Electricity is a wonderfully versatile form of energy that has become essential to our way of life. But its generation and transmission have significant effects on the environment, ranging from the global climate change impact of carbon dioxide emissions to a variety of local and regional impacts. All new power plants attract opposition because of these impacts, whether the energy source is ‘renewable’ or not.
Yet we continue to use more and more electricity. The average amount each of us consumes – the per capita consumption – keeps increasing, driving the construction of new power plants and transmission lines (the supply-side). However, the whole answer cannot lie on the supply-side. We must make major gains on the demand-side as well. At the very least, action on the demand-side buys us time while better supply-side technologies are developed. Better demand-side management of electricity can yield environmental benefits by reducing emissions of carbon dioxide and reducing the need for the construction of new power plants.
Smart meters have been on my radar screen for some time, and hold great promise for influencing electricity consumption. They have the potential to create a step change in curbing the growth in the demand for electricity and giving real benefits to consumers, provided they are capable of interaction in real time between electricity consumers and retailers.
Shortly after beginning this very rewarding job, I heard mutterings that the smart meters being installed in New Zealand are actually ‘dumb meters’. The concern was that the smart meters being installed would deliver benefits to retailers, but would not be able to deliver benefits to the environment or to electricity consumers. This report substantiates that concern.
There are obvious benefits to retailers – remote meter reading, for example. But there are environmental benefits as well. These environmental benefits – reduced emission of carbon dioxide and fewer new power plants – can be delivered if the smart meters are really smart, and have the functionality that will enable peak power to be reduced.
Consumers can also benefit from smart meters through the provision of much better information. A monthly ‘post-consumption’ power bill is deeply uninformative. If my electricity bill is lower this month, I do not know if this is because I bought a more efficient refrigerator, because the weather was warmer, or because the price had fallen.
Because electricity cannot be stored, the cost of electricity generation, transmission and distribution depends significantly on when the electricity is consumed. Smart meters enable sophisticated cost-reflective tariffs, which reflect the variations in the costs of electricity at different times and in different seasons.
Such cost-reflective tariffs would make the Emissions Trading Scheme more effective. Introducing this carbon-pricing scheme into the electricity sector means the cost of generating electricity from fossil fuels will go up relative to the cost of generating electricity from renewable sources. The cost of generating electricity from coal will become relatively higher than the cost of generating electricity from gas because coal power plants emit two to three times as much carbon dioxide as gas power plants per unit of electricity. But consumers on flat rates will have little incentive to change their consumption in ways that would help New Zealand reduce its carbon dioxide emissions.
The Consumers Institute is understandably apprehensive about more cost-reflective tariffs, as many households will have little flexibility in reducing consumption at peak times. In particular, such tariffs might lead to poorer households simply switching off heaters on winter evenings, increasing ‘fuel poverty’. For this reason, if more cost-reflective tariffs for households are introduced, it will be essential to offer households the choice between the cost-reflective tariffs and a flat rate. Over time, new technology will increasingly allow householders to respond to sharper price signals without hardship.
New Zealand appears to be unusual in the developed world in that the roll-out of smart meters is being undertaken by the market, with no government control. In this report, I recommend that the Government takes a more hands-on approach to the roll-out of smart meters. The competitive challenges of our electricity market go beyond the supply-side oligopoly. One of the requirements for a well functioning market is that consumers are empowered to make fully informed decisions, and smart meters will greatly assist this.
In the longer term, the innovation that could come from really smart meters – in conjunction with a smart grid – is exciting. Imagine using the batteries in a fleet of electric vehicles as storage for our electricity system. An electric car could ‘talk’ to the retailer via smart communications, automatically ensuring that its battery is charged when electricity is cheapest or the electricity network is least congested.
Further, consider the way in which dry years are managed in this country. Industrial consumers exposed to the very high spot prices occurring during dry years ramp down production to reduce their consumption to ‘hedged’ levels. But spa pools, for example, continue to be heated at the cost of jobs and productivity because there is no dry year price signal.
Dry year shortages might ultimately be managed more rationally by offering all consumers the option of buying their ‘essential’ electricity at a fixed price with exposure to the spot market for the remainder. But this would require really smart meters ‘talking’ to smart appliances. Such smart appliances might include refrigerators that delay defrosting and dishwashers that delay heating until the price begins to fall from a peak.
Finally, I would like to thank my staff who have worked hard on this project, especially Jo Hendy who has cheerfully and competently persisted with unravelling the complexities of this arcane subject.
Dr Jan Wright
Parliamentary Commissioner for the Environment
Smart meters are a technological solution that could lead to more efficient use of electricity in New Zealand households. By using electricity more efficiently, reducing both consumption and peak demand, carbon dioxide emissions and other environmental impacts will be reduced.
Smart meters can be used to:
• provide better information to householders
• add financial incentives to encourage householders to respond to that information
• make it easy and convenient for householders to strengthen that response.
The delivery of these benefits, however, depends on the necessary functionality being included in the meters and on more cost-reflective tariffs being offered.
In New Zealand at present, electricity generator-retailers are deploying the majority of smart meters and so decide on their functionality. Most generator-retailers are planning to omit the functionality that is key to delivering the environmental and consumer benefits. This is not surprising given that encouraging more efficient electricity use appears to offer little financial benefit to retailers. This suggests regulatory intervention is needed to ensure environmental and consumer benefits can be delivered.
There is, of course, a cost to any intervention: the cost of delivering the additional functionality, a risk of stalling the market deployment, and a risk of locking in the ‘wrong’ technology. Other, cheaper options may also be available to induce demand response.
The difficulty in making a decision on intervention ultimately comes down to uncertainty. The size of the environmental benefits depends on the amount of demand-side reduction that can be achieved. And considerable uncertainty surrounds the resulting level of reduction.
In deciding when to intervene, however, the uncertainty must be weighed against the fact that smart meters are already being rolled out by power companies. Waiting for more information before intervening would mean missing this opportunity as retrofitting the key functionality costs considerably more.
To take advantage of this opportunity, there is a need to urgently identify functions that will:
• benefit the environment
• be unlikely to be delivered by the power companies of their own accord
• cost more to retrofit than if they were included in the initial roll-out.
Based on the above criteria, this report highlights two key smart meter functions: home area network (HAN) communication capability and real-time in-home displays.
Smart meters with HAN communication capability will enable a number of functions that show promise in delivering sustained demand reduction and – with appropriate tariffs – load shedding and shifting.
Network communication capability is necessary to enable in-home displays to be installed in places where they are easily visible. Evidence shows that displays that are located in convenient places can deliver sustained demand reduction.
If demand-side management is easy and convenient, it is more likely to be sustained. HAN communication capability will enable easy management. Through network communication, smart meters could interact with smart appliances and smart electric vehicles. This means householders could programme their smart meters to manage their household electricity consumption automatically, mainly delivering load shedding and load shifting. Shedding load at peak times and shifting some load to outside peak times would reduce the need for new power plants.
800,000 meters without HAN capability are planned for roll-out by 2012. Without HAN capability, the benefits from smart meters almost entirely accrue to the retailer. Consumers will end up paying for meters that provide them with minimal benefits.
If this functionality must be added later it will cost an estimated $60 million more – creating an unnecessary barrier. So regulators must ensure that smart meters are rolled out with this capability. This requires urgent intervention.
I recommend that:
1. The Minister of Infrastructure, the Minister of Energy and Resources, and the Minister of Consumer Affairs urgently require power companies to only install smart meters that will not need the capability for home area network communication retrofitted, by making the relevant Electricity Commission guidelines mandatory.
Network communication between devices is governed by protocols. If manufacturers all use different protocols and are not required to share them, it could add unnecessary costs when switching retailers or moving house. This is inefficient, but more importantly, creates a barrier to switching retailers.
This situation can be avoided by requiring:
• the same protocol to be used by all manufacturers. This protocol might be chosen to match one used in a larger jurisdiction.
• ‘open access’ protocols to be used, meaning that manufacturers must share them.
After the provision of telecommunications in New Zealand changed from a monopoly to competition, it took years before people were able to take their phone numbers with them when they switched providers. Number portability was a barrier to consumers. In a similar vein, if proprietary protocols are used in smart meters, consumers could face significant barriers switching between electricity retailers.
I recommend that:
2. The Minister of Infrastructure, the Minister of Energy and Resources, and the Minister of Consumer Affairs require the protocols used in all smart meters and smart appliances to be either the same or ‘open access’ in order to avoid a potential barrier to consumers switching between retailers.
Many households already have smart meters that do not have home area network (HAN) communication and so lack the potential to deliver consumer and environmental benefits.
A public information campaign informing householders about smart metering is needed. Power companies that are deploying smart meters with home area network communication capability have an incentive to provide this information, but others do not, and a government-led campaign may be required.
I recommend that:
3. The Minister of Energy and Resources and the Minister of Consumer Affairs consider running a public information campaign to inform consumers about smart metering and the opportunities it will bring, provided the meters have Home Area Network communication capability.
Smart meters with in-home displays can provide real-time information about electricity consumption. Good information empowers householders to better manage their electricity consumption, benefitting both consumers and the environment. Indications are, however, that the majority of smart meters rolled out by 2012 will not include in-home displays.
Provided a smart meter has home area network communication capability, adding an in-home display is relatively cheap. In-home displays are likely to deliver environmental and consumer benefits mainly by motivating demand reduction, but the size of these benefits is uncertain. Putting in-home displays in every home would probably cost about $100-200 million, so a good estimate of the potential benefit is required before advocating for their inclusion.
To achieve this, a pilot study could be carried out by the government in partnership with a power company, where in-home displays are rolled out to a sample of households and the effects monitored. Careful project design would ensure that the results were statistically significant and regionally representative.
A cost/benefit analysis should then be conducted using the results from the pilot. If justified by this analysis, in-home displays should then be made available to customers. This could be done in a number of ways, such as:
• regulation requiring companies to make them available
• residential end-use electricity efficiency projects
• public/private partnerships to supply them to households.
I recommend that:
4. The Minister of Energy and Resources and the Minister of Consumer Affairs work in partnership with industry to undertake a pilot study to quantify the benefits of in-home displays and, if justified by the results, promote in-home displays to consumers.
To enable appropriate tariffs, micro generation requires export metering. The majority of major generator-retailers are rolling-out meters that can do this, but one is not. The Electricity Commission’s voluntary guidelines state that, as a minimum requirement, smart meters should have export as well as import functionality if micro generation is contracted between a retailer and its customer.
I recommend that:
5. The Minister of Energy and Resources requires retailers to provide export and import functionality in smart meters if micro generation is contracted between a retailer and its customer, by making the relevant Electricity Commission guidelines mandatory.
To gain the greatest load shedding and shifting, it is logical to expect that cost-reflective tariffs must be offered alongside smart meters, and overseas evidence supports this. Both load shedding and load shifting reduce the need for new capacity and so reduce local environmental impacts.
I recommend that:
6. The Minister of Infrastructure, the Minister of Energy and Resources and the Minister for the Environment investigate the merits of intervening to ensure that retailers offer householders tariffs that will better reflect the costs of generation and transmission at different times.
The effectiveness of an emissions trading scheme in the electricity sector may well be enhanced by more cost-reflective tariffs, which would strengthen the carbon dioxide price signal. Before robust conclusions can be drawn, however, the potential effect of load shifting on carbon dioxide emissions from electricity generation needs further analysis.
I recommend that:
7. The Minister for Climate Change Issues initiates a study to clarify the relationship between carbon dioxide emissions and electricity demand and supply patterns.
‘Fuel poverty’ is exacerbated by the reliance of many poorer households on inefficient electric heating. More cost-reflective tariffs may disadvantage households that cannot be flexible in their electricity use. Poorer households, particularly, may respond to these tariffs by simply switching off heaters on winter evenings to save money.
A number of different measures could help mitigate fuel poverty. Until this issue is fully addressed, however, if cost-reflective tariffs for households are introduced, it will be essential to offer households the choice between these tariffs and an average-cost tariff.
I recommend that:
8. The Minister of Energy and Resources requires retailers to continue to offer an average-cost tariff to households if, and when, cost-reflective tariffs are made generally available.
Retailers are currently required to offer a low fixed-charge tariff. This encourages householders to keep their consumption low so that they can be eligible for the low fixed-charge tariff. This tariff option should remain in place, at least until in-home displays and cost-reflective tariffs are widely available.
I recommend that:
9. The Minister of Energy and Resources maintains the requirement for retailers to offer a low fixed charge tariff to householders.