Thursday, July 28, 2011

Post # 76 - New Electric Industry Study Highlights Benefits of Smart Meters to Consumers--And Need for Consumer Education to Achieve Those Benefits

A new white paper by the Institute for Electric Efficiency (IEE), an organization representing about 70% of the U.S. electric industry—including investor-owned utilities, public power utilities, electric cooperatives, and foreign utilities—finds that for a wide variety of utilities under a range of assumptions, the customer and utility benefits of investing in digital ‘smart’ meters, or advanced smart metering technologies and associated energy management technologies will outweigh the costs.

Co-authored The Brattle Group, an economic, financial and regulatory consulting firm, the paper—The Costs and Benefits of Smart Meters for Residential Customers—quantifies three categories of benefits from smart meters: operational, customer, and societal.

In deriving its cost assumptions, IEE relied on smart meter business cases and equipment manufacturers’ prices, as well as projections and other sources. IEE then used a framework involving different types of utilities and customers to compare smart meter benefits and costs. The framework identified four kinds of utilities defined by real-world factors that influence the overall business case for smart meters, including current generation mix, renewable energy portfolio, regulatory environment, energy prices, and emphasis on efficiency and conservation.

In looking at utility customers, the IEE white paper factored in both how likely they were to be engaged in a utility’s energy programs, and how actively they would manage their energy use. Assuming a service area of one million households, IEE found that the total cost for a utility to invest in smart meters and associated home energy management technologies will vary from a low of $198 million to a high of $272 million.

In looking at benefits, the IEE study found that the smart meter investment will produce operational savings (resulting from avoided metering costs, automated outage detection, and remote connections) of between $77 million and $208 million, and customer-driven savings (resulting from energy pricing programs, in-home enabling technologies, and energy information) of between $100 million and $150 million. The net benefits from investing in smart meters ranged from between $21 million and $64 million for the four types of utilities.

With specific reference to consumer benefits, the IEE study calculates five benefits:

1. Avoided generation capacity costs: This is calculated as the change in peak demand times the avoided cost of generation capacity, and then scaled due to system line losses (assumed to be eight percent) and reserve margin (assumed to be 15 percent). The avoided cost of generation is $50 per kW-year and is based on Brattle’s experiences in this field.

2. Avoided transmission and distribution capacity costs: This is calculated as the change in peak demand times the avoided cost of transmission and distribution, and then scaled due to system line losses and reserve margin. The avoided transmission and distribution capacity cost is assumed to be $10 per kW-year and is based on Brattle’s previous experience.

3. Avoided energy costs: This is calculated as the change in energy in each time period (offpeak, peak, and critical peak) times the cost of energy in the respective time period, and then scaled due to system line losses. The avoided energy costs vary by region and are based on reviews of energy market data as well as Brattle’s prior experience.

4. Avoided carbon dioxide costs: This is calculated as the change in energy use in each time period (off-peak, peak, and critical peak) times the carbon dioxide emissions rate in the respective time period times the value of each ton of carbon dioxide emissions. The emissions rate for each utility differs based on the assumed fuel mix. Furthermore, the value of carbon dioxide emissions is the same for each utility but changes over time with a value of zero until 2016. The value of carbon dioxide emissions is $15 per metric ton in 2017 and increases linearly until 2030 when it reaches a price of $60 per metric ton. (This assumes no national carbon legislation will be in place until after the 2016 Presidential election).

5. Avoided gasoline costs: This is calculated as the change in gallons of gasoline consumed times the price of gasoline (assumed to be $3 per gallon [2011 dollars], a conservative approximation for the national average gas price). This benefit, of course, is only applicable to the customers with electric vehicles. But the authors assert that “the strategy with the potential to achieve the greatest financial impact is to focus on accelerating [electric vehicle] adoption. The benefits of [electric vehicles]. . . are disproportionately high, indicating that even modest increases in [electric vehicle] adoption will have a large impact on benefits.

The study concludes that “the customer-driven benefits could be much greater with more investment in and focus on customer education and engagement.” The IEE document states:

Over the 20 year horizon in this study, most customers migrate from passive engagement in energy management to much more active strategies. This holds true for all utilities types. Hence, a potential area for further study is how to accelerate this process so that a broad array of customers are ready, willing, and able to engage in energy management soon after smart meters are deployed.

In this regard, as in similar studies by other groups (see here, here and here), IEE recognizes the importance of consumer education to achieve consumer buy-in: “Given the high satisfaction ratings of dynamic pricing pilot participants where education is a key component, we believe the combination of program choice based on personal preferences (thereby avoiding opt-in, opt-out arguments) with comprehensive consumer education could yield tremendous financial and societal benefits.”

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