AMI is a subject that is widely talked about at various energy departments of state, regulatory commissions, utility companies, energy forums and among the product vendor community. The debate regarding whether AMI should or should not be implemented has been going on for quite a few years, and recently got a much needed boost by way of the Energy Policy Act 2005 in the USA and the department of infrastructure in Victoria State in Australia.
Utilities across the world are trying out pilots at various locations to establish the feasibility of roll-outs, and meter vendors are trying to push their particular product range. All this activity is hampered, however, by the fact that there is a lack of clear direction and consensus among stakeholders from the regulatory perspective. Government departments in various countries have promulgated acts or laws to promote AMI implementation, but a clear mandate is missing. This article looks at the government and regulatory perspective regarding AMI, and suggests a roadmap to implementation.
INTERNATIONAL REGULATORY/GOVERNMENT APPROACHES
New metering regulations passed by the Swedish parliament in June 2003 require that all electricity meters in Sweden should be read on a monthly basis by 1 July 2009. Sweden is among the highest users of electricity in the world, with an average consumption of 15,000 kWh per capita. There are about 5.2 million electricity users in the country, and electricity is distributed by some 170 power utilities of various sizes and ownership. Vattenfall, Fortum and Sydkraft are the largest, with close to 1 million customers each. In Italy the AMR installation programme was mostly supported by government, which wanted to promote the AMR initiative.
Enel (the largest utility in Italy) was given €1.1 billion ($1.4 billion) by the government in 2005 to cover stranded costs. This covers the loss for Enel if it installs an automated meter in a customer’s home, only for that customer to switch supplier before Enel has gained a return on its investment. In the US, the Energy Policy Act 2005 has stressed the need for hourly meter reading, but has left it to the state regulators to frame guidelines. Some states have carried out pilots and some have gone for medium- to large-scale implementation.
The regulators in states such as California have not mandated the implementation of smart meters; rather they have worked with the utilities to establish the business case for time-based energy pricing. Time-based pricing was also a ripple effect arising from the energy crisis in California in the year 2001. The regulators have not set any time frame for implementation of AMI. Some regulators in the US are not encouraging the deployment of AMI because they do not want customers to have to bear the high costs of implementation.
For example, Kentucky Public Service Commission is not recommending AMI because electricity rates may be driven upwards post AMI implementation. The regulators are not willing to tinker with the implementation plan unless the utility comes up with a strong business case. California Energy Commission’s (CEC) plan for developing an advanced metering business case is shown below: In the summer of 2004, the energy ministry in Ontario, Canada, mandated the Ontario Energy Board to develop a plan for installing 800,000 smart electricity meters by December 2007 and installation of smart meters for all Ontario consumers by December 2010.
The initial installation will focus on large consumers and residential and commercial consumers in urban areas. Consumers with peak demand over 200 kW will get interval meters, and residential and small commercial consumers will get smart meters. Smaller distributors will start installing smart meters for their customers in 2008, drawing on the experience of the large urban installations. The regulator has allowed distributors to recover the cost associated with the acquisition of smart meters, metering equipment, systems and technology and any associated equipment that meets the minimum functionality as per the Ontario regulation.
In Australia, there is a joint effort and proactive approach by both government and the regulator. The Essential Services Commission (ESC) developed a mandate to roll out interval meter in the year 2004, which has been superseded by the AMI programme developed by the department of infrastructure, government of Victoria. The government believes that AMI allows a greater range of beneficial meter functionalities beyond those envisaged in the original ESC decision.
The Victorian government has initiated a programme to deliver advanced metering infrastructure to all Victorian electricity consumers beginning in 2008. About 2.4 million new electricity meters will be deployed over a four year period. Smart meters will help Victorian consumers better manage their energy use by providing more detailed information about their consumption and the opportunities available to save money and reduce greenhouse gas emissions.
In the UK, Ofgem (Office of Gas and Electricity Markets) supports the regulator Gas and Electricity Markets Authority (GEMA) in the implementation of policies framed by GEMA. Ofgem has said that suppliers are best placed to understand their customers and can deliver the most cost-effective solution that meets their needs.
Ofgem also believes that business customers do not need government to give them early access to advanced metering, as a number of suppliers are already actively marketing these solutions and advertising the benefits of smarter meters. Larger customers are able to contract directly with meter providers as part of their supply package if they so choose. Ofgem is still open to all options, and its consultation process will continue for some time before the regulator comes out with a plan for AMI implementation.
KEY REGULATORY CHALLENGES
Regulators appreciate the fact that utilities are facing key issues that need to be addressed quickly. There are incentives for utility companies to invest in generation plants and get more revenue through the sale of power, but in the case of an investment in AMI the driving factor is demand response, which aims at reducing the consumption of power when rates are high (peak period) and encourages it when rates are low (off-peak period).
Demand response is also aimed at reducing consumer spending by managing the consumption of power. This acts as a deterrent for a utility, as it will reduce revenue recovery from consumers because they are using less power. Thus utilities will avoid the proactive adoption of AMI in the present structure. This will impede the alignment of retail and wholesale market prices. Regulators need to address the challenges faced by utility companies in the implementation of AMI programmes.
Some of the key challenges are:
- Investment in AMI and ownership of AMI.
- Quantification of benefits.
- Roadmap for reaping the benefits in the new structure.
- Sustainability and reliability of retail rate structures.
- Recovery of costs and profits from the AMI investments.
- Evaluation of capital expenditure on AMI investment against other investment opportunities.
- Allowance for utility to decouple revenue from sales.
- Meeting the revenue requirements through means other than sale of energy .
REGULATORY APPROACH TO AMI IMPLEMENTATION
It is the function of a regulator to safeguard the interest of all stakeholders in the market. The regulator plays a pivotal role in shaping the market structure and brings about essential changes to the market in agreement with all the stakeholders. The regulator is responsible for the fair and transparent operation of the market. The power market is sensitive to changes in price, as the end consumer is affected whenever there is a change in the tariff structure offered by the utility.
Most energy regulators have taken a reactive approach in the case of AMI implementation. Some governments have developed laws to support AMI and have delegated the responsibility for implementation to the regulator. To date the regulators have been far from active, waiting for the utilities to respond, but utilities, for the reasons explained earlier, have been reluctant to play an active role in the process.
It is therefore high time for regulators to come up with a well-planned approach for the implementation of AMI. A regulator could consider the following steps that will facilitate such an approach:
- Statewide consultation on the process; seek views from stakeholders Arrive at a consensus on the approach by the stakeholders Ensure business case for implementation from the utilities Decision on ownership and investment structure for AMI implementation.
- Financial and technical evaluation of business case.
- Cost recovery mechanism for the utilities Allow other means of revenue generation Evolve a mechanism to strike a balance between cost recovery for utility and rate impact on the customer Avoid tariff shocks to customers.
- Pilot (trial) plan with participating utilities Standardise the technical and functional specifications for AMI Monitor the implementation of pilot plan Analyse and review the pilot and ensure the credibility of claims made by utilities Share the results of the pilot with the stakeholders to arrive at a common platform for large-scale roll-out.
- Phased approach for roll-out Apply learning from the pilot Monitor the implementation process Review expenditure and recovery of cost by the utility periodically Establish exception-handling mechanism on time and monitor cost overruns Review consumer prices Periodic review of the AMI implementation. The regulator needs to play an active role in the AMI implementation process. The regulator needs to be lenient regarding some issues and strict in others, in the interests of the stakeholders.
The regulator also needs to be innovative in the approach adopted, to allow utilities to fully harness the value proposition offered by AMI in terms of various products and services. The key points mentioned in this section will help the regulator to develop an effective plan for the successful implementation of AMI