Making smart work of it

A smart-enabled world can profoundly alter the way suppliers and distribution companies do business. Ysanne Hills and Isabel Scott-Skinner explore some of the big wins on offer.

The rollout of more than 53 million smart meters in the next seven years is a big challenge, but smart is about much more than just meters. It has the potential to change the energy value chain if suppliers and distribution companies use them as an opportunity to review some of the fundamental aspects of their operating models.

One of the key factors in a personalised service is the tariff offered. Static time-of-use tariffs in electricity are likely to come first, but dynamic, alert-driven tariffs will also become possible. An example of this is a “wind twinning” tariff, where an alert is sent to the customer when wind generation is high. This type of demand response can be beneficial for both customers – who benefit from cheaper, greener energy – and the network operator, if it can help to balance the system.

More personalised and alert-driven tariffs represent a real opportunity for suppliers. They allow them to differentiate themselves, and enable demand-response propositions to be put together for distribution businesses.

Dynamic and alert-driven tariffs could be just the tip of the iceberg. Smart meters facilitate a range of potential new services by creating a two-way communications hub. It will be possible (with additional technology) for customers to remotely control individual devices within their homes. Taking this further, customers might even cede control of some devices to a third party to realise further reductions in their bill.

 Settlement solutions are yet to be agreed, but as the rollout gains pace, we can expect the increasing presence of smart to reveal a key weakness of the current settlement regime: the use of load profiles. Changes in customer behaviour are likely to be more pronounced than previously, due to the information presented on the in-house device and more innovative tariffs being offered. This will affect the accuracy of profiles.

Moreover, as the range of time-of-use tariffs technically possible increases and automated appliances become widespread, the times of day when residential customers use energy will become more disparate. We expect this to reach a point where the industry will need to decide whether to increase the complexity and granularity of profiles, or to switch to settlements using actual half-hourly data for domestic customers. Neither is a small change.

There is a time-of-use dilemma here, too. Without settlement change, the benefits of customers moving their consumption to off-peak times will be smeared across suppliers, limiting the scope for individual customers to save.
A number of suppliers are looking to develop internal systems and processes to facilitate trials related to new payment and communication channels. Real-time data flows from meters will enable new payment mechanisms, allowing mobile phone-style pay-as-you-go tariffs and enabling a range of new top-up mechanisms.

Disconnections can also be managed in a much more customer-friendly way. Meters are capable of being set up with disablement calendars (to prevent shut-off overnight or on public holidays) and have configurable credit tolerances.

Retail prices in the UK have historically been linked to long-term wholesale contract prices. Although various seasonal products are traded, customer prices are generally flat across the year and are not seasonally adjusted. Retail prices do not reflect the true cost of the energy being delivered at the time of consumption. Furthermore, sourcing strategies have always been based on averaging out customers’ past usage patterns to predict how much energy should be bought for the future. Smart metering – and in particular the shift towards dynamic time-of-use tariffs – will enable a purchasing strategy whereby suppliers pass on short-term price risk to willing customers, reducing their need to long-term hedge. This will also allow those customers to benefit from lower energy prices in the long term, particularly where they can change consumption patterns to avoid periods of high prices.

Balancing and ancillary services have mainly been the preserve of those with generation assets and are designed around the ability of a generator to alter the amount of energy on the system. Having a better understanding of customer demand and better tools to control this demand will enable suppliers to take a more active role in the balancing market by allowing them to provide services to control the amount of energy taken off the system.

This also creates a new aggregator role, where an organisation could take on responsibility for combining demand-response capabilities for a large number of customers.

Modelling the flow of electricity from the transmission network to low-voltage exit points has always been challenging due to the large number of exit points and scant detail on what is happening as time passes. Introducing smart meters will provide granularity, creating the potential to dramatically improve the accuracy of systems modelling electricity flows on the network.

Improved system modelling and a better understanding of detailed flows across the network have a number of advantages, namely improved investment decision-­making and network planning, and more effective voltage monitoring.

From voltage monitoring and targeted investment, it is a small leap to real-time data and greater automation of the system to manage localised peaks in demand. Moving towards a “distribution system operator role” will require significant IT investment, but creates a sustainable platform to maximise opportunities and allow distributors to defer or even avoid costly system reinforcements. Real-time control will support the transition to low-carbon technologies by actively managing distributed generation and allowing more generation to be connected to the existing infrastructure. It will also help to reduce losses by actively managing peak load.

In summary, smart metering is about much more than just meters: for energy businesses it represents a once in a generation opportunity to fundamentally change key aspects of their operating models and gain a significant competitive advantage.