Metering for the Virtual Utility–An Agenda

Metering for the Virtual Utility–An Agenda

By Shimon Awerbuch, Ph.D.

New modular generation technologies suggest the possibility of fundamental changes in the electricity generation and delivery process. These changes, which reflect the declining minimum scale of production facilities, involve a transition away from traditional, vertically integrated central-station sources to more flexible operations consisting of distributed generation, conservation and power purchase/futures arrangements. These changes are similar to those in manufacturing, where new information-based processes led to a shift away from mass production to more flexible, computer-integrated manufacturing often involving novel arrangements with other producers and suppliers. Improved metering/information technologies are an essential aspect of the utility industry transformation that can serve to significantly further our national objectives of energy conservation and greater reliance on renewables.

The Virtual Utility (VU) concept was introduced and explored at a recent academic symposium. Participants included notable academic researchers, prominent utility regulators and industry executives. Most participants felt the need for, and encouraged a second VU symposium. This second meeting, with its focus on metering and information technologies, will provide a unique setting for the interaction of ideas among the following stakeholders: metering/customer information industry; state and federal regulators and energy officials; environmental community; and renewables/energy efficiency advocates.

The VU Agenda

Metering and customer-based information systems are a crucial aspect of utility deregulation. Automated metering technologies can transmit essentially instantaneous customer usage to a central location. In addition, through their telecommunications link, they provide a platform for other information-based services. Despite its importance, metering has been largely overlooked by regulators. Competition will be enhanced by systems that give producers access to detailed customer-based usage and other information, and provide customers with a gateway for accessing energy information (e.g. forward prices) and integrating information-based services.

Customers want to purchase power from those providers whose cost structures, at any given moment, allow them to minimize their overall electricity bill. Sophisticated, automatic metering enables a fully functional competitive market and significantly enhances societal welfare by allowing proper economic pricing. In this manner, metering also helps further the goals of energy efficiency and sustainability.

Metering/customer-based information systems support important competition and energy efficiency objectives by enabling time-of-use (TOU) and real-time metering (RTM). While past efforts at valuing automated metering have focused on direct-cost savings only, this symposium addresses metering in terms of the important capabilities it creates by providing strategic information to competitive firms, creating options for the provision of enhanced information-based services and providing societal benefits in the form of enhanced energy efficiency in a VU environment.

TOU Metering and Energy Efficiency/Sustainability

Cellular phone providers routinely give away airtime during off-peak periods, thus illustrating the importance of peak-load pricing in optimizing the use of embedded plants and in maximizing customer welfare. Moreover, customers (and regulators) do not seem upset by the fact that airtime, which costs $.50 per minute and more during the day, is free at night. Rather, they seem to plan their consumption so as to maximize their own welfare.

Similarly, it is widely recognized that electricity production costs vary by time of day and season of the year as the result of irregular demand that follows diurnal and seasonal patterns. Here, too, established economic principles suggest that energy pricing follows the marginal or incremental costs of production, yet the implications and the importance of this idea for energy efficiency are poorly understood by regulators. While widely accepted for cellular usage, peak-load pricing of electricity is seen as hurting the poor or, as simply, not worth the effort.

TOU metering, by correctly pricing scarce electricity resources, provides appropriate economic incentives for users to efficiently shift their consumption to lower cost periods; where such shifting is infeasible or economically inefficient, TOU metering assures that users pay for the actual costs incurred in producing the electricity they consume. TOU metering enhances efficiency by reducing utility load-factors so that usage is shifted away from high-cost, peak periods or by collecting charges that reflect the higher cost of peak-period power so that off-peak consumption does not subsidize on-peak consumption. Such pricing is essential under a VU. Regulators sometimes fail to recognize that low-income consumers are not helped when their off-peak consumption is priced higher in order to subsidize their own or others` on-peak consumption.

RTM: Reducing Excess Generation Capacity

Given proper metering devices, consumers can adjust their electricity usage on a weekly or even daily basis in response to a priori pricing offers from suppliers and power marketers. Without automatic metering, a local distribution or power marketing firm would arrange its purchases so that overall or average costs will be the lowest. But individual consumers may have vastly different consumption so that their costs may not be minimized on a case-by-case basis. Automatic metering and information technologies may enable individual consumers to arrange short-term forward purchasing directly. Such arrangements, which could be further facilitated by sophisticated energy management systems, have the potential for significantly enhancing supply-demand equilibrium, thereby reducing excess generation capacity and reserve requirements. This is an important aspect of energy efficiency and sustainability.

Customer Information/Metering Information Gateway

Metering provides important information to electricity producers and marketers which will enable them to provide services tailored to customer needs. Metering also provides an information gateway for the provision of new information-based products/services. Existing analytic techniques tell us little about the strategic value of the information or the value of the strategic options it may create for firms and customers.

The Hidden Costs of Manual Meter Reading

When compared to manual meter reading using direct accounting costs, automated metering technology is frequently not found to be cost-effective. Accounting-based, benefit-cost analyses however, are myopic. They ignore the information value as well as the significant lack of quality inherent in manual meter reading which wastes valuable human and other resources to perpetuate an obsolete 19th century process. This story is not new. Accounting-based, benefit-cost analyses have consistently led to incorrect investment decisions in the past and cannot properly support the metering investment decision; these must be valued on the basis of the enhanced capabilities and level of quality metering provides.

Manual meter reading provides firms and their customers usage information that is essentially a month old; it is therefore generally useless except for its one, originally intended purpose–billing. The relevant question for valuing automated metering is whether manual meter reading, with its absence of real-time information, can support the quality production process that 21st century firms will need. This issue could be addressed by examining the capabilities of automated metering. New strategic and activity-based costing approaches which also reflect the value of information may yield surprising results.

Automated Metering and Net-Metering Initiatives

Net-metering regulations, which already exist in at least 14 states, are designed to provide incentives for the use of small-scale customer-owned solar/renewables such as rooftop photovoltaic panels. Under net metering, the utility is required to purchase the customer`s excess renewables-based power at its retail rate. Conceptually, the solar resource turns the meter backwards, thus offsetting the customer`s grid-based energy purchases with excess solar/renewable energy.

Utilities often argue that net metering forces them to deliver power to the customer`s site, only to have the revenues for those deliveries offset by the customer`s own generation. In the extreme, a utility could conceivably receive no revenue for serving a particular location, even though this may be quite unlikely. Net-metering proponents, on the other hand, argue that the arrangement is fair because the utility benefits from the availability of distributed solar capacity which provides power during daytime peaks when the marginal cost of electricity to the utility is well above average avoided cost. Since existing metering cannot support proper pricing of these transactions at the actual avoided or marginal costs in effect at a particular point in time, the retail electric rate serves as the only reasonable proxy. Further, these advocates argue, net metering imposes negligible costs on the utility as long as the installations are small.

While net metering achieves the desirable objective of helping diffuse distributed, customer-owned solar resources, it represents a “second-best” compromise where standard metering cannot provide needed information. Real-time metering, by contrast, may allow transactions between customers and their utility to be more properly priced by reflecting electricity cost at the time they occur. The value of on-peak, distributed solar power will frequently exceed the average retail electric rate so that standard net-metering proposals actually lead to under-investment in renewable capacity. However, where distribution feeders are not operating near capacity, solar electricity may be overpriced under net metering so that other customers are forced to subsidize it. Clearly the potential exists for real-time pricing to encourage solar investments in an economically efficient manner.

Metering as a DSM Technology

Demand side management (DSM) has been an important energy efficiency initiative over the last decade. Though controversial, billions have been spent on various technologies and incentives to encourage electricity customers to curtail overall electricity consumption and reduce on-peak consumption.

Many economists feel that DSM programs represent an inefficient use of societal resources. Clearly, it makes little sense to pay customers to curtail usage when proper metering and pricing can achieve such societal goals in a more efficient manner. While this is not a new idea, regulatory economists and policy makers have too long assumed that appropriate metering is expensive and hence infeasible. As a consequence, they have designed a host of second-best programs and concepts, including DSM. This issue needs to be re-examined to evaluate how the welfare gains of correct pricing/metering compare to the installation costs. Viewed in this way, it becomes apparent that proper metering may have a significant societal benefit component. Quite simply, it may make more sense to use DSM funds, in part, to install proper metering than to pay some customers to shift their consumption.

Conclusion

The implication of metering and information technologies under restructuring are obviously broad, spanning the gamut from making customer choice feasible to achieving national energy efficiency objectives. It is important for the industry to develop the issues in order to give itself the knowledge platform from which to participate in the current debate and policy making, and educate regulators and others about the important role of metering. Industry-sponsored research activity such as The Second Symposium on the Virtual Utility is essential. It can position metering technology for the new environment and help establish the industry as a stakeholder in the national debate thus enabling it to set the agenda for metering and information technologies in the restructured environment. (For more information on The Second Symposium on the Virtual Utility, please contact the American Meter Reading Association at 847/480-9628.)

Author bio

Shimon Awerbuch, Ph.D., is an independent financial economist in Nashua, N.H. He previously served on the finance faculty at the University of Massachusetts as chief of economic/policy studies. He also worked at New York State Utility Intervention Office and as a consultant with Ernst and Young.

Awerbuch is the co-author of “The Virtual Utility: Accounting, Technology & Competitive Aspects of the Emerging Industry” (Kluwer Academic Publishers, 1997). He has worked on depreciation and cost measurement for telecommunications technology and recently presented his work to delegates of the United Nations Commission on Sustainable Development.

Acknowledgments

Michael Crew and Paul KIeindorfer, The Economics of Public Utility Regulation and Public Utility Economics; J. Dillard, T. Mouck, and A. Preston, “Capital Budgeting, Technological Innovation and the Emerging Competitive Environment of the Electric Power Industry,” Energy Policy, Feb. `96; Thomas Starrs, “Net-Metering: New Opportunities for Home Power,” Issue Brief, Sept. `96; Paul Joskow and Donald Marron, “What Does a Negawatt Really Cost: Further Thoughts and Evidence,” The Electricity Journal, July `93; A.L. Nichols, “Demand Side Management: Overcoming Market Barriers or Obscuring Real Costs?” Energy Policy, `94.

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