Smart Grids and Smart Metering a key for a low carbon energy future Péter Kaderják Director Regional Centre for Energy Policy Research March 20, 2013

Outline of the presentation Traditional electricity networks The vision of smart grids What is smart metering? Costs and benefits Regulatory challenges Basic market models Appendix: pilot projects

1.Traditional electricity networks Characteristics Large, centralised electricity generation Uni-directional flow of electricity, information Passive customers Rare communication between system operator and system users

Challenges to traditional networks Customers become electricity producers The spread of Decentralized Generation Motivation: technology development (gas based microgeneration) and renwables penetration Reverse electricity flow in the network Customers can provide electricity storage services Batteries of electric vehicles Development of electricity markets Hourly electricity price signals More flexible reaction to prices from customers becomes possible – can shift electricity use towards low cost periods Helps system management by reducing peak demand at low cost 21st century IT development Fast and flexible communication of system operator and its users

2.The vision of smart grid infrastructure Characteristics Decentralised generation Bi-directional flow of electricity & information Active customers Active communication of system operator and system users

Smart grids for a better energy sector The future grids (electric, gas, etc.) need to facilitate: Energy efficiency: to change consumer behavior and fend off “rebound effect” Renewables and e-mobility: intermittent and distributed production and consumption The grids also need to be more cost-efficient and reliable. 4A transition towards smart grids, in which smart metering is to play an important role.

Main smart grid initiatives in the EU Smart Grid Task Force set up by the European Commission to outline expected services, functionalities and benefits of smart grids: 4direct interaction and communication among consumers, suppliers and market players 4direct control of consumption patterns; backbone of decarbonized power systems 4integration of RES and EV 4maintaining availability for conventional power generation and system adequacy 4new market in engineering, electronics and IT sectors can enhance worldwide competitiveness of EU companies 4etc. Smart grid priorities of the EC: Developing common European standards Addressing data privacy and security issues Establishing a regulatory framework to provide incentives Guaranteeing an open and competitive retail market Continuous support for innovation and its adaptation

Smart grids: EU tendencies Between 2000-2010, €5.5bn invested in about 300 smart grid projects in Europe (of which €300mn from EU budget) But, e.g., still only about 10% of households have smart meters, and most do not utilize their full capabilities About ¾ of investments in smart meters; second largest category is investments in integrated systems Other main project categories: power storage, home applications, distribution automation, transmission automation Largest project in Europe: Italy’s smart meter roll-out A change in the composition of investments is expected: the EC forecasts that 15% will be spent on smart metering deployment and 85% to upgrade the rest of the system. Smart metering may not prove the most expensive part of the system, but it will be a precondition for the whole system to operate

3. What is smart metering (SM)? Smart metering is more than just smart meters: Electrical meters – instead of traditional electromechanical ones Related hardware equipment (e.g. home displays) Communications network Data management and control center consumption data Smart meter(s) Utility / Service provider remote load controls / disconnection real-time information energy reporting, dynamic energy tariffs, energy analysis & advice Computer / web interface / mobile / home display A scheme of smart metering Building control center heating, cooling, ventilation, electrical appliances

What is smart metering (SM)? (cont’d) Although smart metering is most often envisaged as a part of a smart grid (or “smart homes”), it can also contribute to a greener, more efficient and more stable energy sector in itself by: 4showing data to the consumer to induce more energy consciousness 4allowing time-of-use tariffs for demand-side management and peak-demand shaving 4allowing continuous diagnostics of the grid and observing electricity theft But smart meters alone cannot do the job: 4a complex solution including the hardware and software, and also an appropriate selection of tariffs and services (e.g. data analytics and advisory for customers) is needed.

Requirements for smart metering Interval meter data: Load profile measurement for intra-hour intervals Remote meter reading and data processing Remote meter management: Power reduction, disconnection, demand management Measurement of consumption and generation by distributed units Ability to manage multiple tariffs Remote message transfer from market players to consumers and generators (e.g. price signals) Information display for consumption statistics Power quality measurement Continuity of supply and voltage quality Bidirectional communication (via PLC, GSM, GPRS, etc.) Not just for electricity: also for gas, water, district heating, appliances.

Privacy and security issues Privacy of consumers: 4ensuring that consumers are not subjected to unwanted targeting, profiling and marketing activity Data safety for competing suppliers: 4ensuring the security of sensitive business data 4multi-utility systems are especially exposed to this problem Data security: 4protection against hackers (and stealing consumers) EU recommendations: 4standardization is needed 4distinguishing personal and non-personal data 4the Netherlands: roll-out delayed due to privacy issues

4.Potential benefits of smart metering 4Savings on bills 4Quicker and easier supplier switching 4Increased competition among retailers 4More accurate billing 4Prepayment options 4Increased level of services 4Remote connections and disconnections 4Faster fault location and reconnection after outages 4More accurate calculation of network losses and reactive power 4More accurate monitoring of continuity of supply and voltage quality Consumers DSOs Metering companies Energy retailers 4Cost savings by avoiding manual meter reading 4More accurate data 4Better input data for designing pricing options and energy management services 4Reduction in costs of managing queries regarding bills 4Reduced theft 4Reduced bad debt costs by allowing remote disconnection and prepayment options 4Cost savings on the administration of supplier switching 4Better planning for balancing Government / society 4Overall energy savings 4More cost-efficient energy sector 4Support of distributed generation and the integration of renewables

Costs of smart meters Costs can arise from a variety of sources: Largest part is usually the initial cost of installation Some variable costs can increase: e.g. maintenance and data management costs New cost item: the variable cost of communication Smart metering devices likely consume more power than traditional metering Costs arising from security and safeguarding data privacy A multi-utility system can result in savings compared to parallel individual systems 4common optimization of meter reading and maintenance costs, e.g. by shared communication system and display

5. Regulatory challenges Smart grid deployment is a regulation-driven process 4Regulatory support in remunerating investments is crucial. Commonly a separate metering charge is included in energy bills: 1. Smoothed charge: 4for long-term cost recovery 2. Annually varying charge: 4reflects the relation of costs and benefits for each year 3. Upfront charge, followed by a lower regular charge: 4upfront charge for investments, regular charge for operation 4An important question: what share of the costs can or should be passed on to consumers?

6. Basic models of smart metering Three basic models of smart metering can be differentiated: Distributor (DSO) model Trading company (retailer) model Independent metering company model Generator Wholesaler TSO Trader DSO Energy chain Data center Financial link Smart metering device Information flow Consumer

Summary Smart metering must be a complex solution involving “smart” services and tariffs – ideally pointing towards a smart grid with renewables integration, energy efficiency and increased security of supply Deployment of smart metering solutions always boils down to a question of costs and benefits A major challenge for regulators is the remuneration of investments as costs often emerge at different actors than most benefits Privacy and data security is crucial. So is the protection of vulnerable households For different markets, different solutions: pilot projects are necessary before widespread roll-out

THANK YOU FOR YOUR ATTENTION! pkaderjak@uni-corvinus.hu www.rekk.eu +36 1 482 7071

Appendix

Pilot projects Before large-scale deployment, usually pilot projects – regional or nationwide – are carried out in most countries. The aims of pilot projects are usually threefold: Research of technology Analyzing consumer behavior Testing cooperation among utilities all three in a context of a cost-benefit analysis Three examples: 4the United States, Italy and Ireland

Pilots: United States By May 2012 already 36mn meters installed, 65mn expected by late 2015 2008 Stimulus Bill gives a significant tax advantage for installing smart meters and grids Financing: utilities typically seeking guaranteed cost-recovery with distribution-based surcharge A key question is rate decoupling: removing utilities’ incentives of selling as much energy as they can In California, a USD 1.7bn undertaking by PG&E since 2006 As a result of state-wide policy, but remote meter reading, remote disconnections and outage management were also important factors Pilot results show that most consumers have very low demand elasticity and do not change their consumption patterns much – but all of them pay for the program Most utilities can report economies of scale when installing smart meters for both electricity and gas with a common communication system

Pilots: United States (cont’d) In standalone gas smart meter deployments a very low NPV and no significant demand response was reported ⇒ consumer protection group Ratepayer Advocate filed protest, seeking least-cost alternatives to smart meters Questions remain about the impact on low-income consumers: potential effects depend strongly on different climates, price zones and customer demographics (e.g. peak-time air conditioner usage among the elderly is not everywhere a problem) The role of smart tariffs deemed important: “There is no point in having smart meters if you’re still going to have dumb rates.” (a representative of the Washington, D.C. Public Service Commission) Cost savings in smart metering operations remain ambiguous Regulatory challenge of default service policies: in case of volatile intraday end-user electricity prices, how will essential electricity services remain affordable?

smart meters & data concentrators Pilots: Italy Smart metering deployment in electricity by Enel since 1999 – an evolution into a smart grid envisaged between 2007-2020 Uniquely large-scale project: 33mn meters have been installed Return of investments estimated in 5 years after deployment Cost structure: 73% smart meters & data concentrators 20% installation 7% system Largest cost savings in field operations and logistics: Reduced failures of meters, outage & quality of supply monitoring, practically no on-site reading (99% less), much lower logistics costs due to standardization of meters Substantial savings in energy losses: More accurate fraud detection: up to 50% more theft detected Moderate savings due to less bad loans

Pilots: Ireland National pilot project in electricity and gas, nationwide deployment to take place between 2014-2018 Overarching objective: measurable change in consumer behavior to reduce peak demand and overall energy usage when smart metering is coupled by DSM In electricity: time-of-use tariffs together with detailed feedback to the consumer in their bills Main results so far: a reduction of 2.5% in electricity consumption and 8.8% in peak demand 91% of consumers reported they found home displays effective in helping them reduce their peak loads Fuel poor households’ behavior matched that of the average consumer In gas: Bi-monthly changing tariffs led to a 2.9% reduction in overall gas usage Most smart metering options considered exhibit an investment with a positive NPV