Download The combined AMI-DSO is best suited for a market-driven

How to regulate a market-driven roll of smart meters? A
multi-sided market perspective
Presentation at the 30th USAEE/IAEE North American conference
Jan Schächtele1 Jens Uhlenbrock1
10.10.2011
1 EBS Universität für Wirtschaft und Recht i. Gr.
Contents
▪
▪
▪
Common understanding
Smart meter as multi-sided market
Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Some clarifications to understand the focus of our research
Essential key terms
Electricity meter
We are, however, aware that some types of smart meters can
also measure natural gas and water consumption but our
focus is on electricity
Residential and small
commercial consumers
Large commercial consumers usually face different incentive
structures and are in large parts already equipped with
meters allowing real-time pricing
Market-driven rollout
The discourse about state-mandated vs. market-driven rollout
is yet undecided. We purposefully do not analyze or make
any judgment, but assume a market-driven rollout
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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How do we define the smart meter market in our paper
EUROPEAN PERSPECTIVE
Stakeholder interactions in the electricity market
Electricity
Cash
Information
Retailer
Consumer
Smart devices
Power generator
DSO*
AMI operator **
Key stakeholders
* Distribution system operator
** AMI= Advanced meter infrastructure – a system that meters and stores electricity consumption in short time intervals and communicates this
information to a central data collection point from which it is also capable of receiving data
SOURCE: Own analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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In many cases incentives to install a smart meter are not strong enough
for a single investor – this is the challenge to tackle
Cost benefit comparison
ILLUSTRATIVE EXAMPLE FOR EUROPE
Yearly benefits
in EUR/meter*
Yearly cost
in EUR/meter*
45
40
35
30
25
20
15
10
5
0
DSO
AMI operator
Retailer
Consumer
Investor in
meter
* In order to convert £ to €, an exchange rate of 1.1659 (average of 2010) is assumed.
SOURCE: Nabe et al. (2010); Mott MacDonald (2007); A.T. Kearny (2008)
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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The goal of our research is twofold – identification and assessment
Focus and goal of the paper
Focus
Systematically analyze how to best regulate the smart meter
market assuming the regulator favors a market-driven rollout
▪ Demonstrate that the smart meter market is multi-sided for
Goal
▪
every possible market structure
Identify the superior market structure to overcome the
investment barrier – based on the gained insights
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Contents
▪
▪
▪
Common understanding
Smart meter as multi-sided market
Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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AMI meets the requirements of a multi-sided market
Definition of a multi-sided market
Key stakeholders AMI
Defining properties
Cash
Electricity
Information
Retailer
DSO
Consumer
AMI
operator
Status
At least two types of distinct users – potentially
even with different products
(Rochet&Tirole 2003, Armstrong 2006)

Indirect network effects – based on positive
externalities (Armstrong 2006, Evans2009)

Failure of Coase theorem (Rochet&Tirole 2002)

Performance of min. one core functions (Evans
2009, Haigu 2009)
▪ Shared resource
▪ Matchmakers
▪ Build audience

–
–
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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The economics of multi-sided markets reveal new insights for the pricing
Implications of the multi-sidedness of the AMI
Lessons from multi-sided market literature
▪
▪
Chicken-egg-problem
– How to get critical mass for start due to positive
externalities
– Complication through fixed upfront investment
Indirect network effects
– Benefit transfer between market sides to account for
indirect network effects – towards consumers
Related considerations
▪ Socialization of AMI cost
– Benefits of smart meters are also (partly) socialized
– Likely to be an underprovision due to limited market
knowledge
SOURCE: Armstrong (2006); Evans (2009); Rochet&Tirole (2003); Wright (2003)
Implications for pricing
 Price structure – who
pays what relevant
 Prices do not need to
reflect marginal cost
 In case of smart meter
costs for consumers
should be lowered
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Contents
▪
▪
▪
Common understanding
Smart meter as multi-sided market
Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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The combined AMI-DSO is best suited for a market-driven smart meter
rollout
Summary of the evaluation for the three market structures
Platform
R
R
C
DSO
AMI
R
C
DSO
AMI
C
DSO
AMI
Platform
Platform
Consumer,
DSO
Consumer, Retailer,
DSO
Consumer,
Retailer
Investment security
––
–
++
Socialization of cost
0
––
++
Benefit transfer for
network effects
–
+
++
++
0
+
+
++
–
+
++
–
Market sides
Platform operation
internalizes benefits
Incentive for
operating efficiency
Incentive for
innovation
SOURCE: Own analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Key recommendations for a market-driven rollout
Essential messages
Put the DSO in charge
The DSO is the central player to conduct, administer and
successfully implement a market-driven smart meter rollout
as it best deals with the features of multi-sided markets
Apportion investment
costs of smart meters
Because of positive externalities and the need to lower the
investment hurdle for consumers, a part of the costs should
be socialized–the investment costs are best suited.
Higher operating costs
should be paid by
consumer
These costs should not be socialized, or else there would be
no cost control and it would be a full rollout.
Define a standard
smart meter
In order to have some cost control, a standard smart meter
has to be defined. Costs above this standard have to be
borne by individual consumers.
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Back up
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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What makes meters smart? – Above all it is two-way communication
Catalogue of potential features
▪
Two-way communication interface for
▫ Energy consumption
▫ Flexible tariffs
▫ Function signals
between meter and retailer/DSO
▪
▪
Interface to Home Area Network (HAN)
Electronic meter movement
– Energy
– Power quality control - voltage monitoring
▪
▪
▪
Data storage
Remote (dis-)connect
Fraud and manipulation detection
SOURCE: Bundesnetzagentur (2010), pp. 30-33, Ecofsys, EnCT, BBH (2010) pp. 18-21Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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There are further applications building upon AMI
Customer applications aiming at demand response
▪ Technical components
– In-home displays
– Load control devices/Usage aware devices
▪ Price signals
– Time-of-use pricing
– Critical peak pricing
AMI basic
(Customer applications aiming at integration)
▪ Storage – electronic vehicles, cells
▪ Distributed generation – renewable energy sources
functionality
(remote access)
Grid applications leveraging the AMI
communication infrastructure
SOURCE: McKinsey on Smart Grid (2010), Ecofsys, EnCT, BBH (2010) pp. 53-55
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Each key stakeholder profits in a different way from smart meters
Overview of benefits
Consumer
DSO
▪
▪
▪
Monetary aspects
– Variable (cheaper) tariffs
– Lower energy consumption due to
visualization
– No estimats for meter reading
Qualitative aspects
– No appointments for meter reading
– Higher product quality
▪
Quality aspects
– Detection of outages
– Reduction of voltage fluctuation
Reduction of process cost
– lower maximal grid load
– Detection of fraud
– No estimates of energy consumption for
grid usage fees
Retailer
(Former) meter operator
▪
▪
▪
Reduction of process cost
– Better data quality
– Interperiod meter reading
– Remote deactivation in case of move
– Cost advantages for energy purchase
Closer customer relationship
– better tariff structure
– monthly billing
▪
SOURCE: Frontier Economics (2007), Mott Mac Donald (2007), Nabe et al. (2009)
Reduction meter reading cost
– Only limited personnel required
– Lower organisational effort
Reduction process cost
– Better data quality
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Countries such as Germany favor a market-driven smart meter rollout
Pros and cons of a market-driven smart meter rollout
Pros
▪ No inflation of cost base –
▪
▪
Marginal cost of smart meter
installation do not outweigh
marginal benefits for every
consumer
Conscious decision by
consumer increases changes for
adaption of behavior – pure
installation has no effect on energy
efficiency (OFGEM;
Bundesnetzagentur)
Lower intervention of regulatory
regime required (Baringa)
Cons
▪ No security with respect to
▪
▪
target achievement – neither for
time period nor critical mass
(Wissner)
Missing out cost savings
potential – economies of scale,
learning curve, street by street
rollout (Wissner&Growitsch,
Baringa)
Underevaluation of savings
potential can lead to lower than
meaningful rollout level
(Wissner&Growitsch)
The discourse about state-mandated vs. market-driven rollout is yet undecided. We purposefully do not analyze or make any judgement on this matter, but assume that the
regulator favors a market-driven rollout―for whatever reason
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Retailers as AMI platform operators
Advantages
▪ Cost pressure for platform operation and
incentive for innovations due to competitive
retail market
▪ Internalization of retailer benefits through
platform operation
Cash
Electricity
Information
AMI platform
operator
Retailer
DSO
Consumer
AMI
Disadvantages
▪ Limited socialization of cost – only based on
existing customer base
▪ High investment risks as a consequence of
competitive retail market
▪ Cost transfer away from consumers difficult –
accounting of DSO’s monetary benefits
requires regulation
Conclusion: The cost pressure on retailers fosters cost efficiency and innovation, but the
disregard of two-sided market economics combined with the high investment risk make
it unlikely that such a market ever materializes
SOURCE: Own analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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Independent AMI platform operators
Advantages
▪ Cost pressure for platform operation and
incentive for innovations due to highly
competitive meter market
▪ Cost transfer away from consumers partly
possible – indirect network effects of retailers
passed on due to competition
Cash
Electricity
Information
Retailer
DSO
Consumer
AMI
AMI platform
operator
Disadvantages
▪ No socialization of cost – bearing of full smart
meter cost by consumers
▪ Investment risk due to competition in the meter
operator market
▪ Cost transfer away from consumers partly
possible – accounting of DSO’s monetary
benefits requires regulation
Conclusion: The competitive environment creates innovation incentives and cost pressure for AMI platform operators, however, the investment risk and the partial disregard of
multi-sided market economics may hinder a market driven roll-out
SOURCE: Own analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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DSOs as AMI platform operators
Cash
Electricity
Information
Retailer
Consumer
AMI
DSO
Advantages
▪ Possibility for socialization of smart metering
costs – if allowed by regulator
▪ High investment security due to monopoly
▪ Cost transfer possible – indirect network effects
of retailers passed on due to competition
▪ Internalization of DSO benefits through platform
operation
Disadvantages
▪ Low incentives for platform efficiency and
innovation above regulatory required standards
▪ (Reversal of meter market liberalization)
AMI platform operator
Conclusion: The market structure allows for taking advantage of the characteristics of
two-sided markets which decreases the roll out cost for consumers, but this comes at the
expense of a monopoly position for the AMI platform operator
SOURCE: Own analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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There are four potential design options for the combined grid and AMI
platform operator
Common base
▪
Socializable cost
are defined and
recognized by
regulatory regime
▪
DSO is in charge
for socializable
cost and
compensated
through fees
▪
Consumer with
veto power in
case of higher
cost
SOURCE: Own analysis
Design options
No socialization
of cost
Text
Socialization of
operating cost
Description
▪
The individual consumer has to bear the full
cost of the smart meter - investment and
operating cost
▪
The consumer has to bear the investment
cost of the smart meter
The operating cost of the smart meter are
socialized and distributed over all consumers
▪
▪
Socialization of
investment cost
▪
▪
Total socialization of cost
The investment cost of the smart meter are
socialized and distributed over all consumers
The (increased) operating cost of the smart
meter are billed to the individual consumer
Both investment and operating cost are
socialized and distributed among all
consumers
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr.
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