Viewpoint_Smart-Metering_FINAL
- 1. Viewpoint Reputation built on results Insights and opinions from Baringa Partners Leveraging the smart revolution – opportunities for energy businesses
- 2. Leveraging the smart revolution – opportunities for energy businesses The roll-out of over 53 million smart meters over the next seven years is a huge and complex challenge. But smart is about so much more than just rolling out meters. If suppliers and distribution businesses use the smart meter roll-out as an opportunity to fundamentally review aspects of their operating model, then the smart roll-out has the potential to impact the whole energy value chain. As the number of meters on the wall increases, we are moving towards an environment where there is a critical mass of smart-metered sites and a wide range of benefits and opportunities are close to being unlocked. And, with the focus increasingly on the customer, there are competitive opportunities to pursue for companies that are geared up to do so. In this Viewpoint, Baringa’s Ysanne Hills and Isabel Scott-Skinner examine the steps which can be taken on the route to competitive advantage. tariffs Driving new types of tariffs and new ways to communicate One of the key factors in a personalised service is the tariff offered. Static Time of Use (TOU) tariffs in electricity are likely to come first, but smart meters enable far more than this. Dynamic, alert-driven tariffs, and device automation become a possibility. An example of this is a “wind- twinning” tariff, where an alert is sent to the customer when wind generation is high. This means that the customer can benefit from cheaper, greener energy and this type of demand response can be beneficial for the network operator too - allowing them to stabilise the system and potentially prevent the curtailment of wind generation. This flexibility will only become more valuable as the volume of wind and other forms of intermittent generation become more prevalent. As a result, alert-driven tariffs have the potential to be significantly more valuable than static TOU tariffs. Hedging and wholesale pricing Data collection and processing Generation Metering Transmission and distribution Billing and settlement Tariffs 2 Viewpoint – Leveraging the smart revolution – opportunities for energy businesses
- 3. There are barriers to these kinds of offerings too, and careful consideration will be needed around: switching customers between tariffs with different numbers of rates how comms failures are managed and how alerts are sent to the customer. Nevertheless, more personalised and alert-driven tariffs represent a real opportunity for suppliers. Not only do they create an environment where suppliers can differentiate themselves from the competition, but they offer the chance to build a demand response proposition to be offered to distribution businesses, or to reduce electricity sourcing costs through reduced peak requirement and more accurate forecasting. Baringa has recently supported a major utility in delivering its market leading alert-driven tariff with three price levels, which uses smart metering technology to switch between the price levels. Home automation and new ways to save energy New dynamic and alert-driven tariffs could be just the tip of the iceberg. Smart meters facilitate a range of potential new services by creating a two-way communication hub. It will be possible (with additional technology) for customers to remotely control individual devices within their homes – for example, turning on the heating half an hour before they get home. Taking this a step further, customers might even cede control of some devices to a third-party to further minimise their bill, or use an automated monitoring system to tell them when their use is higher (or lower) than expected and to help them to optimise their usage in line with changing prices. In the case of vulnerable people living alone, this could even send a pre-set alert to a neighbour or relative. At a glance – Demand- Side Response and impact on peak demand Baringa Partners performed an analysis in 2012 of the potential benefits of Demand- Side Response (DSR) from domestic customers and small and medium enterprises (SME) over the medium term to 2030. The objective was to evaluate how the DSR resource potential is best deployed within the electricity system, in terms of avoiding distribution network investment and/or providing balancing services at the wider system level. Baringa modelled the demand profile projections and evaluated the penetration rate of TOU tariffs, forms of DSR considered in the study, proposed by suppliers over time and the customer response to those supplier offerings. Scenarios were built covering a range of electricity demand assumptions based on the uptake of Low Carbon Technologies, namely heat pumps, electric vehicles and smart appliances, combined with the rate of uptake of TOU tariffs by customers and the response of households in terms of changing their pattern of use. Low carbon technologies were considered to be potentially flexible. Indeed, electric vehicles provide flexibility due to the storage capacity of their batteries, which are assumed to be charged overnight, and not fully discharged (continued overleaf) 3Viewpoint – Leveraging the smart revolution – opportunities for energy businessesIssued 2014
- 4. Billing and settlement Settlement and half-hourly data Settlement solutions are yet to be agreed, but as the roll-out gains pace we can expect the increasing presence of smart to reveal a key weakness of the current settlement regime – the use of load profiles. Changes to customer behaviour are likely to be more intense than previously experienced, both due to the information presented on the in-house device (IHD), and also as more innovative tariffs become available. This will impact the accuracy of profiles. As the range of TOU tariffs technically possible increases, and automated appliances become widespread, the times of day when residential customers use energy will become increasingly disparate, with some customers who move to highly dynamic tariffs having less predictable consumption patterns. each day. This allows for within-day flexibility, charging at times of low demand, and intraday flexibility – limiting charging on days of high demand and charging more on subsequent days. Similarly, heat pumps with water tanks provide storage in the form of heat in the water, and provide flexibility by heating the water at periods of low demand. The typical storage capacity of heat pumps is of the order of a few hours of heat output. Smart appliances often do not need to be run at a precise time - for example, washing machines. They can provide flexibility by running in response to an external trigger, potentially price. Different penetration rates for TOU tariffs were assumed based on the likelihood that households with Low Carbon Technologies would take up a TOU tariff once they had a smart meter. Forecasts for the consumer response to TOU tariffs were developed based on a review of DSR trials across the world. Based on those assumptions, the conclusions of this analysis showed that the potential DSR benefits increase over time, due to the assumed increase in flexible loads, primarily due to the uptake of heat pumps and electricity vehicles and the uptake of more dynamic DSR tariffs such as load control and critical peak pricing. Peak demand is reduced by shifting flexible load away from peak periods which creates the potential for lower distribution network reinforcement costs. New ways to pay Baringa has been working with a number of suppliers to develop internal systems and processes to facilitate trials related to new payment and communication channels. Real-time data flows from meters will enable new payment mechanisms – allowing mobile phone style Pay-As-You-Go tariffs, and facilitating a range of new top-up mechanisms (eg via a website). Disconnections can also be managed in a much more customer-friendly way – with meters capable of being set up with disablement calendars (to prevent shut-off overnight or on public holidays) and have configurable credit tolerances. This functionality, coupled to SMS alerts to customers, plus, of course, the ability to top-up automatically via Direct Debit, means that suppliers will be able to find many ways to mitigate customers’ concerns regarding disconnection. The high infrastructure costs associated with pre-pay will also vanish. In the smart-metered world, all meters are capable of providing this functionality, eliminating this differential. Customers who are paying in advance (and with self-disconnect enabled) will have a lower cost to serve as they pose no debt risk, improve the cash flow for their suppliers, and will have fewer reasons to correspond with suppliers (given billing is essentially being done in the home). All of this implies that in future, these customers should see the lowest cost of energy. (continued from previous page) 4 Viewpoint – Leveraging the smart revolution – opportunities for energy businesses
- 5. We can expect this to reach a tipping point, where the industry will need to decide whether to increase the complexity and granularity of profiles, or to switch to settlement using actual half-hourly (HH) data for domestic customers. Neither is a small change. There is a TOU dilemma here too. Without HH settlement, the benefits of customers moving their consumption to off-peak times will be smeared across suppliers, limiting the scope of individual suppliers to offer truly cost- reflective TOU tariffs and discouraging suppliers from changing their wholesale purchasing strategies. With it, any supplier who can offer an effective TOU product has the potential to reduce its wholesale costs – but only if it understands when and how its customers use energy, and is capable of supporting them to shift load. In this scenario, a supplier that is successful in supporting its customers to use energy at the most cost efficient times could reap significant benefits. Baringa is currently working with a European energy regulator, to define a mandate for the introduction of TOU electricity tariffs for residential and SME customers, they are consulting on the options for shaping the TOU mandate and the transition to widespread TOU tariffs, as smart meters are rolled out. In support of this consultation, we have considered what the appropriate approach might be to incentivise suppliers and networks to offer cost- reflective tariffs and support their customers to shift their peak load. At a glance – trialling electricity smart metering in Ireland One of the most significant trials of TOU tariffs to date was the year-long trial that took place in 2010 and involved 4,300 domestic customers in Ireland. The aim of the trial was to measure consumer response (behaviour change) to a range of TOU tariffs, in addition to more detailed usage information. Five static TOU tariffs were trialled, all with three rates – day, night and peak. The price differentials between the rates varied across the tariffs being trialled, and one of the tariffs also offered the cheaper ‘night’ rate all weekend. The deployment of TOU tariffs and detailed consumption information were found to reduce overall electricity usage by a statistically significant 2.5 per cent overall, and peak usage by a highly significant 8.8 per cent. An analysis of the load distribution suggests most participants responded by shifting load from peak to the post-peak period and, in general, to night usage from peak. Interestingly, none of the single tariff groups stood out as being superior in reducing overall or peak energy usage – suggesting that simply having a TOU tariff is enough for customers to change their usage profile. Hedging and wholesale pricing Sourcing strategies may evolve Retail prices in the UK have historically been linked to long-term wholesale contract prices. Although various seasonal products are traded, customer prices (their tariff) are generally flat across the year and are not seasonally adjusted. Retail prices do not reflect the true cost of the energy being delivered at the time of consumption. Further, sourcing strategies have always been based on averaging out past customer usage patterns to predict how much energy should be bought for the future. Smart metering - and in particular the shift towards dynamic TOU tariffs - will enable a purchasing strategy whereby suppliers pass on short-term price risk to their customers, reducing their need to long-term hedge. In this context, we can expect within-day and short-term pricing to become less volatile as dynamic TOU tariffs expose customers to the actual cost of consumption at different times of day, leading to aggregate consumption patterns becoming less ‘peaky’ and unpredictable. This is likely to lead to a retail pricing model that is more aligned to the Scandinavian model where retail pricing more accurately reflects or even tracks day ahead and spot prices. 5Viewpoint – Leveraging the smart revolution – opportunities for energy businessesIssued 2014
- 6. Generation Generation and system balancing – widespread smart metering enabling suppliers to provide balancing and ancillary services to National Grid Balancing and ancillary services have mainly been the preserve of those with generation assets and are designed around the ability of a generator to alter the amount of energy put on to the system. Having a better understanding of customer demand and better tools to control this demand will enable suppliers to take a more active role in the balancing market by enabling them to provide services to control the amount of energy that is taken off the system. This also creates a new ‘aggregator’ role where an organisation can take on the responsibility of combining the demand-response capabilities of a large number of customers into a big enough unit to be useful to National Grid. This is a role which could be undertaken by suppliers or even new entrants and one which will become increasingly important to National Grid as the proportion of energy supplied by intermittent renewables increases and to distribution businesses as the job of managing load on the distribution network becomes more complicated due to the anticipated increase in distributed energy. Transmission and distribution Improving customer service and fault management Distributors are largely reliant on their customers to tell them when they have a power cut. Access to smart meter data on faults, including ‘last- gasp’ functionality, where the meter sends a final signal to say it has lost power before switching off, offers the opportunity to take a proactive approach. This could vastly improve the customer’s experience, with the ability to conduct a remote energisation test while they are on the phone, saving both customers and the distribution company from unnecessary site visits. In addition, automated ‘last-gasp’ messages will allow the distributor to get the right skills to the right place more quickly – using the pattern of meter signalling faults to diagnose exactly where the issue is, and potentially the cause, before the first engineer is even dispatched. Network planning and management Modelling the flow of electricity all the way from the transmission network to low voltage exit points has always been challenging due to the large number of exit points and scant detail on what is happening as time passes. Introducing smart meters will provide granularity creating the potential to improve dramatically the accuracy of systems modelling electricity flows on the network – whether the information is used real-time, or not. This improved system modelling capability and better understanding of detailed flows across the network have a number of key advantages: 1 Improved investment decision-making and network planning – improved planning and refurbishment programmes will be possible using the detailed electricity flow modelling enabled by smart data rather than waiting until a problem emerges. The timing of network upgrades for new connections will also be more precise due to the increased modelling accuracy – allowing distributors to make the most cost- efficient investment. 2 More effective voltage monitoring on the low voltage network – smart meters will remove the need for site visits to check voltage, and increase the speed at which localised voltage issues are picked up. Utilising this new information effectively will be critical as the volume of low carbon or distributed generation increases, as this often increases the local voltage instability. 6 Viewpoint – Leveraging the smart revolution – opportunities for energy businesses
- 7. Smart grids From voltage monitoring and targeted investment, it is a small leap to real- time data and greater automation of the system to manage localised peaks in demand. While moving towards a ‘distribution system operator role’ will require significant IT investment, doing so will create a sustainable platform to maximise opportunities, and allow distributors to defer or even avoid costly system reinforcements. Real-time control will support the transition to low carbon technologies by actively managing distributed generation and allowing more generation to be connected to the existing infrastructure. It will also help to reduce losses by actively managing peak load, using demand-response and TOU tariffs to incentivise load shifting away from peak hours or areas of system stress and through the targeted use of electrical storage embedded in the network. As this transition takes place, and as the substantial changes needed to the regulatory environment are defined, the key for distributors will be to assess the investment requirements carefully and to create a roadmap with a clear transition plan. Baringa is currently supporting a number of distributors to do this through their Low Carbon Networks Fund projects. Conclusions The roll-out of smart meters is a project of huge proportions. But successful roll-out in itself will not set companies apart. Market leaders will set the agenda by planning a series of supplementary innovations including: taking advantage of the information which accrues from HH data and data automation establishing the best way for customers to gain from the savings associated with shifting their consumption to times of lower costs embracing new technologies – such as IHD, smart phone, smart TV or web - to facilitate better relationships with customers personalising the offering to customers through intelligent use of TOU tariffs establishing new payment methods that reduce price to customers, and reward those who pay promptly improving the accuracy of models which predict the flow of electricity across the distribution network to enable better investment decisions. Inevitably, there will be issues to confront. For example, the installation of smart meters will highlight data inconsistencies that have existed at meter level for some time. And changes in customer behaviour through, for example, TOU tariffs may well lead to less predictable consumption patterns. These present considerable challenges but are not insurmountable, and may also open opportunities for those prepared to invest time in exploring further. 7Viewpoint – Leveraging the smart revolution – opportunities for energy businessesIssued 2014
- 8. For more information please contact: smartrevolution@baringa.com or Ellen Fraser, Director +44 787 654 3187 Baringa Partners LLP, Dominican Court, 17 Hatfields, London SE1 8DJ T +44 (0)203 327 4220 F +44 (0)203 327 4221 W www.baringa.com E info@baringa.com Copyright © Baringa Partners LLP 2014. All rights reserved. This document is subject to contract and contains confidential and proprietary information. About Baringa Partners Baringa Partners LLP is an award-winning management consultancy that specialises in the energy, financial services and utilities markets in the UK and continental Europe. It partners with organisations when they are developing and delivering key elements of their business strategy, as well as working extensively with government and regulators providing policy and advisory services. Baringa works with its clients either to implement new or optimise existing business capabilities relating to their people, processes and technology. Baringa is recognised both in the UK and internationally for its unique culture for which it has been awarded a number of accolades and continues to reaffirm its status as a leading people-centred organisation.