That settles it

Smart meters will shake up energy settlement. John Peters says this may be disruptive but should be embraced for the benefit of industry and customers

Settlement is the process of reconciling how much energy a supplier is deemed to have delivered to customers against the amount of energy the supplier has bought from generators. Current settlement processes will change significantly once smart meters are rolled out.

Until now, suppliers have had little visibility of detailed usage data, making it difficult for them to truly understand how their product is used by their customers. Simple cyclic meter readings only provide an aggregate energy use over the meter reading period, typically three months. Suppliers use meter data to produce customer bills but it is also important data for the settlement process.

Suppliers forecast their customers’ usage and buy, in advance, the electricity they think they will need to meet that demand. Because customer usage is affected by various unpredictable factors, such as the weather, it is difficult to create accurate forecasts. Consequently, there is always an imbalance between what suppliers supply to their customers and the energy they have contracted for.

National Grid deals with the real-time imbalance between supply and demand by contracting with generators to produce more or less as required – but it is some time after the event that the imbalance in suppliers’ contracted positions is reconciled. The volume suppliers are deemed to have supplied in each half-hour period is determined based on meter readings. This is compared with the energy they have bought in the forward market, taking into consideration a number of factors such as the energy lost in transportation.

If a supplier is deemed to have supplied more than they have obtained, they “top up” by buying the shortfall through the imbalance settlement process. If they are deemed to have supplied less, they “spill” by selling the surplus through this process. Thus, the accuracy of the process for determining how much energy each supplier is deemed to have supplied in each half-hour period has a major impact on settlement.

Today most customers have simple meters that measure cumulative energy. To know how much energy has been used you need to know the difference between the readings from two points. For most of us this happens when our meters are read. This infrequent measurement of energy does not directly support the half-hourly settlement of energy. Usage between readings has to be allocated to half hours using a profile. The profiles used in settlement are derived from a statistical sampling method that looks at a few hundred non-half-hourly customers fitted with half-hour meters. Customers are grouped into eight profile classes and everyone in the profile class is treated the same.

The business case for smart meters is partly based on customers changing their behaviour and reducing consumption. Additionally, smart meters make the introduction of new tariffs designed to encourage changing consumption patterns more likely – for example, demand response and consequential shifts in peak demand. However, existing settlement calculations and arrangements are based on average customers and treat everyone the same. This means that, without changes to the settlement process, suppliers will not always be able to realise the savings made when their customers avoid using peak priced energy, meaning these savings will not be passed on to these customers.

Changes to settlement could be introduced to make use of far more frequently sampled smart data, and to take into account real behaviour versus average behaviour. But they would need to be cost effective. More­over, a move away from the homogenous treatment in settlement may lead to some customers whose consumption varies from the average having to pay different prices. This could be lower or higher depending on the customers’ usage, but it is highly likely that anyone at home between 5pm and 6pm in the winter would cost more to supply. Good news for commuters, but bad news for the elderly or young families.

More widely, smart settlement has the potential to bring significant benefits to the industry and ultimately its customers. Increased visibility will improve the forecasting of customer use so suppliers can buy the right amount of energy. The alignment between customer billing and supplier settlement can be improved. Suppliers may make tariffs available that encourage customers to move their energy use away from peak periods, where the strain on and cost of the physical infrastructure that delivers the energy is at its highest, and where there is more need to run expensive or ­carbon-emitting generating plant. This could provide customers able to respond to such incentives with cheaper electricity.

However, a move toward smart settlement will not be without its challenges. The need to ensure that consumers benefit fully from any reduction in their consumption and other behavioural changes will need to be considered in conjunction with the need to protect customers who cannot make such changes to their energy use and who will otherwise be subject to higher energy bills. In addition, many of these benefits are premised on suppliers having more granular data about customer usage – and this is something customers will have to permit if they want to realise the full suite of benefits smart meters could bring them.

In our view, these challenges are being appropriately considered and addressed. Attention is being given to smart metering and smart settlement by a variety of stakeholders, including the government’s Smart Metering Implementation Programme, Ofgem through its smarter energy markets team, and Elexon and its stakeholders. So as well as enabling many industry innovations, smart meters will also offer improvements to industry processes such as settlement that have, up to now, operated effectively but have been restricted by lack of timely, accurate and current data.

Having an industry where billed and settled data are more closely aligned and a more accurate reflection of consumers’ usage is important. It will both streamline suppliers’ processes and support a world where consumers can more readily benefit directly from innovative products and tariffs that reward reduced consumption or behaviour change such as demand-side response.

John Peters, managing director, Engage Consulting

This article first appeared in Utility Week’s print edition of 15th February 2013.

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