Smart Metering for Residential Consumers

A good thing for consumers?
The Ontario Government policy directive is to have 800,000 smart meters installed by the end of 2007 and for all consumers to have them by December 31st, 2010. The Ontario Energy Board (OEB) was instructed to develop an implementation plan and the Board posted their draft plan for comment on November 9th 2004.

The OEB proposes a basic (one-way communication) smart metering system that would measure how much electricity a customer uses each hour of the day. Through wireless communication or other technologies the data would be transferred daily to the local distributor. Using this data the distributor will charge the customer an energy price that varies depending on when the electricity was consumed. Consumers will be able to retrieve their previous day's usage to better understand how their consumption impacts on what they pay for power. Using the Board's estimated cost of $3.50 per month recognizing that this cost will likely fall between $3 and $4 per month, we set out to explore the economics of smart metering for residential consumers of Ontario.

Using Enersource (Hydro Mississauga) residential rates and universal charges for such things as transmission and regulatory costs the expected charge for an average Ontario household using 10,000 kWh annually (834 kWh monthly) was calculated. Tacking on the expected $3.50 per month for smart metering costs and using the existing two-tier pricing for power [4.7 cents per kWh for the first 750 kWh and 5.5 cents per kWh for the balance] resulted in an estimated bill of $85 per month before tax. The commodity charge for power was $39.84 for the month or about 48% of the total bill. This is significant because for the remaining 52% of the bill, shifting load will not have an impact on reducing costs!

With only about half the bill "in play" we set-out to better understand the trade-offs between load shifting, price differentials between time periods and the break even cost of smart metering. For proponents of universal smart metering the results were very discouraging.

The required hourly savings must either be abnormally large and/or the amount of electricity load-shifted unreasonably high just to cover the costs of the basic meter!

Example 1.

The Independent Electricity Market Operator (IEMO) defines on-peak pricing in their monthly market reports as the period from 7am to 10pm (EST) for a business day. In 2003 on-peak pricing comprised 45.7% of all hours of the year and the actual price differential between on-peak and off-peak hours averaged $24.88/MWh or 2.488 cents per kWh.


An average Ontario household would need to load-shift 17% of their on-peak demand to off-peak hours, based on 2003 pricing, to generate enough savings on the electricity they purchased to cover the cost of the smart meter!
 
Example 2

In 2003 the Hourly Ontario Energy Price (HOEP) exceeded $100/MWh for a total of 611 hours or about 7% of the time. The average price during this period was $145/MWh. The assumed price differential between those hours when HOEP was greater than $100/MWh and off-peak pricing is estimated at $102/MWh.

An average Ontario household would need to load-shift 26% of their hourly demand when HOEP was in excess of $100/MWh, based on 2003 pricing, to generate enough savings on their electricity purchases to cover the cost of the smart meter!

The OEB noted in the Appendices of their Plan that the authors of a study in the U.K. suggest that load shifting is easier than load reduction so cost savings are easier to achieve than energy savings, but both would probably lie in the 0 - 5% range for a home without electric heating. On that basis, pricing in 2003 combined with even 10% load-shifting would be insufficient to even cover the cost of the smart meter for the average Ontario consumer.

What about 2004 pricing?

The average spread between on-peak and off-peak pricing in 2004 through the first ten months has dropped to $21.87/MWh or 2.187 cents per kWh. Further the period in which HOEP exceeded $100/MWh has declined to only 3.2% of total hours and averaged only $119/MWh. The estimated spread between this period and off-peak prices has also dropped to about $79/MWh. Our conclusion is that 2004 prices would have been even less supportive of smart metering than 2003 prices!

What about the intangible benefits?

Proponents of smart metering will correctly point out that flattening the load profile for power will result in both a reduction in peak power prices and a reduced need to construct new power plants. In fact these points were identified by the OEB. But in fairness to the Board their mandate was to develop an implementation plan and not to justify or question government policy. Since the OEB has not questioned the smart meter policy we will.

1. Will consumers shift load in response to market pricing given the opportunity and
2. Will the market price be sufficient to sustain a response for consumers to at least cover the cost of the meters?

To the first point a lot will need to happen before we are convinced that consumers will have the tools, the time, and the knowledge to load-shift effectively. Culturally Canadians are not great conservationists . Everyone can relate to stories of coming home to find every light on in their house during the middle of the day. The world is also getting to be more complex. How many of us know spouses that still can not program a simple VCR?

To be able to utilize smart metering we will need the right technology with a mind-set to use it to conserve during periods of high prices.

To the second point we are even less assured that market prices will support the universal installation of smart meters. When monthly consumption is lower, the required savings in electricity price must be that much higher and/or the amount load-shifted must increase.
Also keep in mind that load-shifting in general will tend to reduce extreme peak pricing a lot and increase off-peak prices a little; thereby narrowing the pricing advantage! Note too that any fixed price contracts entered into with a marketer also negates the pricing incentive of load-shifting.

Any initial success in load-shifting will reduce the pricing incentive between peak and off-peak periods through price arbitrage resulting in a money losing equilibrium for consumers.

Recommendations ?

We are not against smart metering for residential consumers in Ontario. We support the installation of smart meters but on a limited basis for residential consumers:

1. Larger volume consumers have more opportunities to save and therefore recover the fixed cost of the smart meter as well as save additional dollars.
2. Consumers that want smart metering are more likely to utilize them by learning how to save money and by implementing new technology to lever load-shifting.
3. A smaller group of consumers will drive an equilibrium point in the market such that there remains a price differential between peak and off-peak pricing sufficient to sustain load-shifting activities and that will cover the cost of the smart meter.
4. It is better to learn to walk before trying to run. Working with a smaller group of consumers will be easier to implement with less chance of cost overruns.