Oct 12, 2011

Are Smart Meters Worth the Cost?


A notice in my mailbox last week told me that smart meters are going to be installed in my neighbourhood. I’ll admit that the geek in me would like to see real-time information about my energy usage, but as an economist I’m interested in costs and benefits of the program. So far we have seen lots of bold claims in their favour — they’re called “smart” so they must be good for us. But just like the promises of the paperless office and more efficient workplaces from computers, the lived reality tends to be different, and may even have unintended consequences.

While the effectiveness of smart metering in BC is yet to be seen, the upfront capital investment for the utility is unquestionably significant. Initial estimates report costs of $660 million for the meters and $270 million for the grid, for a total price tag of just under $1 billion. That does not include a box in your home to give you access to your data — a couple hundred dollars that will come out of your pocket, though BC hydro says it will provide some rebates.

BC Hydro’s “business case” argues that after considering implementation costs, smart meters will provide a net benefit of $3 billion over a two-decade period through to 2033, with 80% of the benefits internally to the utility, and the remainder dependent on uptake of additional in-home tools. The analysis assumes that smart meters will not need to be replaced during this period, and that no other unintended consequences are manifest. The benefits are based on: improvements in safety and reliability, such as real-time information about power outages; enhanced customer service; reductions in electricity theft; and improved operational efficiencies.

About 17% of the “benefit” to BC Hydro of smart meters arises from eliminating jobs for meter readers across the province due to automation. File those 1,200 lost jobs under “BC Jobs Plan”. [Update: COPE 378 informs me that 398 of their members will lose their jobs as meter readers. Another 400 or so are being lost on the admin side via Accenture. And BC Hydro has been ordered to shed another thousand or so.]

The largest source of benefit to BC Hydro (56% of estimated benefits) is reducing the theft of electricity for marijuana grow-ops and other illegal activity. BC Hydro claims theft costs the utility $100 million per year in lost revenue, although it is not obvious that smart meters would convert every kWh of stolen electricity to legitimate revenues. Smart meters may make it easier for criminals to steal electricity by hacking into the smart metering system (Jim Quail makes this case here). This could, in effect, increase the prevalence of power theft as well as give rise to a range of other security concerns.

Beyond eliminating jobs and reducing theft, other gains are small amounts that are difficult to verify, particularly when spread over a two-decade time frame. While I’m inclined to think that there will be some gains, it is not clear whether we can bank on them. I’m betting that there are also costs that are not fully understood right now, and unintended consequences of the move. And some of those benefits hinge on customers buying additional equipment to avail themselves of new information. This will be challenging for many low income households or the 30% of households that are renters.

The other wild card in this has to do with implementing time-of-use (TOU) pricing. While BC Hydro and the government deny that they want to bring in TOU pricing, most experts seem to agree that the whole point of smart meters is to have TOU pricing. So once they are implemented, I’m betting we see TOU within a few years. At any rate, TOU pricing is more of benefit to smoothing and shifting peak load, a benefit in coal or nuclear systems that are hard to ramp up and down; this is less of an issue in BC where we have huge hydro reservoirs that act as batteries for electricity storage.

Overall, smart meters will do little to reduce household energy consumption. So, could almost $1 billion have been better spent to conserve existing power resources? BC Hydro’s 2007 Conservation Potential Review (CPR) was commissioned to identify potential for electricity conservation through demand side measures (DSM) in the residential, commercial and industrial sectors. Over a 20-year study period, the study estimates the total potential electricity savings and peak load reduction from new and emerging energy efficiency technologies, customer-supplied small-scale renewable energy and behavioral change.

The CPR’s estimates of potential savings from conservation are substantial, ranging up to 40% of business-as-usual consumption by 2026. The cost of achieving these reductions is way cheaper than acquiring new expensive electricity, as BC Hydro has been mandated to do by the government. In addition, investment in DSM is more likely to be distributed within the local economy while smart meter installation will likely be contracted out to a single firm. And to add some crony capitalism to the story of smart meters, the announcement the smart meter contract was met with some controversy, as it went to a firm with ties to the BC Liberal party.

Note: This piece was developed as part of our recent Energy Poverty publication, but did not make the final cut. So special thanks to my co-authors Eugene Kung and Jason Owen, whose insights are reflected in the post.