Building the Smart Meters Business Case

By Lisa Wood, Institute for Electric Efficiency

Electric utilities in 43 states are proceeding with plans to install smart meters. U.S. utilities have installed 16 million meters in pilot programs and full-scale rollouts. Research for the Institute for Electric Efficiency (IEE) indicates that some 65 million new meters will be deployed nationwide by 2020—about half of U.S. homes.

Customers favor the industry’s moving forward with smart meter and smart grid technology. The latest research from Edison Electric Institute, the EEI Power Poll—Q3 2010, found that more than two-thirds (68 percent) of consumers nationwide want the electric power industry to move ahead. And one in four wants the industry to do so quickly.

Moving to smart meters, along with advanced metering infrastructure (AMI), requires significant utility investments. The costs include system hardware (primarily meters) and software, installation labor, customer education, and integrating the new hardware into a utility’s existing computer systems. In promoting benefits produced on both sides of new meters, electric utilities can create for state regulators a strong business case that smart meters are a wise investment.

Customer Benefits

When coupled with an energy feedback system—typically a computer, handheld device or small wall- or desk-mounted display—smart meters can help customers monitor their home electricity use. These energy management systems display household electricity demand hourly or more frequently.

This benefit is especially important for customers who worry about high bills or who otherwise are interested in lowering their energy use. Studies show that just by becoming aware of their homes’ daily electricity usage, customers can lower their electric bills up to 10 percent.

Energy savings will increase further as home appliances become smarter, especially electric-intensive air conditioners, refrigerators, washing machines and dryers and dishwashers. Eventually, these and many other electric appliances will be able to receive price signals from smart meters. Customers will be able to program them to operate based on the price of electricity as it varies during the day.

Smart meters also help build a foundation for better customer service. They do so through operational improvements, including more accurate billing and fewer estimated bills. Automated outage detection is another benefit. In helping restore service faster, smart meters can lower operating costs and improve customer service.

Smart meters can shorten the time it takes utilities to connect new customers or disconnect old ones, saving time and money. In areas with large population turnover, such as college towns, this feature can lead to significant savings for utilities and customers. As the industry addresses challenges, including increasing demand and rising energy costs, smart meters can play an important role.

Electric Utility Benefits

Smart meters create immediate, operational efficiencies for utilities, as well. The elimination of manual meter reading is among the most important. When automated meter reading replaces traditional manual reading, all the variable costs of manual reading are avoided. This benefit typically represents one-third to two-thirds of the total utility operational benefits of smart meters.

Smart meters will enable utilities to lower their peak-demand periods through the new energy management capabilities the meters create for customers and the potential they produce for utilities to offer smart or dynamic electric rates. Both capabilities will help utilities defer the need for investing in new and replacement infrastructure. As part of the smart grid, smart meters will support the industry’s efforts to meet more stringent environmental regulations, as well.

Smart meters also can help lower peak-demand periods by creating the potential for utilities to provide smart, or dynamic, electricity rates. Dynamic pricing designs, such as a critical-peak pricing (CPP) program, attempt to convey the true cost of power generation during the 100-200 hours each year—typically during summer—when demand reaches its highest levels. In exchange for paying high prices during those peak hours, customers receive discounted rates for remaining hours of the year.

By encouraging customers to shift some demand on critical days to off-peak hours, the higher peak prices can help utilities defer the need to run expensive peaker plants and to build additional generation and transmission capacity. In addition, the lower off-peak prices represent an average savings for customers over their regular electric rates.

An IEE study analyzed results from five dynamic-pricing programs from the past five years that measured how customers respond to dynamic prices. Customers respond to higher prices by shifting some of their electricity use to lower-cost time periods.

The study also found that when customers have a technology—such as an energy orb (a radio-controlled ball that changes color in response to electricity prices) or a thermostat that automatically controls an air conditioner’s settings based on the price of power—they respond more to the high-price signals.

Smart meters and dynamic-pricing programs show signs of benefitting low-income customers. IEE looked at five dynamic-pricing studies undertaken during the past few years to see how low-income customers fared. In each of the five studies, IEE found that low-income customers benefitted. Even without responding to dynamic rates, a large percentage of low-income customers were immediate beneficiaries of dynamic rates because of their flatter than average load profiles.

The operational flexibility brought about by smart meters also will bring more opportunities for new electricity resources—including distributed generation sources such as rooftop solar panels and backyard wind mills—as well as newer technologies such as advanced, large-scale batteries and plug-in electric vehicles (PEVs).

At a time of mounting concerns about gasoline prices, U.S. energy security and unemployment, PEVs could help customers save money while reducing oil imports and creating jobs. One day customers might be able to charge their automobiles at night and then, with a smart meter, get credit for putting some of the power from their car batteries back on the grid the next day.

Data Management

Another consideration in planning grid-modernization projects is handling data the meters will create. Edison Electric Institute (EEI) research shows that nearly eight out of 10 consumers think that only their utilities and they should have access to electricity usage information from smart meters. About 13 percent said customers, utilities and authorized third parties should have access. And only 2 percent said that customers, utilities and any third party should have access.

EEI, which has been monitoring the data issue, has worked with its members to develop consensus guidelines for policies to protect customer privacy. Among them are that customers should have the right to their own energy consumption data, as well as the right to decide whether third-party providers should have access. States, though, should consider the conditions under which this data should be disclosed.

Under no circumstances, however, should the data be disclosed to third parties without affirmative customer approval. States also should design the approval process so authorization is clear, and the process should provide for disclosure of the purposes for which the data is to be used and the means by which consumers may withdraw their permission.

Third parties should be required to protect the data and to use it only as directed by state utility regulators. The states should enact rules establishing the circumstances, conditions and data that may be disclosed to third parties.

It should be emphasized that utilities need and should have access to customer usage and consumption data. They need this operational data to plan and operate their systems in a manner that ensures safety, reliability and efficiency.

Smart meters are an innovative technology with potential for electric utilities and customers. With a compelling business case that identifies and promotes smart meters’ features and benefits, electric utilities can argue with confidence that the meters are a wise investment for customers.

Lisa Wood, Ph.D., is executive director of the Institute for Electric Efficiency. Find more information at http://edisonfound ation.net/iee.

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