jan schächtele 1 jens uhlenbrock 1
DESCRIPTION
Jan Schächtele 1 Jens Uhlenbrock 1. How to regulate a market-driven roll of smart meters? A multi-sided market perspective Presentation at the 30 th USAEE/IAEE North American conference. 10.10.2011. 1 EBS Universität für Wirtschaft und Recht i. Gr. Contents. Common understanding - PowerPoint PPT PresentationTRANSCRIPT
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.
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 2 |
Contents
▪ Common understanding
▪ Smart meter as multi-sided market
▪ Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 3 |
Some clarifications to understand the focus of our research
We are, however, aware that some types of smart meters can also measure natural gas and water consumption but our focus is on electricity
Electricity meter
Large commercial consumers usually face different incentive structures and are in large parts already equipped with meters allowing real-time pricing
Residential and small commercial consumers
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
Market-driven rollout
Essential key terms
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 4 |
How do we define the smart meter market in our paper
Stakeholder interactions in the electricity market
SOURCE: Own analysis
Smart devices
Power generator DSO* AMI operator **
Retailer
Electricity
Cash
InformationConsumer
Key stakeholders
EUROPEAN PERSPECTIVE
* 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
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 5 |SOURCE: Nabe et al. (2010); Mott MacDonald (2007); A.T. Kearny (2008)
0
5
10
15
20
25
30
35
40
45
DSO AMI operator Retailer Consumer Investor inmeter
* In order to convert £ to €, an exchange rate of 1.1659 (average of 2010) is assumed.
Yearly benefits in EUR/meter*
Yearly costin EUR/meter*
In many cases incentives to install a smart meter are not strong enough for a single investor – this is the challenge to tackleCost benefit comparison ILLUSTRATIVE EXAMPLE FOR EUROPE
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 6 |
The goal of our research is twofold – identification and assessment
Focus and goal of the paper
Systematically analyze how to best regulate the smart meter market assuming the regulator favors a market-driven rollout
Focus
▪ Demonstrate that the smart meter market is multi-sided for every possible market structure
▪ Identify the superior market structure to overcome the investment barrier – based on the gained insights
Goal
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 7 |
Contents
▪ Common understanding
▪ Smart meter as multi-sided market
▪ Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 8 |
AMI meets the requirements of a multi-sided market
Key stakeholders AMI
Electricity
Cash
Information
Defining properties Status
At least two types of distinct users – potentially
even with different products
(Rochet&Tirole 2003, Armstrong 2006)
Performance of min. one core functions (Evans
2009, Haigu 2009)▪ Shared resource ▪ Matchmakers▪ Build audience
––
Definition of a multi-sided market
DSOAMI
operator
Retailer Consumer
Failure of Coase theorem (Rochet&Tirole 2002)
Indirect network effects – based on positive
externalities (Armstrong 2006, Evans2009)
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 9 |
The economics of multi-sided markets reveal new insights for the pricing
SOURCE: Armstrong (2006); Evans (2009); Rochet&Tirole (2003); Wright (2003)
Lessons from multi-sided market literature
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
▪ 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
Implications of the multi-sidedness of the AMI
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 10 |
Contents
▪ Common understanding
▪ Smart meter as multi-sided market
▪ Market structure analysis
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 11 |
DSO AMI
CRPlat-form
– –
0
–
++
Consumer, DSO
DSO AMI
CR
Plat-form
–
– –
+
0
Consumer, Retailer, DSO
The combined AMI-DSO is best suited for a market-driven smart meter rollout
SOURCE: Own analysis
Investment security
Socialization of cost
Benefit transfer for network effects
Platform operation internalizes benefits
Market sides
DSO AMI
CR
Platform
++
++
++
+
+
+
++
++
Incentive for operating efficiency
Incentive for innovation
–
–
Consumer, Retailer
Summary of the evaluation for the three market structures
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 12 |
Key recommendations for a market-driven rollout
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.
Define a standard smart meter
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.
Apportion investment costs of smart meters
These costs should not be socialized, or else there would be no cost control and it would be a full rollout.
Higher operating costs should be paid by consumer
Essential messages
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
Put the DSO in charge
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 13 |
Back up
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 14 |
What makes meters smart? – Above all it is two-way communication
SOURCE: Bundesnetzagentur (2010), pp. 30-33, Ecofsys, EnCT, BBH (2010) pp. 18-21
▪ 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
Catalogue of potential features
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 15 |
There are further applications building upon AMI
SOURCE: McKinsey on Smart Grid (2010), Ecofsys, EnCT, BBH (2010) pp. 53-55
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
functionality
(remote access)
(Customer applications aiming at integration)▪ Storage – electronic vehicles, cells▪ Distributed generation – renewable energy sources
Grid applications leveraging the AMI communication infrastructure
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 16 |
Each key stakeholder profits in a different way from smart meters
▪ 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
Consumer
▪ 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
Retailer
DSO
(Former) meter operator
▪ 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
▪ Reduction meter reading cost– Only limited personnel required– Lower organisational effort
▪ Reduction process cost– Better data quality
Overview of benefits
SOURCE: Frontier Economics (2007), Mott Mac Donald (2007), Nabe et al. (2009)
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 17 |
Countries such as Germany favor a market-driven smart meter rollout
Pros and cons of a market-driven smart meter rollout
▪ 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)
Pros 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 pur-posefully 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. 18 |
Retailers as AMI platform operators
SOURCE: Own analysis
Electricity
Cash
Information
AMI platform operator
DSO AMI
ConsumerRetailer
Advantages▪ Cost pressure for platform operation and
incentive for innovations due to competitive retail market
▪ Internalization of retailer benefits through platform operation
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
Jens Uhlenbrock and Jan Schächtele; EBS Universität i.Gr. 19 |
Independent AMI platform operators
Electricity
Cash
Information
AMI platform operator
DSO AMI
ConsumerRetailer
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
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 pres-sure 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. 20 |
DSOs as AMI platform operators
Electricity
Cash
Information
AMI platform operator
DSO AMI
ConsumerRetailer
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)
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. 21 |
There are four potential design options for the combined grid and AMI platform operator
SOURCE: Own analysis
Design options Description
Text
No socialization of cost
▪ The individual consumer has to bear the full cost of the smart meter - investment and operating cost
Socialization of 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
▪ 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
Total sociali-zation of cost
▪ Both investment and operating cost are socialized and distributed among all consumers
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