The Australian smart metering market emerged in 2006, when the Victorian Government approved the rollout of meters for all customers with an annual consumption of less than 160MWh. The rollout has since been completed with over 2.5 million smart meters deployed.
The Victorian rollout was marked by a number of issues (e.g. cost overrun, implementation delays and community opposition) which have negatively impacted the perception of smart meters in Australia and contributed to the absence of any subsequent mandated deployments. However, over recent years, new smart meter value drivers for a variety of stakeholders (e.g. customers, networks and retailers) have been identified which are now driving the regulatory and commercial smart metering space in Australia.
The AEMC’s Power of Choice paper addresses a number of these drivers and rules are currently under development to introduce a competitive metering market. The reforms have a clear focus on improving customer choice and are set to provide additional support for the uptake of demand side participation products and services, and allow for the benefits of demand side participation to be captured across the supply chain.
Consultation on the proposed Rule change was initiated in April 2014, and has resulted in some significant debate through the consultation period. The draft Rule and determination was released on 26 March 2015, with the final draft Rule and determination to be published in July 2015. Commencement dates for the new Rules has slipped from an initial target of mid-2016 to mid-2017.
Under the proposed rules, the customer’s retailer has the responsibility to ensure that a meter is installed and that a Metering Coordinator (MC) is assigned to the site. The MC, in turn, maintains liability for the overall metrology services (data security and integrity) and is responsible for assigning a metering provider (MP, installation and maintenance) and a meter data provider (MDP, data collection and management).
This means that retailers will play a prominent role in the emerging competitive market and their approach to these developments will have ramifications across the Australian smart metering market.
How will the market evolve?
One of the main concerns for a retailer rolling out smart meters will be how to recover the cost of the meter and its installation, especially considering the risk of customer churn. It is hence likely they will seek to pass on this ownership risk to the MC and pay, for example, an annual flat fee per meter, rather than the upfront and ongoing costs. The MC could seek to manage the ownership risk by:
- Contractual arrangements – such as exit fees for customers wanting to change meters. In order to minimise cost to customers, it is possible that to avoid such fees, the MC role will remain with the meter when the customer changes retailer[1].
- Access to meter value – much of this value lies in the data generated by the smart meter and the communications functionality within it. These attributes are the domain of the MDP and MP, and rely heavily on the interoperability of the systems and communications networks involved in the end-to-end metering services supply chain. Hence, it is likely that the MC, MP and MDP roles will be consolidated within the single metering services entity.
Under this scenario, the strategy of smart meter market players may essentially end up being a “land grab”. Metering Services Companies (combining MC, MP and MDP roles) will push to secure as many retail customers as possible in the initial stages, as grabbing market shares once smart meters are fully rolled out will be much more difficult. Additionally, as the retailer ultimately has the choice as to when to offer their customer a smart meter and who will be their metering service provider[2], they are in the prime position to be early movers and take advantage of this new market opportunity.
The big three retailers, with large existing customer bases and access to capital, are well positioned to create their own competitively priced metering services business, roll out meters to their customers, and immediately capture a large slice of the metering services market. Movement in this direction is already evident from AGL and Origin Energy. AGL recently said in a statement[3]: “AGL will invest in the growing suite of empowering technologies including launching a digital metering business next year (2015)”. Origin Energy, which has an existing metering business, has also publically declared[4] that they intend to be at the “forefront” of the deployment of digital metering and energy monitoring.
It is possible we could even see smart meters being offered by retailers before the contestable market rules come into effect, although any moves to replace a customer’s meters will require the approval of the local Distributor.
So what does this all mean for the smaller retailers, Distributors and the customers?
Smaller retailers
The metering services market is likely to be dominated by large retailers and existing players who can achieve economies of scale. Opportunities are expected to be more limited for smaller retailers without the required balance sheet. There are, however, some options for market entry available to smaller market players:
- Follow the leader – follow a large retailer’s roll out with improved smart meter products and services. Overcoming the risk of meter churn and customer exit fees will be critical for this approach to be attractive. Small retailers will need a keep a watchful eye out for metering contractual clauses that increase their cost of customer acquisition.
- Offering bundled products – innovative time-of-use tariffs and/or products and services bundled with a smart meter, allow customers to opt-in to a smart meter rollout. The important considerations for this approach is finding a low-cost metering service provider to maximise customer uptake and developing innovative and customer-focused products which combine information about energy usage, and the ability to do something about it to reduce cost.
Distributors
For Victorian Distributors with existing smart meter capabilities, the metering services market is a distinct opportunity to leverage the experience, systems and processes developed in the State’s smart meter roll-out. However, Distributors will need to act quickly and get on the front foot to approach retailers with competitive offerings.
Regardless of their ability to access the metering services market, Distributors may also see an opportunity in having more customers with smart meters within their regions to help better manage their businesses – however this will likely come at a cost.
The proposed minimum functionality for electricity smart meters does not include functions attractive to distributors (e.g. supply outage and restoration notifications), with more of a focus on remote meter reading and remote activation and deactivation. The worst case for Distributors would be that smart meters without these functions are installed, and additional hardware is required to enable them. The more likely case is that these functions will exist within the meter but metering service providers will apply additional charges to Distributors to activate them and collect the data.
Another factor impacting Distributors may be the choice of meter data communication technology. The RF Mesh technology that has been so successful for the Victorian Distributors[5] may be overlooked by retailers due to the more patchy and dispersed nature of a customer opt-in roll out approach. While this may make sense in the short term and satisfy retailers’ needs, in the long term, the opportunities presented by the low marginal cost of additional end-points on an RF mesh communication network may be missed. These end-points could provide additional value to an infrastructure focused Distributor of the future and could be used to communicate with solar inverters, EV chargers, street lights, bush fire detection units, as well as the obvious opportunity for smart water and gas meters. If a Distributor owned this communication network (as they do in Victoria), there is an opportunity to leverage this functionality for additional revenue streams.
Outside of Victoria, perhaps the best way for Distributors to access this opportunity (aside from becoming the dominant metering service provider within their own network), is to approach Meter Service Providers to explore partnership opportunities that service the retailers, but do not exclude the many and varied value streams from smart meters available to Distributors.
Customers
Customers can expect new products and services that are smart meter dependent, such as time-of-use tariffs (AGL’s free energy on Saturdays, for example), information usage portals and smart phone based services (such as emerging Victorian retailer, Powershop).
However, there is a risk that metering service contracts between retailers and Meter Service Providers will create an effective exit fee for customers. If, for example, the incoming retailer takes on the existing metering service provider (because it’s cheaper than replacing the meter) but the metering service provider charges them a higher rate than the previous retailer (because the previous retailer owned the metering service provider). This extra cost would need to be borne by the consumer (as effectively an exit fee) or by the incoming retailer (as an additional acquisition cost).
This is one of many scenarios considered in the draft determination which will, no doubt, be read with great interest by potential market players as they explore how to position themselves in the emerging competitive market.
Although final implementation of these changes is over two years away, activity is well underway, and smaller retails and Distributors need to get on the front foot in this developing market to make this most of the opportunity and manage the risks.
Footnotes
- In NZ, where the metering market is similar to the proposed Australian model, retailers have come to an agreement that the meter ownership remains with the Metering Equipment Provider (equivalent to the MC and MDP in Australia) when a customer churns retailer.
- Based on the latest information available from the AEMC, customers will not have the ability to choose their own MC for at least the first 3 years of the contestable market.
- AGL embraces disruptive technologies to meet changing consumer needs (Monday 17 November 2014).
- Grant King, Presentation of Origin Energy half-year financial results (19 February 2015).
- Powercor CitiPower have reported greater than 95% successful meter reads by 6am the next days and greater than 99% within 24 hours, Australian Utility Week Conference paper (November 2014).
