Pipeline &
Gas Journal
April issue 2000:
New Metering-based Information
Systems Can Shift Balance
Of Power In Utility Industry
Information and communications technology may spark a major shift in the balance of power among energy producers, utilities, commercial and industrial customers, and consumers over the next decade, according to a new study by Cambridge Energy Research Associates (CERA), “Capturing Value: The Future of Advanced Metering and Energy Information.”
“Like UPC codes, the SABRE travel reservation system, electronic trading systems and other examples, automated meter reading and computerized control systems will dramatically influence the way energy resources and power are bought and sold worldwide,” said Steve Taub, an associate director of CERA’s North American Energy Group who headed the new metering study. “Those who control the meter will capture the benefits, but it is not at all clear yet who will fill this role.”
Commercial and industrial customers will form the initial battleground between distribution utilities and retail energy merchants, the study finds, although distribution utilities are more likely to keep control over residential meters, Taub said.
The information that can be gleaned from these automated systems has had profound and often unexpected implications for other industries when they were first developed, the study found.
“Automated reservation systems have shaped today’s airline business by enabling innovations like yield management pricing, frequent flyer programs, hub-and-spoke routes and Internet travel reservations,” according to the study.
“UPC codes have similarly allowed smart companies to attain unprecedented scale, efficiency and profitability through better marketing and inventory management. Companies that adopted these new ideas have prospered in highly competitive environments, while laggards suffered,” it said.
Competitive Advantages
In the energy industry, early adopters of this technology will gain a significant advantage over their competitors, the study predicts, in part by leveraging the value of the data ahead of competitors and by influencing regulatory decisions and standards in the earliest stages.
Metering and control automation also has the potential to drive a number of structural changes. For example, retailers and aggregators may leverage end-user data to control a portion of demand, and this could influence commodity prices. In addition, integrating customer metering with demand control could help reverse the long-term trend of declining load factors and increase asset utilization. By creating a real-time pricing information system, short-term price increases could help smooth demand during peak demand periods.
These changes could require energy companies to become telecommunications companies as well, the study points out. Traditional telecommunications players may enter the energy business if they see attractive business opportunities.
New Technologies
Sophisticated metering and communications technology has been available for many years, but its value to the vertically integrated, regulated monopolies that dominated the business was limited. Currently, only 6 percent of electric meters and 2 percent of gas meters are remotely read, even though the technology has been on the market since 1992. Most utilities decided that meter readers who cover their routes on foot or in vans are too cheap to replace with even the latest communications technology.
All of this is about to change. Changes in the regulation and structure of the energy industry over the past five years have vastly increased the value of the information that can be gathered from energy meters. Two-way information is critical to making the new industry structure work, and a lot of it will come from customer meters, the study found.
“Electricity and gas flow from producing and generating companies through transmission, distribution, marketing and service companies to the end user. There has to be end-user information flowing back just to show who used how much and when, in order to settle accounts among the multitude of functions that used to be managed internally by vertically integrated suppliers or through long-term contracts and bundled services,” said the study.
Market Penetration
Depending on the rate at which the cost of metering communication systems declines over the next 15 years, CERA projects that electric meter installations will grow at between 10 percent and 17 percent annually, while the total electric market expands just 1 percent per year. Natural gas meter installations are expected to rise between 16 percent and 26 percent annually, while the installed gas meter population grows just over 1 percent per year.
As a result, CERA anticipates that by the year 2015, communications-equipped metering will be included in between one-fourth and two-thirds of U.S. electric meters, and in at least one-fifth and potentially all of U.S. gas meters.
Deregulation Effects
Meter information will prove especially critical as more and more retail consumers and businesses are allowed to choose their own gas and electricity service providers. State regulators in more than two-thirds of U.S. states and several Canadian provinces either have passed or are considering laws and regulations that will inject competition into energy delivery and service to smaller industrial, commercial and residential accounts.
“Mass-marketing of energy requires a quantum leap in the amount and flow of information needed for the industry to function smoothly,” Taub noted. “While the wholesale gas and electric industry manages transactions among a few thousand players, competition at the retail level requires the tracking of power and gas as they flow to tens of millions of end users.
“Competition makes information on individual users’ consumption more valuable, because the new technology enables energy companies to understand customer needs and offer additional services that add value to their product, assist their marketing efforts, or streamline their operations,” he added.
This technology will create a number of strategic advantages for industry players such as retail marketers and sellers of information technology. But it will create new challenges for others. Wholesale marketers, for example, will profit less from risk management, as reduced price volatility and flatter demand will dampen the need for peaking capabilities. Another segment, distribution utilities, will remain under attack by unregulated competitors, although incumbents will have opportunities for building new businesses. P&GJ