Cost-Benefit Analysis (CBA) for a National Gas Smart Metering Rollout in Ireland

Transcription

1 Cost-Benefit Analysis (CBA) for a National Gas Smart Metering Rollout in Ireland DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: Information Paper CER11180c 11 th October 2011 The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin

2 CER Information Page Abstract: This cost-benefit analysis (CBA) delivers the findings of a robust economic assessment of the long-term costs and benefits to the market and the individual consumer (residential and small businesses) of a national gas smart metering rollout in Ireland. Target Audience: This paper is for the attention of members of the public, the energy industry, energy consumers and all interested parties. For further information on this Information Paper, please contact Gary Martin (gmartin@cer.ie) at the CER. Related Documents: Smart Metering Information Paper 5 CER/11/ Oct Gas Smart Metering Customer Behaviour Trial (CBT) Findings Report CER/11/180a 11th October Dual Fuel Smart Metering Technology Trial Findings Report CER/11/180b 11th October 2011 Smart Metering Information Paper 4 CER/11/ May Electricity Smart Metering Customer Behaviour Trials (CBT) Findings Report CER/11/080a 16 th May Electricity Smart Metering Technology Trial Findings Report CER/11/080b 16 th May Electricity Smart Metering Cost-Benefit Analysis (CBA) Report CER/11/080c 16 th May 2011 Smart Metering Consultation Papers and Responses: - Responses to Consultation Paper 2 CER/11/033 18th February Consultation Paper 2 CER/10/197 11th November Responses to Consultation Paper 1 CER/10/161 9th September Consultation Paper 1 CER/10/082 11th June

3 Executive Summary i. Introduction The CER has worked with industry stakeholders to produce a detailed costbenefit analysis (CBA) on a number of options for the national rollout of smart meters in the Irish gas market. This follows on from the electricity smart metering CBA published by the CER in May 2011 (CER/11/080c). A fundamental assumption of the gas CBA is that a national gas smart metering rollout leverages the infrastructure that would be put in place for electricity smart metering, hence only costs incremental to those already included in the electricity CBA are included in the gas CBA. The gas CBA delivers a robust economic assessment of the long-term costs and benefits to the market and the individual consumer (i.e. all gas customers in the G4 meter category, which includes all residential customers and some nonresidential customers, mainly small businesses) of a national gas smart metering rollout. The analysis indicates that the rollout of smart metering has the potential to provide a positive net benefit to the Irish gas market and consumers. The publication of this report is a major milestone in the CER s Smart Metering Project, and a key deliverable in the completion of Phase 1, which focused on delivering electricity and gas smart metering trials and cost-benefit analyses. The findings from the CBA will provide a rich source of information which will be used to inform energy policy decisions in Ireland relating to smart metering enabled initiatives such as more detailed and frequent billing, in-home displays, innovative tariffs and prepayment metering. 3

4 ii. Background to the CBA Smart meters are the next generation of meters, which can replace existing electro-mechanical and diaphragm meters and offer a range of benefits for both the individual electricity and gas consumer and for the electricity and gas systems in general. The implementation of a smart metering system encompasses more than just metering. It is essentially a hybrid technology consisting of three high level layers; physical meters and associated devices, communications layer covering data transport and communications network management, IT systems which manage the data, applications, and services. At the core of a smart metering system is a more sophisticated digital metering unit. It records customers actual use of electricity/gas over short intervals (e.g. every 30 minutes). These meters are connected by a communications system to the network company / meter data collector providing the operator with automated, up-to-date information on the amounts of electricity/gas used by customers. From a technical perspective, access to this information provides opportunities to reduce network operation costs, including reduced costs of visiting customer premises to manually read the meter and carrying out any necessary connections and disconnections. There are also savings due to reductions in technical losses and theft. The data collected from smart meters can also be used by electricity and gas suppliers, subject to data protection requirements, to deliver useful information to their customers regarding their electricity and gas consumption and costs. In particular, the installation of smart metering will allow electricity suppliers to create innovative pricing arrangements that can be offered to customers to support the efficient use of electricity, such as time-of-use electricity tariffs. This is where the price of electricity varies at different times of the day to reflect the changes in the costs of producing electricity. This will allow customers to manage their consumption of electricity in line with price movements and demand patterns. Smart meters can facilitate improving energy efficiency by empowering consumers with more detailed, accurate, and timely information regarding their energy consumption and costs, thus helping consumers reduce any unnecessary energy usage and shift any discretionary electricity usage away from peak consumption times. The benefits of smart metering are recognised internationally and there are a number of key EU legislative instruments promoting smart metering to ensure that customers are properly informed of actual energy consumption and costs frequently enough to enable them to regulate their energy consumption. In particular the 3 rd Package requires that Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the electricity and gas supply markets. The 4

5 implementation of those metering systems may be subject to an economic assessment of all the long-term costs and benefits to the market and the individual consumer or which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their distribution. While much work is underway at a European level in the development of technical standards and guidelines of good practice, the status of smart metering for electricity and gas in Europe is still diverse and changing at a rapid pace. In March 2007 the Commission for Energy Regulation (CER) issued a Demand Side Management and Smart Metering Consultation Paper (CER/07/038) 1 in which the case for providing domestic and small business customers with time of use (ToU) electricity prices and smart metering arrangements was made. This was followed in November 2007 with the publication by the CER of an information paper, Smart Metering - The Next Step in Implementation (CER/07/198) 2, which outlined a proposed framework in which the future scope of smart metering arrangements can be established. Following on from the conclusions reached in the smart metering information paper CER/07/198 the CER established the Smart Metering Project Phase 1 in late 2007 with the objective of setting up and running smart metering trials and assessing their costs and benefits, which will inform decisions relating to the full rollout of an optimally designed universal National Smart Metering Plan. In order to draw on the experience and expertise of the electricity and gas market a Steering Group and a Working Group was established by the CER for the Smart Metering Project Phase 1. Both groups are chaired by the CER and consist of representatives from the Department of Communications, Energy and Natural Resources (DCENR), Sustainable Energy Authority of Ireland (SEAI), the Northern Ireland Authority for Utility Regulation (NIAUR) and Irish Gas and Electricity Industry Participants. The Economic and Social Research Institute (ESRI) was engaged by the CER to partner delivery of the electricity cost-benefit analysis and to peer review the gas cost-benefit analysis. Frontier Economics was engaged to work with the CER to deliver the gas cost-benefit analysis. This gas CBA is another key deliverable of Phase 1 of the CER Smart Metering Project. It draws information from the following key Phase 1 deliverables which are published alongside it: Gas Customer Behaviour Trials (CBT) Findings Report (CER/11/180a) The gas customer behaviour trial is among the largest and most statistically robust smart metering behavioural trials conducted 1 f54fb368be f54fb368be16 5

6 internationally to date and thus provides a wealth of insightful information on the impact of smart metering enabled initiatives on gas consumers. The gas CBT looked at the measureable reduction in customer demand achievable through the use of smart meters in combination with a number of information stimuli (i.e. detailed billing on a bi-monthly and monthly frequency, in-home displays) and a variable tariff. Dual Fuel Technology Trial Findings Report (CER/11/180b) The dual fuel technology trial examined the general concept of gas smart metering leveraging the electricity smart metering communications infrastructure. This trial enabled Bord Gáis Networks and ESB Networks to attain a better understanding of the requirements and risks that would be associated with a dual fuel (i.e. electricity and gas) national smart metering rollout. Figure 1: Smart Metering Project Phase 1 Participants and Deliverables Customer Behaviour Trials Findings Reports Electricity: CER/11/080a Gas: CER/11/180a Technology Trials Findings Reports Electricity: CER/11/080b Dual Fuel : CER/11/180b Cost-Benefit Analyses Reports Electricity: CER/11/080c Gas : 6

7 These reports on gas smart metering follow similar reports on electricity smart metering which were published by the CER in May 2011 (CER/11/080). The electricity smart metering customer behaviour trial and cost-benefit analysis findings were positive, indicating that consumers respond positively to smart metering related demand side management (DSM) measures and that a strongly positive net benefit for Irish electricity market and consumers is likely to be achieved from proceeding with a national electricity smart metering rollout. This combined suite of electricity and gas smart metering findings reports, the publication of which mark the culmination of the exploratory Phase 1 of the Smart Metering Project, is intended to inform the Commission for Energy Regulation (CER), the Department of Communications, Energy and Natural Resources (DCENR), and stakeholders of the possible merits of providing smart electricity and gas meters to residential and SME customers in Ireland. In addition, the CBAs should help cast light on the relative attractiveness of various design options for implementation of smart metering and the main sources of risk associated with a national rollout. 7

8 iii. Approach to the Gas CBA For the purposes of compiling the gas CBA, Bord Gáis Networks, ESB Networks and gas suppliers currently active in the Irish market were requested by the CER to provide smart metering related costs and benefits in accordance with the national smart metering high level design and implementation assumptions, which had been developed by the CER via the Smart Metering Project industry forums and a public consultation process. The CER reviewed and validated the submitted costs and benefits, including a review by a contracted independent third party, Frontier Economics. Some sources of costs and benefits are more amenable to quantification than others, so the analysis is divided between quantifiable and qualitative sources of costs and benefits. To place some structure on the analysis of the quantifiable elements, costs and benefits are also divided into rough categories by source: networks, suppliers/shippers, and consumers. The validated network and supplier related costs and benefits were then inputted into a CBA model developed by Frontier Economics and peer reviewed by the ESRI. Results from the gas customer behaviour trial (CER/11/180a) were also inputted into this CBA model in order to derive the usage-related benefits and some of the networkrelated benefits. The cost-benefit analysis assesses the broad societal costs and benefits of implementing smart metering rather than the private costs and benefits to any given subset of affected parties. The Gas CBT Findings Report (CER/11/180a) does illustrate some distributional effects arising from a move to smart metering related initiatives for gas. There may also be distributional effects along the value chain, for example transfers of welfare between suppliers and customers, but to economise on the time required for this analysis such effects have not been modelled. The CER identified 8 high level smart metering national rollout options. The overall attractiveness of each option is identified for the quantifiable costs and benefits by computing the net present value (NPV) of the project in 2011, taking into account predicted cash flows from The gas CBA analysis varies according to the different meter deployment and energy savings scenario assumptions, and the underlying counter-factual business as usual scenario. A scenario based approach has been used to assess the impact of the different assumptions, based on: Two separate meter deployment scenarios, i.e. fast and phased meterdeployment scenarios: Fast rollout: in this case all smart meters would be installed in four-years, 2015 to 2018; and 8

9 Phased (or slow ) rollout: in this case, smart meters would be installed only when traditional non-smart meters would have to be replaced, thus completing the full rollout only in 2030; (although the retro-fitting of the smart-ready meters already installed at the start of the rollout would take place over an accelerated four-year period, 2015 to 2018); Four separate energy saving scenarios depending on the type of customer informational stimuli deployed in a national rollout (based on Gas Customer Behaviour Trial Findings CER/11/180a). Informational dimensions are frequency (bi-monthly or monthly) and detailed content (energy statement) of billing used with smart metering, whether an in-home display (IHD) device is deployed or not and whether a variable tariff is added. Table 1 below summarises the options analysed. Table 1: List of Options Analysed in CBA Option Energy Code. Saving 9 Meter Rollout Scenario Scenario 1F Bimonthly ES Fast 1S Bimonthly ES Phased 2F Monthly ES Fast 2S Monthly ES Phased 3F Bimonthly ES + IHD Fast 3S Bimonthly ES + IHD Phased 4F Bimonthly ES + IHD + Variable Tariff Fast 4S Bimonthly ES + IHD + Variable Tariff Phased ES=Energy Statement; IHD = In-home Display A fundamental assumption of the gas CBA is that a national gas smart metering rollout leverages the electricity smart metering infrastructure. The gas smart metering high-level design assumptions that underpin the gas CBA are predicated on this assumption: The electricity meter will act as the utility communication-hub for the home; The gas meter will communicate with this communication-hub on the electricity meter; The electricity meter communication-hub will forward the gas data via the electricity smart metering wide area network (WAN) communications system to the electricity smart metering meter data management system (MDMS) at the required intervals; The electricity smart metering MDMS will in turn send the gas related data to the gas smart metering MDMS and then onwards to the customer information system (CIS) for validation and processing in accordance with the required gas market processes. If a dual fuel in-home display (IHD) is part of the smart metering rollout solution then the electricity meter communication-hub will also forward the gas data to the IHD.

10 Figure 2 below illustrates the high level design assumptions for a dual fuel national smart metering rollout, highlighting the specific components of the electricity smart metering infrastructure that a gas smart metering is assumed to leverage. The costs of the national rollout of the electricity smart metering infrastructure have already been included in the electricity smart metering CBA (CER/11/080c) and therefore these costs are not double-counted in the gas CBA model, which captures only the incremental costs to be borne by the electricity smart metering rollout as a result of facilitating gas smart metering i.e. the additional incremental electricity smart metering communication and meter data management system (MDMS) costs. The CER wishes to emphasise that the regulatory treatment of costs and their attribution to various segments of the industry in this CBA are without prejudice to any findings that may be made in the context of future price control measures or other regulatory actions. Figure 2: High-level system architecture overview Customer Premises Local Area Networks Wide Area Networks Meter Data Collection BGN Managed Systems GIS MAM OMS In Home Display Head End Data Collector 1 A2A Integration Electricity Smart Meter Head End Data Collector 2 Meter Data Management System B2B Integration Meter Data Management System Gas Smart Meter Head End Data Collector n A2A Integration Market Systems CIS Industry Portal B2B Integration Joint Responsibility for provision ESBN Responsible for provision BGN Responsible for provision Gas Shippers End Customers 1 MAM = Meter Asset Management (MAM) system, i.e. the BGN MAXIMO system 2 CIS = Customer Information System (CIS), i.e. currently the BGN Integrated Utility System (IUS) 3 OMS = Operational Meter System 10

11 iv. Key Findings of the CBA Overall Results from Quantifiable Analysis The estimated total NPVs for the 8 national gas smart metering rollout options (Table 2 and Figure 3 below) analysed in the quantitative CBA are generally positive, often substantially so, for options including an IHD (options 3 and 4), and generally negative or marginal for options not including an IHD (options 1 and 2), with the exception of option 1F. The NPVs are generally more favourable for energy saving scenarios based on the fast rollout scenario compared to the phased rollout scenario. The energy saving scenario with the strongest NPVs, especially for the fast rollout scenario, is the combination of energy statement with IHD and variable tariff (Option 4F and 4S). If these results were borne out in an actual deployment of gas smart metering, leveraging an electricity smart metering infrastructure, the project would bring about net benefits for Ireland in comparison with the base case (counterfactual) scenario for the with IHD options (3 and 4), especially if a fast rollout approach is taken (options 3F and 4F), and also the without IHD option 1F. Table 2: Total NPV by option Energy saving scenario Meter rollout scenario Option code Total incremental NPV (EUR) Bimonthly ES Fast 1F 15,663,848 Bimonthly ES Phased 1S -1,612,759 Monthly ES Fast 2F 938,003 Monthly ES Phased 2S -13,870,616 Bimonthly ES + IHD Fast 3F 33,323,837 Bimonthly ES + IHD Phased 3S 12,101,010 Bimonthly ES + IHD + VT Fast 4F 59,879,967 Bimonthly ES + IHD + VT Phased 4S 33,991,380 ES=Energy Statement; IHD = In-home Display; VT = Variable Tariff 11

12 Figure 3: Total NPV ( m) by options Summary of NPV Breakdown by Component Figure 4 below depicts the distributional breakdown by component of the total NPV for the fast rollout options. Figure 4: Fast Rollout Options - NPV ( m) Breakdown by Component 12

13 The same distributional trend is broadly reflected in the phased rollout options also. The Networks component is generally strongly negative in all options (ranging from - 58m to - 64m for fast scenarios and from - 61m to - 67m for phased scenarios) and Customer component being strongly positive (ranging from - 77m to - 122m for fast scenarios and from - 63m to - 100m for phased scenarios). The Supplier/Shipper component remains mainly marginal (circa - 1m) for most options, except for the smart metering monthly billing options which are strongly negative (- 33m to - 38m). Sensitivity Analyses 11 sensitivity tests were conducted on the gas CBA model. Important sources of variation in estimated NPVs arose from assumptions about the price of gas and the discount rate used (Table 3 below). The NPVs are also moderately sensitive to increases in the cost of smart meters and supplier IT systems costs. Generally the with IHD options, which generally have the strongest NPVs of all options, proved very sensitive to a change in the assumption regarding the persistence of the IHD energy saving impact post-2020 (Table 4 below). They are also sensitive to a lesser but not insignificant extent to a change in the assumption regarding sharing of the IHD device costs. The other sensitivity tests all improved the NPVs across all options from minor to moderate extents. Table 3: Discount Rate that would turn each option s NPV to zero Energy saving scenario Meter rollout scenario Option code Discount rate cut-off value Bimthly ES Fast 1F 5.8% Bimthly ES Phased 1S 3.8% Monthly ES Fast 2F 4.1% Monthly ES Phased 2S 1.9% Bimthly ES + IHD Fast 3F 7.4% Bimthly ES + IHD Phased 3S 5.6% Bimthly ES + IHD + VT Fast 4F 9.8% Bimthly ES + IHD + VT Phased 4S 8.1% ES=Energy Statement; IHD = In-home Display; VT = Variable Tariff 13

14 Table 4: Sensitivity 8: IHD effect wanes after 2020 Base case Sensitivity 8 Meter Energy saving Option rollout scenario code scenario NPV NPV Difference TRUE Bimthly ES + IHD Fast 3F 33,323,837 13,531,982-19,791,855 Bimthly ES + IHD Phased 3S 12,101,010-5,433,405-17,534,415 Bimthly ES + IHD + VT Fast 4F 59,879,967 20,296,257-39,583,710 Bimthly ES + IHD + VT Phased 4S 33,991,380-1,077,451-35,068,831 ES=Energy Statement; IHD = In-home Display; VT = Variable Tariff Societal Benefits from reduced emissions of greenhouse gases The reduction in gas usage will result in societal benefit for Ireland in the form of abated carbon dioxide (CO 2 ) emissions from less gas being burnt. The value of this carbon abatement is included as part of the calculation of the consumer usage-related reduction using the carbon tax as a proxy for the value of carbon. The amounts of carbon abated for each of the CBA scenarios is calculated using the CO 2 emissions intensity factor for natural gas of 0.190kg of CO 2 per kwh. Figure 5 below shows the total CO 2 savings, across the entire CBA period, for each gas smart metering national rollout option analysed in the CBA. Figure 5: Total CO2 savings by option (tco2) 14

15 iv. Next Steps The rollout of smart metering represents a major national infrastructure project and the publication of this report is one of the defining milestones in its delivery. Given the scale of investment required to deliver smart metering, a thorough and robust analysis is required to substantiate any rollout decision. This CBA, which concludes the potential for a positive net benefit for gas consumers, will facilitate the further development of the Smart Metering Project. The next steps for the project are outlined in the Smart Metering Information Paper 5 (CER/11/180) which accompanies this CBA report. The CER appreciates the significant contribution of all stakeholders that have been involved in compiling this CBA and the other reports and looks forward to their ongoing involvement in the next steps for the Smart Metering Project. 15

16 Table of Contents Executive Summary... 3 i. Introduction... 3 ii. Background to the CBA... 4 iii. Approach to the Gas CBA... 8 iv. Key Findings of the CBA iv. Next Steps List of Figures List of Tables Introduction The Commission for Energy Regulation Purpose of This Paper Acknowledgements Approach to Analysis Background Information What is Smart Metering? EU Legislation EU Initiatives Smart Metering Rollout Status in Europe Smart Metering Progress in Ireland Government Policy and Legislation CER Smart Metering Project Structure of This Paper Commenting on This Paper Overview of Quantifiable Gas CBA Structure Introduction High-level Design and Functional Requirement Assumptions High-level Design Assumptions Functional Requirements Assumptions PPM Meter Solution Remote Re-enablement of the Meter Gas CBA Options Gas CBA Scope and Calculation Assumptions Scope of the Gas CBA Key Calculation Assumptions Structure of Remaining Document Quantifiable Costs and Benefits for Networks Introduction Networks Related Costs Meter Capital Costs Smart Communication Module Failures Smart Metering IT Systems Costs Electricity Smart Metering Interface Incremental Costs Network Related Benefits Meter Reading Benefits

17 3.3.2 Siteworks Savings Meter Exchanges Prepayment Meter Exchange and Operations Savings Fuel Gas Savings Revenue Protection - Theft of Gas System Reinforcement Quantifiable Costs and Benefits for Suppliers Introduction Retail Enquiries and Complaints Option 1 (Bi-monthly Billing) Option 2 (Monthly Billing) Customer Education and Awareness Campaign Option 1 (Bi-monthly Billing) and Option 2 (Monthly Billing) Bill Printing Costs Option 1 (Bi-monthly Billing) Option 2 (Monthly Billing) Colour Printing Set-up Costs Debt Management Benefits Option 1 (Bi-monthly Billing) and Option 2 (Monthly Billing) Working Capital Staff Training Costs IT Systems Costs IT Systems CAPEX for Option 1 (Bi-monthly Billing) and Option 2 (Monthly Billing) IT Systems OPEX for Option 1 (Bi-monthly Billing) and Option 2 (Monthly Billing) Web Portal Payment Transactions Costs Option 1 (Bi-monthly Billing) Option 2 (Monthly Billing) Supplier Switching Related Benefits Option 1 (Bi-monthly Billing) and Option 2 (Monthly Billing) Hedging Benefits Prepayment Benefits Quantifiable Costs and Benefits for Consumers Introduction Residential usage-related benefits Gas Cost Average Quantity Societal Benefits Non-usage related costs and benefits Reduction in complaints Elimination of dial-a-read calls Familiarisation cost of smart metering Results of Quantifiable Cost-Benefit Analysis Introduction

18 6.2 Options and CBA Parameters Options tested in the CBA High level parameter assumptions used in the CBA Total NPV by Option NPV Components by Option Network Component Supplier Component Customer Component Societal Component Summary of NPV Breakdown by Component Sensitivity Tests Sensitivity Test 1: Shared IHD Cost Sensitivity Test 2: Meter Costs Increase Sensitivity Test 3: Programme Management Costs Sensitivity Test 4: Supplier IT Systems Costs Increase Sensitivity Test 5: Dual Fuel Licence Cost Discount Sensitivity Test 6: Lower communication OPEX costs Sensitivity Test 7: Energy Savings for Small Businesses Sensitivity Test 8: IHD benefit wanes from 2020 onwards Sensitivity Test 9: Gas Price Forecasts Sensitivity Test 10: Gas Price Consistent with Electricity CBA Sensitivity Test 11: Discount Rate Summary of Sensitivity Tests Summary Qualitative Costs and Benefits Introduction Potential for greater usage-related benefits Monthly Electronic Billing Costs for Suppliers Hedging Benefits for Suppliers Customer Interface Costs and Benefits Competition-related Benefits Consumer Investment Related Benefits Summary Conclusions Summary and Next Steps Appendix A Glossary

19 List of Figures Figure 1: Smart Metering Project Phase 1 Participants and Deliverables... 6 Figure 2: High-level system architecture overview Figure 3: Total NPV ( m) by options Figure 4: Fast Rollout Options - NPV ( m) Breakdown by Component Figure 5: Total CO2 savings by option (tco2) Figure 6: Smart Metering Project Phase 1 Participants and Gas Deliverables 22 Figure 7: General structure of a smart metering system Figure 8: Smart Metering Project Phase 1 Overview of Participants Figure 9: Smart Metering Project Phase 1 Governance Structure Figure 11: Overview of Gas CBA Structure Figure 12: High-level system architecture overview Figure 13: High-level overview of meter functional requirements Figure 14: Overview of Programme Timetable (Fast Rollout) Figure 15: Prepayment Penetration Rates Assumed - All Scenarios Figure 16: Total NPV ( m) by Option Figure 17: Total CO2 Savings by Option (tco2) Figure 19: Phased Rollout Options - ( m) Breakdown by Component Figure 20: Sensitivity of NPV to Real Discount Rate for Options 1F, 2F, 3F, 3S, 4F, 4S

20 List of Tables Table 1: List of Options Analysed in CBA... 9 Table 2: Total NPV by option Table 3: Discount Rate that would turn each option s NPV to zero Table 4: Sensitivity 8: IHD effect wanes after Table 5: Status of Smart Metering CBA Development in EU Member States Table 7: Meter Capital Costs - Fast Rollout Scenario Table 8: Meter Capital Costs - Phased Rollout Scenario Table 9: Smart Meter Rollout Schedule - Fast Scenario Table 10: Gas Meter Population in Table 11: Smart-communication module failure assumptions Table 12: Smart metering IT systems - All Scenarios Table 13: Smart metering programme costs assumptions Table 14: Summary of Costs for interface with electric meters Table 15: Summary of Meter reading savings Table 16: Summary of Siteworks Savings Table 17: Failure rates Table 18: Meter exchanges costs Table 19: Prepayment Churn Rate Assumptions Table 20: PPM operations savings assumptions Table 21: Fuel gas savings assumptions Table 22: Supplier ('Gas shippers') - Costs and Benefits Overview Table 23: Gas CBT Results Overview Table 25: New builds Usage and Rate Assumptions Table 27: List of Options Analysed in CBA Table 28: Total NPV by Option Table 29: NPV by Option for Network Component Table 30: NPV by Option for Supplier Component Table 31: Gas Customer Behaviour Trial Results Table 32: NPV by Option for Customer Component Table 33: Total CO2 Savings by Option (tco2) Table 34: Summary of NPVs ( m) by Option Table 35: Results of Sensitivity Test 1 - Shared IHD Cost Table 36: Results of Sensitivity Test 2 - Meter Costs Increase Table 37: Results of Sensitivity Test 3 - Programme Management Costs Table 38: Results of Sensitivity Test 4 - Supplier IT Systems Costs Increase Table 39: Results of Sensitivity Test 5 - Dual Fuel Licence Cost Discount Table 40: Results of Sensitivity Test 6 - Lower communication OPEX costs Table 41: Results of Sensitivity Test 7 - Energy Savings for Small Businesses 128 Table 42: Results of Sensitivity Test 8 - IHD benefit wanes from Table 43: ICE Gas Futures Prices Used in Sensitivity Test Table 44: Results of Sensitivity Test 9 - Gas Price Forecasts Table 45: Results of Sensitivity 10 - Gas Price Consistent with Electricity CBA 131 Table 46: Discount Rate That Would Turn Each Option s NPV to Zero

21 1.0 Introduction 1.1 The Commission for Energy Regulation The Commission for Energy Regulation ( the CER ) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The CER was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act The enactment of the Gas (Interim) (Regulation) Act 2002 expanded the CER s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the CER powers to regulate electrical contractors with respect to safety, to regulate natural gas undertakings involved in the transmission, distribution, storage, supply and shipping of gas and to regulate natural gas installers with respect to safety. The Electricity Regulation Amendment (SEM) Act 2007 outlined the CER s functions in relation to the Single Electricity Market (SEM) for the island of Ireland. This market is regulated by the CER and the Northern Ireland Authority for Utility Regulation (NIAUR). The CER is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector. 1.2 Purpose of This Paper The purpose of this paper is to outline and describe in detail the results of the cost-benefit analysis (CBA) for a national rollout of gas smart metering in Ireland. The scope of the CBA covers all gas customers in the G4 meter category, which includes all residential customers and some non-residential customers. This gas CBA follows on from the electricity smart metering CBA published by the CER is May 2011 (CER/11/080c). A fundamental assumption of the gas CBA is that a national gas smart metering rollout leverages the infrastructure that would be put in place for electricity smart metering, hence only costs incremental to those already included in the electricity CBA are included in the gas CBA. This gas CBA delivers a robust economic assessment of the long-term costs and benefits (incremental to those already included in the electricity smart metering CBA) to the market and the individual consumer of a national gas smart metering rollout. This will inform decisions to be made regarding the rollout of smart metering in Ireland. The findings from the CBA provide a rich source of information which will be used to inform energy policy decisions in Ireland relating to smart metering enabled initiatives such as more detailed and frequent billing, in-home displays, innovative tariffs and prepayment metering. This CBA is a key deliverable of Phase 1 of the CER Smart Metering Project. It draws upon other key Phase 1 deliverables which are published alongside it i.e. 21

22 the Gas Customer Behaviour Trial Findings Report (CER/11/180a) and the Dual Fuel Technology Trial Findings Report (CER/11/180b). It should be noted that, for the purposes of compiling the CBA, Bord Gáis Networks, ESB Networks and gas suppliers currently active in the Irish market were requested by the CER to provide smart metering related costs and benefits in accordance with the national smart metering high level design and implementation assumptions which had been developed by the CER via the Smart Metering Project industry forums and a public consultation process (refer to section 2.2 for further details). The CER reviewed and validated these costs and benefits, including an external review by Frontier Economics. Figure 6: Smart Metering Project Phase 1 Participants and Gas Deliverables Gas Customer Behaviour Trials Findings Report (CER/11/180a) Dual Fuel Technology Trial Findings Report (CER/11/180b) Gas Cost-Benefit Analysis Report () 1.3 Acknowledgements The Smart Metering Project is a collaborative project managed by the Commission for Energy Regulation (CER) with the support of multiple energy 22

23 industry stakeholders (Figure 6). The cost-benefit analysis for a national gas smart metering rollout in Ireland is a robust and detailed document which will inform future decisions relating to smart metering and associated energy policy in Ireland. The CER would like to acknowledge and commend the valuable contributions made by the following organisations involved in successfully developing the Irish gas smart metering cost-benefit analysis to such a high standard: Bord Gáis Networks and ESB Networks provided the network operator related cost and benefit inputs to the CBA model. Airtricity, Bord Gáis Energy, Phoenix Energy and Vayu provided the supplier/shipper related cost and benefit inputs to the CBA model. Frontier Economics which was contracted to develop the CBA model and to assist the CER with a validation check on the network and supplier submitted costs and benefits. Frontier were partnered by Logica, which contributed to the review with their technical expertise in the areas of IT and communication equipment. The Economic and Social Research Institute (ESRI) which performed a peer review of the CBA model. Finally, the assumptions for the high level design and implementation of a national smart metering rollout that underpin this CBA were set after taking into account the feedback from responses received to the CER s two consultations on the topic during 2010/11 (CER/10/082 and CER/10/197). The CER would like to thank all parties that contributed responses and attended the associated public consultation workshops. 1.4 Approach to Analysis This paper is intended to inform the CER, the Department of Communications, Energy and Natural Resources (DCENR), and stakeholders of the possible merits of providing smart gas meters to all Irish gas customers in the G4 meter category, which includes all residential customers and some non-residential customers. In addition, the analysis should help cast light on the relative attractiveness of various design options for implementation of smart meters and the main sources of risk associated with a rollout. Some sources of costs and benefits are more amenable to quantification than others, so the analysis is divided between quantifiable and qualitative sources of costs and benefits. To place some structure on the analysis of the quantifiable elements, costs and benefits are divided into rough categories by source: networks, suppliers/shippers and consumers. There are some points at which an activity allocated to one category influences costs or benefits arising in another category. Nevertheless, it is considered helpful to group the results in this way for the purpose of exposition. Where the allocation of costs and benefits among these 23

24 categories overlap some decisions have been made to allocate those costs and benefits so as to prevent double counting. The cost-benefit analysis assesses the broad societal costs and benefits of implementing smart metering rather than the private costs and benefits to any given subset of affected parties. The Gas CBT Findings Report (CER/11/180a) does illustrate some distributional effects arising from a move to smart metering related initiatives for gas. There may also be distributional effects along the value chain, for example transfers of welfare between suppliers and customers, but to economise on the time required for this analysis it has not been attempted to model such effects. The overall attractiveness of each option is identified for the quantifiable costs and benefits by computing the net present value (NPV) of the project in 2011, taking into account predicted cash flows from A fundamental assumption of the gas CBA is that a national gas smart metering rollout leverages the electricity smart metering infrastructure. The gas smart metering high-level design assumptions that underpin the gas CBA are predicated on this assumption: The electricity meter will act as the utility communication-hub for the home; The gas meter will communicate with this communication-hub on the electricity meter; The electricity meter communication-hub will forward the gas data via the electricity smart metering wide area network (WAN) communications system to the electricity smart metering meter data management system (MDMS) at the required intervals; The electricity smart metering MDMS will in turn send the gas related data to the gas smart metering MDMS and onwards to the customer information system (CIS) for validation and processing in accordance with the required gas market processes. If a dual fuel in-home display (IHD) is part of the smart metering rollout solution then the electricity meter communication-hub will also forward the gas data to the IHD. The costs of the national rollout of the electricity smart metering infrastructure have already been included in the electricity smart metering CBA (CER/11/080c) and therefore these costs are not double-counted in the gas CBA model, which captures only the incremental costs to be borne by the electricity smart metering rollout as a result of facilitating gas smart metering i.e. the additional incremental electricity smart metering communication and meter data management system (MDMS) costs. 24

25 The CER wishes to emphasise that the regulatory treatment of costs and their attribution to various segments of the industry in this CBA are without prejudice to any findings that may be made in the context of future price control measures or other regulatory actions. 1.5 Background Information What is Smart Metering? An intelligent metering system or smart meter is an electronic device that can measure the consumption of energy, adding more information than a conventional meter, and can transmit data using a form of electronic communication. A key feature of a smart meter is the ability to provide bidirectional communication between the consumer and supplier/operator. It should also promote services that facilitate energy efficiency within the home. The move from old, isolated and static metering devices towards new smart/active devices is an important issue for competition in energy markets. The implementation of smart meters is an essential first step towards the implementation of smart grids. 3 It is important to note that smart metering encompasses more than just the meter itself. Smart metering should be viewed as a system rather than a single device. It is essentially a hybrid technology consisting of three high level layers: Physical meters and associated devices Communications layer covering data transport and communications network management IT systems which manage the data, applications and services The following diagram (Figure 7) illustrates the general structure of a smart metering system. Smart meters are the next generation of meters, which can replace existing electro-mechanical and diaphragm meters and offer a range of benefits for both the individual electricity and gas consumer and for the electricity and gas systems in general. The existing standard mechanical meter records the total amount of electricity/gas used over time. These meters are read manually and the information is sent to the network company and then used to calculate customer bills. If a meter reader does not have access to the customer s meter, estimated 3 Commission staff working paper - interpretative note on directive 2009/72/EC concerning common rules for the internal market in electricity and directive 2009/73/EC concerning common rules for the internal market in natural gas - retail markets - 22 January 2010 (Pg 7) _markets.pdf 25

26 consumption information (or a reading provided by the customer) is used to calculate the bill. If the estimated consumption is higher or lower than the actual meter read, this is corrected for when the meter is next read by the customer or the meter reader. Figure 7: General structure of a smart metering system (Source: Figure 6, ERGEG Status Review of Regulatory Aspects of Smart Metering4) A smart meter is much more sophisticated. It records customers actual use of electricity/gas over short intervals (e.g. every 30 minutes). These meters are connected by a communications system to the network company / meter data collector providing the operator with automated, up-to-date information on the amounts of electricity/gas used by customers. Access to this information provides opportunities to reduce network operation costs, including reduced costs of visiting customer premises to manually read the meter and carrying out any necessary connections and disconnections. There are also savings due to reductions in technical losses and theft. The data collected from smart meters can be used by electricity and gas suppliers, subject to data protection requirements, to deliver useful information to their customers regarding their electricity and gas consumption and costs. In particular, the installation of smart metering will allow electricity suppliers to create innovative pricing arrangements that can be offered to customers to support the efficient use of electricity, such as time-of-use electricity tariffs. This is where the price of electricity varies at different times of the day to reflect the changes in the costs of producing electricity. This will allow customers to manage their consumption of electricity in line with price movements and demand patterns. Smart meters can facilitate improving energy efficiency by empowering consumers with more detailed, accurate and timely information regarding their energy consumption and costs, thus helping consumers reduce any unnecessary energy usage and shift any discretionary electricity usage away from peak consumption times. 4 Ref: E09-RMF ab/e09-rmf-17-03_smartmetering-sr_19-oct-09.pdf 26

27 1.5.2 EU Legislation There are a number of key EU legislative instruments promoting smart metering, which include: a) Third Legislative Package for Further Liberalisation of the Electricity and Gas Markets 5 The 3rd Package contains provisions regarding intelligent metering systems, with the aim of better informing customers of their consumption and helping to increase awareness of energy consumption. The implementation of those metering systems may be subject to an economic assessment of all the longterm costs and benefits to the market and the individual consumer or of which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their installation. The general principle is that consumers must have access to their consumption data. National Regulatory Authorities (NRAs) must ensure access to customer consumption data, and the existence of a nationwide harmonised format for consumption data and a process for suppliers and consumers to access the data must be defined. Intelligent metering systems are promoted twice in the Directives: first, with the aim to promote energy efficiency and demand side management measures; second, with the aim to ensure active participation of consumers in the market. Different provisions apply for electricity and for gas details below. There are also a number of EU Interpretive Notes which cover smart metering published on these directives. i) Electricity - Directive 2009/72/EC (Annex 1) 6 This directive states that: 1. (i) [Member States shall ensure that customers] are properly informed of actual electricity consumption and costs frequently enough to enable them to regulate their electricity consumption 2. Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the electricity supply market. The implementation of those metering systems may be subject to an economic assessment of all the long-term costs and benefits to the market and the individual consumer or which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their distribution

28 Such assessment shall take place by 3 September Subject to that assessment, Member States or any competent authority they designate shall prepare a timetable with a target of up to 10 years for the implementation of intelligent metering systems. Where rollout of smart meters is assessed positively, at least 80 % of consumers shall be equipped with intelligent metering systems by An EU Retail Markets Interpretive Note 7 on Electricity Directive 2009/72/EC highlights a European Commission Declaration 8 which clarifies that: It is understood that in the case no economic assessment of the longterm costs and benefits is made, at least 80% of all consumers have to be equipped with intelligent metering systems by ii) Gas - Directive 2009/73/EC (Annex 1) 9 This directive states that: 1. (i) [Member States shall ensure that customers] are properly informed of actual gas consumption and costs frequently enough to enable them to regulate their own gas consumption. 2. Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the gas supply market. The implementation of those metering systems may be subject to an economic assessment of all the long-term costs and benefits to the market and the individual consumer or which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their distribution. Such assessment shall take place by 3 September Subject to that assessment, Member States or any competent authority they designate, shall prepare a timetable for the implementation of intelligent metering systems. b) Proposed Energy Efficiency Directive 10 7 Commission staff working paper - interpretative note on directive 2009/72/EC concerning common rules for the internal market in electricity and directive 2009/73/EC concerning common rules for the internal market in natural gas - retail markets - 22 January _21_retail_markets.pdf 8 Council document 10814/09 ADD 1 REV