While most electricity distribution companies provide their large industrial customers with advanced automated meters, only a few have taken the steps and given them to residential customers.
That’s because the investment can seem hard to justify. But since Duquesne Light Co. of Pittsburgh began installing advanced meters in 1996 for all 526,000 of its residential customers, the company has reaped annual operating and maintenance savings of 20%.
“We wanted to increase operating efficiency and decrease operating costs,” says Bob Green, manager of the company’s AMR and data collection systems department.
The meters cut costs by reducing or eliminating expenses associated with traditional meters read by meter readers. They also provide better outage reporting and restoration data, and reduce theft, according to Green, who says there are other benefits that are harder to quantify.
“It depends on how you want to look at it,” says Green, who reports that Duquesne put in the meters just as customer choice was coming to Pennsylvania. “Our company felt strongly that there was value associated with having great forecasting ability.”
Though Duquesne might be one of only a few companies to install advanced meters for their residential customers, most would like to do so, according to Dan Delurey, executive director of the Demand Response and Advanced Metering (DRAM) Coalition. Delurey says advanced meters offer utilities many benefits, including valuable information that can help them improve their bottom line. For example, according to Plexus Research Inc. vice president Stephen Hadden, one company was able to evaluate the hourly load on every segment of its electrical system because of its advanced metering network. As a result, officials at this company, who had used a very high safety factor for their distribution transformers, learned they had installed three times as much transformer capacity as needed and had spent $80 million unnecessarily.
While the information will not get that money back, says Hadden, it will prevent further unnecessary capacity from being added. Moreover the advanced meters showed that three transformers were seriously overloaded, and the utility was able to correct this problem.
Advanced meters have other financial benefits as well, such as theft reduction. Electricity theft, which involves tampering with or bypassing the meter, was estimated at between 0.5% and 3.5% of annual gross revenues in the US in 1998. Advanced meters are more difficult to tamper with, and they carry theft detection mechanisms that alert the utility when there has been tampering.
Utilities that have installed residential advanced meters also report that that they reduce customer complaints by as much as 75%, enabling them to reduce the number of staff in their call centres.
Ten years ago advanced meters cost as much as $3,000, so utilities could not even consider replacing residential customers’ traditional induction meters. Prices have dropped significantly since then, however, and today an advanced meter can cost as little as $100, including installation and associated information systems. But despite these reduced costs and utility enthusiasm, 95% of the nation’s residences still have traditional meters. What is holding back residential implementation of automated meters?
The primary obstacle is still cost. Though automated meter prices have dropped dramatically, most homes are already equipped with standard induction meters and replacing them would be expensive. Moreover, since standard meters rarely fail, there is no reason to replace them.
Furthermore, a critical mass of meters must be installed to capture the economies of scale that make it cost-effective to invest in the information systems required to support them, according to a 2002 report prepared by Good Co. Associates for the Texas Advanced Metering Coalition. One-by-one meter installation is six times as expensive as installation on a large scale for residential customers, and eight times as expensive for commercial customers.
UNCERTAIN REGULATORY CLIMATE
Another barrier has been created by an uncertain regulatory climate, according to Eric Hirst, author of a 2002 paper Barriers to Price-Responsive Demand in Wholesale Electricity Markets, written for the Edison Electric Institute. In states that have not restructured, he says, the possibility of restructuring means that a utility could lose its investment in meter upgrades. In states that have restructured, there is concern about how to recover costs if customers switch to a different energy supplier.
Hirst’s view is widely held in the industry.“Industry uncertainties about pending regulatory conclusions concerning meter ownership, maintenance, calibration and data management are an obvious barrier to aggressive deployment,” concludes a report prepared by Plexus for the National Association of Utility Regulatory Commissioners.
Moreover, says Hadden, the “anchor application” for advanced meters – i.e., its biggest benefit, which is reduced meter reading costs – only delivers between one-third and one-half of its financial benefits. The rest come from avoided losses.
A study conducted by Levy Associates of Sacramento for the California Energy Commission found that most utilities can not justify an investment in advanced meters because their cost-benefit analyses are incomplete. The study found a perception in the industry that technology and cost are barriers to implementation, but went on to state that, “the most significant barrier appears to be the inability of existing cost effectiveness methodologies to properly capture and account for metering impacts.”
Specifically, the report says, most analyses simply compare the cost of installing meters to the benefit of reduced meter-reading costs – the anchor application – and find that it takes ten years or more to recover investments. They do not consider other benefits such as theft reduction, call centre cost reductions or improvements in capacity planning.
DEMAND RESPONSE ISSUES
The Levy report also finds that standard utility analyses fail to consider the benefits of demand response. In a normal market, consumers decline to buy a product as its price rises, but in the market for electricity, where consumers are shielded from hourly wholesale prices and get their bills once a month, they have no incentive or ability to respond. As a result, the overall cost of energy goes up because power producers must maintain facilities that are only needed a few times a year, when demand for electricity is at its peak.
Because advanced meters can associate the amount of electricity consumed with the time it was used, and can act as an information gateway between customer and utility, they make possible demand response programmes that can lower overall electricity prices by reducing consumption during peak periods. This also benefits utilities, which must pay much more for electricity during peak periods than they are allowed to charge customers.
Demand response is critical to a well-functioning capitalist market, and both economists and policymakers at every level of government agree it is crucial to a successful electricity market. But many regulators give utilities negative incentives to encourage demand response by granting them higher rates when they build more power plants and sell more electricity, according to Chris King of the American Energy Institute. King, author of a 2001 paper The Economics of Real-Time and Time-of-Use Pricing For Residential Consumers, says this disincentive, combined with historically high prices of advanced meters, has prevented widespread demand response programmes for residential consumers.
“Today, however, higher value and lower technology costs now make the economics not only favorable, but compelling,” says King.
In fact, a number of utilities have run very successful demand response programs for residential customers. At Gulf Power in northwestern Florida, for example, residents pay one of three rates 99% of the year. These rates are determined by factors such as season and time of day, the factors that determine wholesale electricity prices, and two of the three are lower than the standard residential rate.
For the remaining 1 percent of the year, however, Gulf has the option of charging a critical-period price of $0.31 per kWh, which is more than three times higher than the highest of the other prices. When prices hit this critical range, a control panel in a customer’s home alerts the resident that the critical peak condition has been reached. The resident can choose either to shut off electricity-consuming devices such as air conditioning, or the panel can be programmed to do it automatically.
3300 customers have signed up since the programme, which also provides outage notification and surge protection, began in 2000. As a result, they reduce peak demand of 2500 MW by 2.1 kW in the summer and 3.2 kW in the winter, according to company spokesman Andy Montaina.
As regulators come to recognise the benefits of advanced meters, their challenge is to overcome these formidable obstacles in order to deliver the savings to consumers that are expected with demand response programmes. These savings have been estimated at as much as $15 billion per year.
Hirst recommends that public utility commissions make decisions about who will pay infrastructure costs for advanced meters. That will put to rest any uncertainty regarding the possibility of stranded investments in the meters.
Good Co. recommends that advanced meters be mandated for new houses, and that tax incentives such as accelerated depreciation and federal tax deductions be implemented. Good Co. also recommends, as do Severin Borenstein, Michael Jaske and Arthur Rosenfeld in their 2002 paper Dynamic Pricing, Advanced Metering and Demand Response in Electricity Markets, that all customers with threshold consumption levels receive advanced meters.
Borenstein et al recommend that all residential customers be given advanced meters and placed on pricing programmes similar to that of Gulf Power. While the transition will probably be rocky, they write, over time the benefits will far outweigh the costs.
Similarly, Hirst recommends that regulators require interval meters to be installed first for large customers, then, as the costs and performance of metering and communications systems improve, for smaller customers too.
Although such a step has the advantage of guaranteeing the lowest possible cost of implementation, since it would be done on a large scale, the Plexus report cautions that it could also have disadvantages. It holds that the choice before regulators is either to encourage dedicated networks to bring about advanced metering benefits to more electricity customers sooner, or not to encourage dedicated networks, which would allow a more diverse grid to develop more slowly, with greater competition and potentially greater functional capability.
Other, lower-cost interim measures have also been suggested. For example, a small clamp attached to the wire leading to a meter can transmit near real-time information to a communications device with just a small loss of accuracy, according to a 2001 report prepared by Synapse Energy Economics. The Other Side of Competitive Markets anticipates other metering innovations as load response becomes more fully developed. “Advanced metering does not only mean interval metering,” according to the report.
In any case, advanced meters are considered the future of metering technology, both because of the critical role they play in demand response and because of the cost benefits they provide utilities. The only question is how much time it will take to get there.