Meters play brings out Macquarie

IF THERE is money to be made in the field of government-regulated assets such as toll roads, electricity and gas, it does not take long for Macquarie Bank to show its hand. And with the likely introduction of smart meters in NSW, the bank is only too keen to help.

By InvestSMART · 29 Nov 2012

By InvestSMART ·
29 Nov 2012

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The introduction of these meters is under way in Victoria and this week the NSW government disclosed it has established a working party to study their introduction in NSW.

So-called smart meters can be read remotely and the power supply also controlled remotely. As a result, they promise significant savings for power companies, but their benefit for most households is uncertain.

But the poor experience in Victoria, where the cost of the roll-out has risen to more than $2.3 billion, which is well up from the initial estimate of $800 million, and a lack of household benefit from the move, threatens to derail the proposal in NSW.

Recently, the power industry overseer, the Australian Energy Market Commission, opened the door to the possibility of taking meters out of the hands of the power distributors and putting them into independent management, in a bid to drive change.

Macquarie Bank, for one, reckons electricity retailers are the natural owners of the meters, since they already hold the supply contracts with consumers.

This would involve taking the metering business out of the hands of the distributors, such as Ausgrid or Endeavour Energy in NSW, in favour of having the retailers such as EnergyAustralia, Origin Energy and AGL run it.

In a little noticed submission to the Productivity Commission review of electricity networks, Macquarie argued retailers were better placed to assess and manage the risk of the introduction of meters - and face the loss of customers and market share if they had an uncompetitive product.

For most users, the lack of clear benefits from smart meters means there is natural concern that their introduction will emerge as a new revenue stream for power companies.

Coming as electricity prices are surging to fund an upgrade to electricity networks, without readily identifiable positives, resistance will be acute.

One of the mistakes in Victoria was to mandate the introduction of these meters just before their price per unit collapsed. They now cost significantly less than $100 each, depending on their functionality, but Victorians are paying more than double this.

According to some, the largest single benefit from smart meters would be ending the need for meter readers to visit every property, along with eliminating thefts of electricity.

These benefits would be significantly greater than any savings from reduced power consumption, for example. Supporters of the technology claim it would help cut power bills by eliminating over-investment in poles and wires of the network.

The apparent gains could explain why Macquarie has a big stake in the metering industry in Britain. There it owns more than 500,000 smart meters out of a total of more than 6 million gas and electricity meters, and is looking at opportunities in Australia.

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Frequently Asked Questions about this Article…

What are smart meters and why are they being considered for NSW and Victoria?

Smart meters are remote-reading electricity meters that can also allow power supply to be controlled remotely. Victoria has already begun a rollout and the NSW government has set up a working party to study their introduction in NSW. Proponents say they promise operational savings for power companies, though household benefits remain uncertain.

How costly was the Victoria smart meter rollout and what does that mean for investors?

The Victorian rollout’s cost has risen to more than $2.3 billion, up from an initial estimate of $800 million. For everyday investors, that magnitude of cost overrun signals regulatory, execution and political risk around large metering projects and could influence future rollouts or the economics of companies involved.

Who might own and operate smart meters in Australia — distributors, retailers or independent firms?

The article notes debate about ownership: Macquarie Bank argues electricity retailers (such as EnergyAustralia, Origin Energy and AGL) are the natural owners because they hold customer supply contracts. The Australian Energy Market Commission has also opened the possibility of moving meters into independent management rather than keeping them with network distributors like Ausgrid or Endeavour Energy.

Why is Macquarie Bank involved in the smart meter market and what exposure does it have?

Macquarie has a significant commercial interest in metering — in Britain it owns more than 500,000 smart meters out of a total of over six million gas and electricity meters — and the bank is looking for opportunities in Australia. Macquarie has also made submissions to Australian policy reviews arguing retailers are best placed to manage metering risk.

What are the main benefits of smart meters for power companies and for households?

For power companies, key benefits highlighted include eliminating the need for meter readers to visit every property and reducing electricity theft, which can generate significant savings. Supporters also say smart meters could help avoid over-investment in poles and wires. For most households, however, the article says clear, direct benefits are uncertain.

Could smart meters become a new revenue stream for power companies and affect electricity prices?

The article raises that concern: because household benefits aren’t obvious, there is apprehension that rollout costs could become a new revenue source for power companies. That concern is especially sensitive as electricity prices are already rising to fund network upgrades, meaning resistance from consumers and political scrutiny could be strong.

What mistakes were made in Victoria’s rollout that investors should watch for in future projects?

One mistake noted was mandating the rollout just before the unit price of meters fell sharply. The article says meters now cost significantly less than $100 each depending on functionality, yet Victorians ended up paying more than double that — an outcome that highlights procurement timing and contract design risks investors should watch.

What regulatory reviews could change the smart meter market and how might that affect investors?

The article references the Productivity Commission review of electricity networks and the Australian Energy Market Commission’s consideration of removing meters from distributor control and placing them with independent managers or retailers. Such regulatory shifts could alter who earns metering revenues, change competitive dynamics and affect investment opportunities in retailers, network firms and specialist metering businesses.