The dumb approach to smart meters

Julia Gillard has managed to get the state premiers at the COAG meeting to sign onto her plan to apparently end gold plating via the roll-out of smart meters.

However the experience from Victoria illustrates that if this is done the wrong way it could mean we pay a lot of money for new meters and have little to show for it. So what can we learn from Victoria's mistakes?

1) Don't task electricity networks with rolling them out because you'll pay too much

In Victoria network businesses were assigned the task of installing smart meters across the state. The problem was that they operated on a regulated cost-plus basis with no competitor, so had very little incentive to keep the cost of the roll-out low. If they failed to manage costs, they were able to put their hand out for more money – which they did.

The Victorian regulator would have been better served to have directly undertaken its own open and fully transparent tender for several suppliers to roll-out, and possibly also maintain, the meters.  

2) Don't charge customers for meters without giving them something in return

Firstly, it's hardly surprising the roll-out of Victorian smart meters was badly received when, like me for example, you were delivered an electricity bill carrying an itemised charge for a smart meter which hadn't even been installed yet! No wonder people got angry.

Secondly, the meters were installed without any enhanced energy usage information for customers until around two years after the roll-out had commenced. The meter could provide near to real-time energy usage information and this information could be offered through a range of platforms (in-house displays, computers, internet devices). But energy companies weren't providing customers with mechanisms to exploit this functionality until around two to three years after the roll-out commenced. 

Thirdly, the time of use pricing that has been introduced involves a peak period that lasts from 7am until 11pm. How are customers supposed to shift a significant proportion of their demand into 11pm to 7am? Such pricing structures don't correspond with actual costs in the electricity system (where the peak is focussed between 2pm and 8pm) and just make consumers suspicious that they are getting ripped off, even if they aren't.

3) Charge for meters based on recovering the net costs over their lifetime, not up-front

Victorian consumers were hit with quite hefty metering charges aimed at recovering the extra cost of these meters within a short period, which made these charges quite noticeable and difficult for some consumers to handle. In the end consumers are expected to benefit through lower charges from distributors for meter reading and undertaking connections and disconnections (which can be done remotely). 

Yet network business' cost of borrowing money and their cash flows are likely to be superior to most households. So it would have made better economic sense for distributors to recover any net costs (after savings on meter reading etc.) incrementally over the life of the meter. This could have avoided the significant sticker shock consumers encountered.

4) Don't leave it up to the electricity industry to inform and educate consumers

The Victorian government largely delegated the role of informing and educating consumers about the ‘what and why' of smart meters to electricity companies, which was a miserable failure. Electricity distributors have very limited direct interaction with end-consumers and so aren't particularly good at it. Nor do they have much incentive to do it well, being regulated monopolies.

Electricity retailers also had little to gain from providing such information and didn't want to be held responsible for an unpopular initiative for which they had little direct involvement.