that this unbundling is a consequence of the emergence of the Internet as a ubiquitous and standardised communications channel. It is certainly true that reliable communications will be a vital requirement for the efficient operation of the industry. A current view of the UK energy industry is that there is little ‘innovation’ and that the infrastructure itself is being broken into its specialist parts, each with specialised management. The Data Transfer Catalogue (Electricity) and the Network Code (Gas) have provided a standardised language for the relevant parts of the industry to communicate.
2 The increasing cost effectiveness of micro generation based on gas or renewable sources could also promote new local operations.
3 Meter Readings for trading purposes and work instructions for Infrastructure Management.
4 OfGas has already suggested the potential requirement for a National Meter Information Database which is primarily associated with asset information.
5 The Network Code and Data Transfer Catalogue both define the content of messages to be passed between the parties, but the delivery of the service objectives and the achievement of SLA are dependent on the ability of organisations to manage the processes these data support.
6 A feature of the outsource industry is that it has to clearly demonstrate its ability to preserve the boundaries between its client organisations. In this respect outsourcers will have a stronger credibility to achieve the ‘informationally separate’ requirement from the regulator than an in-house operation taking on current assets. Additionally, if there are areas where new organisations appear that would not be able to invest in their own IT, shared services are an enabler to the market by reducing cost of entry.
7 This is an example of an area where metering technology and IT have to be considered together. Furthermore, AMR could be the basis of metering becoming a source of competitive advantage rather than a grudge purchase.