Environmental Valuation & Cost-Benefit News

Link: http://www.electricitycommission.govt.nz/pdfs/opdev/retail/ami/NZIER-CBA.pdf

Executive summary
There are a number of additional functionalities available which retailers are not yet including in the smart meters they are rolling out currently. These additional functionalities would incur additional costs to include, whilst their benefits would accrue to parties other than retailers. The demand for these additional functionalities and whether retailers could recoup the costs of their inclusion are as yet uncertain. This raises two questions – would inclusion of these additional functionalities be of net benefit to New Zealand as a whole and, if so, would the net benefits be greater from inclusion at the time of rolling out smart meters or retrofitting at a later time as consumers demand these additional functionalities?

The Electricity Commission has asked NZIER to provide an initial high-level analysis of the costs and benefits of two additional functionalities – home area network interfaces and in-home displays. Home area network (HAN) interfaces enable smart meters to communicate with consumers’ digital devices such as computers, security systems and “smart” appliances (e.g. air conditioners, heat pumps, washing machines) to control these remotely. This communication enables the smart appliances to receive signals of high loading on the electricity system or high prices and to respond by reducing some or all of their electricity consumption in these time periods.

In-home displays (IHDs) provide consumers with close to real time information on their electricity consumption and prices to enable more informed consumption decisions. This information can be effective in assisting and encouraging consumers to reduce their electricity consumption or to move some of their electricity consumption to time periods when prices are lower. For the purpose of this cost-benefit analysis (CBA), a HAN modem is deemed to be a prerequisite for operating an IHD.

For this CBA, we are therefore interested in not the total costs and benefits of smart meters, but only the incremental costs and benefits of including the additional functionalities of HAN interfaces and IHDs – how much extra these functionalities would cost to include and would deliver in benefits.

This CBA finds that although deferring installation of HAN interfaces until smart appliances are introduced reduces the present value total costs of including this functionality, the demand response to HAN interfaces alone is still too small to cover these costs. The demand response to IHDs is sufficiently large to cover the ongoing annual costs of including both HAN interfaces and IHDs in smart meters, but not large enough to recoup the very substantial initial installation costs for these functionalities within the next 20 years or even by 2050. Only if the demand response to IHDs can be increased to a 6% reduction in electricity consumption or the cost of the IHDs can be halved would including HAN interfaces and IHDs deliver sufficient net benefits to break even within the next 20 years.
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4.2 Total costs and benefits
With discounting to reflect their relative timing, the above annual costs and benefits imply present value total costs over 2009/10 to 2028/29 of $429 million under option 1, $231 million under option 1a and $987 million under option 2. Although option 1a incurs an additional cost for site visits to retrofit HAN modems, it avoids incurring any costs until HAN interfaces are required by smart appliances.

Inclusion of the additional functionalities delivers present value total benefits over the next 20 years of just $1.718 million under each of option 1 and option 1a and $727 million under option 2, given the larger demand response to IHDs than HAN interfaces alone.

The net benefits are therefore -$427 million under option 1, -$229 million under option 1a and -$260 million under option 2. Although option 2 achieves greater benefits, it also incurs larger costs. For each dollar of cost, option 1 and option 1a return less than $0.01 in benefits, whilst option 2 returns $0.74. None of the options break even within the next 20 years. Although, option 2 does reach a point (from 2017/18) where its annual benefits outweigh its annual costs, these annual net benefits are not large enough to cover the initial installation costs within the next 20 years or even by 2050.

These results indicate that, although deferring installation of HAN interfaces until smart appliances become available reduces the costs of including this functionality, the demand response to HAN interfaces alone is still far too small to cover these costs. The demand response to IHDs is sufficiently large to cover the ongoing annual costs of including both HAN interfaces and IHDs in smart meters, but not large enough to recoup the very substantial initial installation costs.

The largest cost component is the licence fee for HAN interfaces under option 1 (42%), the purchase and installation by retrofitting of HAN modems under option 1a (44%) and the replacement of damaged or lost IHDs under option 2 (37%). The benefits are solely avoided generation costs under options 1 and 1a and split equally between avoided generation costs (45%) and deferred generation investment (45%) under option 2. Of the total benefits of option 2, reduced electricity consumption (load shedding) accounts for almost 100% and electricity consumption moved from peak to off peak times (load shifting) accounts for just 0.2%.

Prepared by: Johannah Branson
New Zealand Institute of Economic Research (NZIER) www.nzier.org.nz
for the Electricity Commission www.electricitycommission.govt.nz
December 2, 2009