By Hans Vrinds and Tjard Brons
Projections for investments in smart grids are expressed in billions of euros, but some countries are still struggling to handle investments in distribution grids that are smaller and less complicated, such as smart meters. A particular example is the Dutch market, where the rollout of smart meters was postponed. The current article provides insight into the various causes of the postponement and outlines to what extent these factors can be projected onto other markets.
In 2007 one of the authors was involved in a survey on the financial feasibility of smart meters in the Dutch market. The survey was based on a proposal for a revised market structure to enable the introduction of smart meters and was conducted with the four largest distribution system operators (DSOs) in the Dutch market. The conclusions of the survey included the assessment that smart metering was not financially feasible for the DSOs given the proposed market structure and remuneration for metering services. Even though similar surveys in European markets came to an identical conclusion, most European markets are preparing a rollout of smart meters. In most cases it is argued that the business case for society as a whole is indeed positive, and in most cases is based on the benefits for energy savings by consumers.
At the time of the survey the assumptions and prerequisites seemed fairly straightforward but with the advantage of hindsight some of them seem to be inappropriate at the time of writing. An important prerequisite for the Dutch market was that the fee for metering services should not increase as the result of the rollout of smart meters. This (political) argument was backed by the fact that in the past the fee had been too high for the services delivered: it was therefore considered that smart meters had already been paid for by the consumer.
In order to achieve an appropriate price level for the deployment of smart meters the Dutch government proposed a number of measures to reduce the costs of a rollout:
- All electricity and gas meters should be replaced on a mandatory basis (reducing cost of installation as door-to-door installation is significantly less expensive)
- Standardisation of minimal functionality of smart meters was required to create a level playing field for energy suppliers
- Standardisation of the non-functional aspects of equipment should make it interoperable, reducing the equipment effectively to a commodity.
Both the functional and non-functional requirements were handled by a national standard for smart meters, NTA 8130.
OPPOSITION TO SMART METERS
Even with the measures for cost reduction in place, the DSOs seemed reluctant to install smart meters. When the proposed changes to the market structure and the subsequent rollout of smart meters were handled in the Dutch senate, none of the DSOs were present, even when twice the senate asked for additional information. Eventually it took a third term in whch the senate finally did not accept the proposed changes and the rollout was effectively postponed.
One of the main reasons for the senate not accepting the bill was that a large special interest consumer organisation was worried about the privacy of end-users and asked an independent research committee to perform an investigation on this issue. This committee compared the suggested regulatory proposals with article 8 of the European Convention of Human Rights (ECHR).
The main results of this investigation  were the following: Because the Dutch government issued regulatory detailed metering intervals (15 minutes for electricity and hourly for gas) that are not used for billing purposes this doesn’t comply with the European legislation. Furthermore, it is possible to take a peek into the personal lifestyle of the consumer. Things that can be recognised in the energy usage pattern are the presence or absence of the consumer, how many people are present, alarm systems that are turned on or off, and even how many showers are taken (Figure 1). This also touches another aspect of article 8, i.e. “respect of one’s private and family life.”
The mandatory installation of smart metering was felt to be out of line with the country’s democratic principle. Everybody should get the opportunity to get a smart meter, but they shouldn’t be obliged to do so. Accordingly, the discussion in the Netherlands is mainly about the protection of correspondence, including electronic information interchange (art. 8 of the ECHR).
In the meantime during the assessment of the bill, none of the DSOs indicated the necessity of smart meters to their customers or to the authorities. The central question is: why did the DSOs take this torpid pose? The answer to this question is fairly straightforward. For the calculation of financial feasibility an expected life cycle of 15 years was used for the metering equipment. A life cycle of 15 years for the envisioned metering equipment is now considered to be hardly feasible given the expected innovations with respect to smart grids and telecoms networks. One of the authors was recently involved in developing a technology roadmap for a Dutch DSO where it turned out that anticipated innovations for smart grids, exceeding the capabilities of the standardised meters, occurred within 5 years, thus rendering the envisioned smart meter a barrier rather than an asset with respect to smart grids.
Besides the fact that the functionality of the meter reduces the effective life cycle, the technical implementation of the envisioned meters seems to be superseded. The envisioned meters had the communication functionality at best implemented in a separate module whereas fully integrated solutions were considered to be the obvious choice (especially for power line communication). Currently lay outs are considered where the communication module is fully independent of the meter (as in Germany through the multi utility communication controller, MUC). In some cases the telecom equipment is even owned by parties other than the DSOs. The NTA 8130 standard does not include a standardised communication channel for this purpose, thereby making the lifecycle of the equipment dependent on the communication technology.
Besides the depreciation resulting from the shortened lifecycle, the owners of the meters were facing another issue. In 2006 one of the authors introduced the security aspects of smart metering to a metering conference in Copenhagen. This concerned the possibility of data security breaches in communication. The people involved in the standardisation of smart meters had not paid particular attention to this aspect, although the NTA 8130 standard was almost completed. The final version of the NTA, however, did not incorporate the security issue. Subsequently examples of hacking metering equipment have scared both consumers (for privacy reasons) and DSOs (for economical reasons: a hacked meter effectively renders all meters of that type useless and worthless).
Current insight is that the standardised functionality of the equipment is considered hardly appropriate for the purposes of the near future (5 – 10 years). The meters cannot handle distributed generation in a way that enables a gross production measurement and the proposed meters have a fairly restricted tariff structure. Finally the most cost effective communication channel for smart meters has been found to be power line communication, which will turn out to be inadequate (with respect to quality of service) for future development towards smart grids.
The DSOs therefore found themselves in an awkward position where:
- The minimum functionality of meters was required by legislation
- The required functionality for the meters was not future proof thus reducing the lifecycle of the equipment leading to rapid depreciation
- The remuneration for metering services was fixed, restricted and based on the minimal functional requirements.
A SPLIT INCENTIVE?
This position has not changed since, which brings us to the notion of the split incentive. The investments required from the DSOs are considerable whereas their return on investment is regulated and fairly uncertain given the length of the life cycle and expected changes to regulations (the Dutch regulator had already anticipated a revision to the remuneration of metering services even before the current one became operational). The investor therefore does not expect to reap the benefits of the smart metering and there is no incentive for the DSOs to invest. As long as the current situation persists, the DSOs will remain reluctant to invest even if they are forced to implement smart meters. The only obvious solution to change this is to create an incentive for the DSOs to invest, but how can this be accomplished? Letting the DSOs pass the costs of smart metering directly onto customers is not an acceptable approach and from a political point of view is not very attractive.
Although the original reasons for implementing smart meters did not include an environmental aspect, it contained the objective of energy savings. In fact, the energy savings included in business case calculations provided the benefits for the societal business case to become positive. Utilities, although paying lip service to the environment, are not very willing to actually reduce consumption unless another source of income is available. With the advent of carbon taxes, this opportunity exists. France recently proposed to introduce a carbon tax for domestic consumers and most European markets are expected to follow. The Dutch ministry for environment planning (VROM) recently proposed to increase taxes to finance investments in the energy industry.
The average household in the Netherlands produces CO2 of a little over 6 tons annually for electricity and natural gas. Given the current prices of CO2 (EU ETS) this represents a value of around €100. In the future this will probably be handled through a carbon tax or similar levy. The tax is an incentive for consumers to save energy and with the tax in place saving energy has an extra bonus besides the reduced cost for consumption. An important factor, however, is that the DSOs facilitate energy savings through innovations in their network (including smart meters). If the DSOs were entitled to a percentage of the savings through the taxes, it would create an incentive to innovate the networks. A fairly small percentage of the savings for consumers suffices for the business case for smart meters to be closed from the perspective of the DSOs.
Given the fact that prices for electricity and gas are expected to rise, combined with the carbon tax, will create a strong incentive for consumers to save energy, especially if the tax savings use a progressive scale: the more energy you save the larger the savings on taxes. The non-linear scheme of tax reductions resembles the effect of reverse tariffs (where the price per kWh is increased when over a defined threshold) but is politically more attractive (rather the carrot than the stick). In order to enable the savings smart meters are considered an important tool.
An important lesson to be learned is that governments should be concerned with defining policies and not get involved in defining solutions, and the latter should be left to the industry to decide on. The approach where a government defines a solution, as the Dutch government tried to do with smart meters, has proven unsuccessful. Hence the wisdom: governments should not pick winners. This has proved to be especially true in the utility industry and has been experienced time and again.
A second important lesson to be learned is that the pace of innovation for the utilities industry has always been set by the industry. The incremental innovation was restricted to the inevitable changes as there were no real incentives for radical innovations. If the utilities industry has to facilitate energy savings, the loss of income resulting from success should be compensated for.
Thirdly, not inviting important players like interest groups at an early stage of the standardisation process has led in the Dutch case to much resistance. The fact that the end user’s privacy was ignored led to the rejection of the bill. Furthermore the privacy issues combined with concerns about security have resulted in a significant percentage of consumers rejecting the idea of having a smart meter installed in their homes.
The fourth lesson indicates that utility companies will not invest large sums for the purpose of sustainability only. A remuneration based on the successfulness of the investment for sustainability, however, may prove to be more successful. Business cases with a positive result for society only will not lead to the necessary investments.
As a fifth lesson consider the fact that the efforts of standardising equipment for the Dutch market did not bring the expected benefits, as the Dutch market is too small for equipment suppliers to develop dedicated equipment. As a result the suppliers were willing to participate in the standardisation process but did not commit to the obligation of supplying equipment that complied with the standards. Several larger scale standardisation initiatives funded or initiated by the EU are under way but it remains to be seen if standardised equipment will keep pace with innovations and if the standards provide opportunities for innovation.
And finally, although the horizons for climate change extend over several decades, the policies to meet the political ambitions and/or aspirations are restricted to four years only. For utilities that are confronted with large investments this creates an uncertainty that will prevent them from making large investments. As a result they linger and are cautious to commit to political targets. A clear long term policy defined by the authorities will clearly reduce the regulatory risk and render the authorities credible partners for the utilities industry. Only in this way can the industry be expected to make a capital intensive contribution to climate change.
The conclusions drawn may seem harsh but it should be noted that they were drawn with the advantage of hindsight. For markets contemplating the installation of smart meters, however, the lessons learned will be useful especially in cases where these markets do not consider themselves to be unique but take similarities with the Dutch market into consideration to determine the way ahead. As a final remark, nobody will question the fact that smart meters are an important building block on the way to a sustainable electricity supply. The important point is to create incentives for all stakeholders along the way.
Het wetsvoorstel ‘slimme meters’: een privacytoets op basis van art. 8 EVRM, Cuijpers, dr. C., Koops, dr. B.J., Oct 2008