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The application of Smart Metering technology is not limited to productivity improvements that translate into cost savings for the utility. Some of its capabilities produce benefits that accrue directly or indirectly to consumers rather than show up as cost savings on the utility ledger. Societal benefits are another source of benefits that could be incorporated into Smart Metering business cases. In fact, business cases filed by some U.S. utilities with their regulatory bodies have cited societal benefits as part of the rationale for proposing to deploy Smart Metering.
Societal benefits accrue to customers, either explicitly or implicitly, and therefore are not available directly to the utility to cover the system cost unless provision is made to do so. Smart Metering can enable customers to realize greater value from the investment in the electric system, provide ways to reduce bills, and contribute to accomplishing environmental goals. Virtually all societal benefits imply some change in market circumstances that benefit some, or in many cases, all consumers of electricity, but not necessarily to an extent directly proportional to their electricity usage pattern or level. The pluralistic nature of many (but not all) of these benefits explains why they are not commonly referred to as societal benefits.
Many of the sources of benefits attributable to Smart Metering do not require the universal deployment of that technology. For example, demand response programs have been offered by utilities for over three decades and nationally comprise over three percent of the total resources used to serve electricity demand reliably and cost effectively. These programs have been implemented by installing the requisite metering equipment at only those premises that elect to participate in a demand response offering, rather than at all premises as most Smart Metering initiatives contemplate. Moreover, the programs involved implementing meter reading, billing, and support systems sufficient to support only a relatively small percentage of total consumers, rather than the entire population of customers, as is envisioned in many Smart Metering applications.
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In almost every instance, the realization of benefits requires more than the installation of the Smart Metering technology. It requires institutional changes in utility operating practices, regulatory changes to accommodate new services, and acceptance and adoption of new behaviors by consumers, all of which involve a sustained effort for many years and in many cases require additional expenditures. Accordingly, in evaluating the stream of benefits enabled by a Smart Metering investment, it is important to account fully for both benefits and costs to properly estimate the net benefits that can be anticipated.
While this report is meant to provide a structure for assessing societal benefits, it certainly is not intended to be the last word on the subject. EPRI anticipates that this framework will be refined and enhanced as it is employed in a wide range of circumstances.
Sources of Societal Benefits
Technology vendors, technology analysts, utilities, and public policy analysts have proffered an expansive list of the sources of societal benefits that may result from Smart Metering. However, there is no universal agreement on what constitutes a societal benefit or how individual classes of benefits can or should be measured. Therefore, devising an overarching framework requires first categorizing the sources of benefits in a way that reflects both how they are manifested -- what physical change in electric service is observed -- and how, if possible, those manifestations can be transformed into additive monetary values. Moreover, a categorization must avoid double-counting benefits while making sure that all benefits are accounted for.
Defining the societal benefits attributable to Smart Metering requires invoking an important distinction: operational versus societal benefits. Smart Metering operational savings are measurable reductions in the cost of providing customers with electric service in accordance with established safety and commercial service standards. These savings include the reduced labor and transportation expenses associated with the conventional practice of on-premise meter reading. Another source of operational savings may involve capital cost savings (sometimes referred to as avoided costs) associated with reduced levels of, or longer lifetimes for, the equipment and materials required to operate and maintain the electric system that are the result of a Smart Metering investment.
All of these operational savings reduce the utility's net cost to deploy Smart Metering. In contrast, the societal benefits attributable to Smart Metering do not generally correspond to specific utility cost savings, even though they represent value to consumers and can be accounted for to fully portray the Smart Metering investment's consequences, for example in a business case.
Societal benefits are benefits that accrue primarily as a result of actions undertaken by consumers. For example, providing customers with access to readily available metered electricity usage information may help them evaluate when and how they use electricity. This knowledge could possibly result in lower bills or enable participation in demand response programs. The result is that the consumers that undertake behavioral changes should realize direct benefits that can probably be quantified. Additionally, the usage changes can result in secondary impacts on market prices or utility costs that may indirectly produce benefits that accrue to all consumers.
These secondary or derivative demand response benefits have the property that they impact utility cost prospectively: they represent future (implied) costs that are avoided, not a reduction in a current cost.
Other benefits may be harder to measure and monetize, but they too contribute to the benefits consumers realize from Smart Metering investments. Faster restoration from a service outage reduces the inconvenience that households and business are exposed to. It thus has value: but that value is implicit, not explicit, and measuring it requires constructing hypothetical value transformation functions. Some contend that robust demand response behavior by consumers is a necessary condition for realizing the full benefits of competition in wholesale retail markets. Smart Metering may be a necessary condition for achieving this outcome. Others maintain that the expanded service choices enabled by advanced metering and communication technology are essential if consumers are to realize the full benefits of wholesale competition. These theoretical but potentially important benefits can be hard to measure in practice, because some involve hypothetical transactions that consumers have not encountered before.
Clearly, an insightful and comprehensive framework for evaluating the societal benefits attributable to Smart Metering should distinguish between benefits sources that can be traced back to utility cost savings and are associated with directly measured consumer bill savings from those that result from indirect or secondary impacts on consumers.
Societal benefits may be associated with Smart Metering, but this attribution is not always exclusive or without ambiguity. That's because Smart Metering enables societal benefits, but does not assure that they are realized. Thus if the small time-step interval recording and data transmission functions that are part of even the most rudimentary Smart Metering configuration are universally deployed, every consumer, regardless of size and location, can participate, at least in principle, in a demand response program, possibly without incurring an additional metering cost. Nevertheless, Smart Metering would make universal participation possible, not inevitable; and the actual benefits that could be attributed to Smart Metering in demand response programs would be marginal in nature. As noted above, existing demand response programs accomplished with relatively rudimentary enabling technology already account for three percent to eight percent of ISO/RTP peak loads and involve tens of thousands of end-use customers with a substantial positive impact on market performance.1
Smart Metering is an enabler; it provides several paths to changes in how electricity is provided and used that benefit consumers, but does not assure their realization. The responsibility for asserting the provenance and veracity of the claimed benefits properly remains with those that are evaluating a Smart Metering system.
Are All Benefits of Equal Importance?
The distinction between operational savings and societal benefits may be critically important from a public policy perspective if the operational savings attributed to Smart Metering configuration are less than the costs of that system. Business case analysts often estimate the savings that could be realized in a specific system configuration that involves specific functions (or functionality in the common parlance) based on 1) the functions of devices or systems that are available and ready to install, 2) speculative assessments of how functions might become valuable later on, and 3) concerns about obsolescence. Smart Metering systems are commercially available with many features already bundled based on the manufacturer's determination of what will sell. However, specifying a system independently of the marginal value of the functions added could result in a system configuration whose operational savings do not exceed the cost and are not otherwise substantiated by an offsetting stream of other benefits.
If societal benefits are real, consumers should be willing to pay for them; presumably they would pay at a price commensurate with the level of those benefits. Some societal benefits are financial in nature and therefore are readily incorporated into an enterprise-level cost benefits analysis. Others are less objective or not so easily monetized but nonetheless are benefits that accrue to consumers, so counting them would seem to be legitimate. However, the benefits are realized over time and may be realized unevenly by consumers, which renders them a public good and thus raising the difficult policy issues associated with free riders and distributional impacts.2
The Need for a Framework
The issue of whether a utility should invest in Smart Metering technology has become a public policy issue that will be resolved in many cases in state Public Service Commission (PSC) venues. PSCs will be asked to consider whether the societal gains attributable to Smart Metering are of sufficient level and character, when taking into account the temporal and distributional aspects of their realization, to warrant authorizing the utility to undertake the investment with assurance of recovery of the difference between the cost of implementing the system and the realized operational savings. Many PSCs will require that utilities provide them with a comprehensive description of the costs and benefits they expect will be attributable to a Smart Metering investment. Guidance on establishing operational savings is available from several sources, and there are several prototype and filed business cases that provide examples of how this has been accomplished in particular market circumstances. Characterizing and quantifying the societal benefits is less well developed.
A few business case filings have indicated that a proposed investment will generate societal benefits. However, many of these analyses are either lacking in detail to clarify how the values proffered were derived or use methods that, while intriguing, are not sufficiently rationalized to serve as a precedent for subsequent filings. The shortcomings of methods to characterize and value societal benefits can have substantial consequences. Review and resolution of Smart Metering investment proposals may be expedited by clarifying the various ways those societal benefits can be manifested.
A Final Qualification
EPRI devised the framework for quantifying the societal benefits of Smart Metering discussed in this article to assist those that have determined to undertake such an endeavor. Its purpose is informational, instructional, and demonstrative. It draws upon a large body of analytical protocols and tools that have been used to conduct cost/benefits analyses in other contexts. The final determination as to what constitutes the proper basis for making Smart Metering decisions rests with each utility and its stakeholders, including its investors, consumers, and regulators.
Notes:
This article is excerpted from a larger EPRI study prepared for a consortium comprised of four Ohio utilities -- American Electric Power, Dayton Power and Light, Duke Energy and FirstEnergy. The study develops a framework that describes how societal benefits can be characterized according to how benefits are generated and, where feasible, identifies potential methods for their monetization.