Smart metering Estonian case study

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1 Smart metering Estonian case study Dr. Märt Ots Estonian Competition Authority www. erranet.org

2 Estonia north-eastern part of Europe 2

3 General information about Estonia Small country: area: sq km; population: 1,3 million. Member of EU since 2004 Member of Eurozone since

4 Competition Authority the regulatory authority in Estonia Administrative reform in Merger of: Competition Authority Energy Regulator (gas, electricity, district heating) Telecom and Postal Regulator Railway regulator Establishment on combined competition authority and sector regulators. Similar authorities in Spain and Netherlands. In a number of EU member sates multi sectorial regulators. 4 4

5 Regulation in Estonia, relevant to smart metering Electricity Gas District heating (DH) Water 5

6 Smart metering Electricity Transmission not an issue, small number of points. Distribution more complex issue: a large number of customers. Natural gas Correction of metering data: calorific value, temperature, pressure. The metering is complicated: the measured physical unit is m 3 but for the customers the consumed energy (kwh; MWh) is the most important. District heating. Metering in connection point of the house is possible. Not by each of the flat. Water. Depends on legislation. Typically the connection point of the house. 6

7 Legislation Estonia Electricity- by each customer shall be equipped with a smart meter. Gas by each customer with annual consumption at least 750 m 3 (8 MWh) per annum shall be equipped with smart meter. District heating no special requirements by legislation, company s decision. Water no special requirements by legislation, company s decision. 7

8 Estonia Electricity all customers equipped with smart meters. Gas 2020 mainly all customers equipped with smart meters. District heating: a large number of cities equipped with smart meters. For example Tallinn 100%. Water: a number of cities equipped with smart meters. 8

9 Why to install smart meters 1. Commercial losses especially in electricity. But also in DH. 2. Customers comfort. No need for reading. 3. Demand side management, combined with smart metering. 4. Introduction of two component tariff system. 5. By replacing of metering system it is rational to install a smart metering system. 6. Reliability and quality improvements. The utility get online information in case of supply interruption. For example less complex to detect the location of failure in power distribution network. 9

10 Two component tariff Utilities decision in Estonia. Electricity for larger industrial customers only. Gas and DH. Single component tariff mainly. The utilities are not very active to introduce. Problem by measuring of actual load. Smart metering enables to solve the problem. Enables to measure and monitor the actual capacity (kw, MW). 10

11 Power losses in distribution 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 11

12 Heat losses in larger DH utilities Arithmetical mean Weighted average 12

minute SAIDI of Elektrilevi (DSO) 500 450 400 350 469 443 446 380 413 300 250 266

13 minute SAIDI of Elektrilevi (DSO)

14 Utility regulation in Estonia Large number of small size utilities. DH: networks 145, generation 32. Power networks 32. Gas networks 24 Water 54 Privately owned. Tha gas and power TSO and the largest power DSO are state owned companies. 14

15 Different regulatory methodologies supportive to investments? Ex-post. ROIC=WACC, the company is free on efficiency and investment decisions. Monitoring based on regulators initiative. General competition regulation. Ex-post incl. mandatory annual profit adjustment. The regulator is monitoring that ROIC=WACC. No incentive for efficiency. Company is free to decide on investments. Rate of Return or Cost+. Based on company s historical costs. The company is free to apply for new tariffs at any time. No incentive for efficiency. Company free to decide on investments. 15

16 Different regulatory methodologies National wide price cap based on efficient tariff. (Holland DH, Estonia planned for DH but not approved by the parliament). The company is free to decide on investments. Light type of regulation RPI-x. Defined tariff periods, the company is free to decide on investments. Strong type of RPI-x regulation. Defined tariff periods, strong regulation of efficiency and investments. For example the British regulatory model. Non-profit type of regulation. 16

17 Different regulatory methodologies supportive to investments? Estonia. Incentive type of RoR. The company is free to apply for new tariffs at any time, no defined regulatory period. The regulator is demanding efficiency. OPEX, energy efficiency. Strong type of regulation. Light type of regulation on investments. Setting the WACC on proper level in order to avoid overinvestments. regulatory WACC > company WACC: risk of overinvestments. 17

18 Mai goal of economic regulation: RPI-x ROIC=WACC p t p e 18

19 Tariff calculation DSO Input to the network MWh Sales MWh Losses MWh Losses % 4% Electricity price /MWh 30 Power losses OPEX RAB WACC % 4,50% Depreciation Profit Total Tariff /MWh 28,3 19

20 Regulatory asset base (RAB) Defining the value of RAB is essential subject in price regulation. Capital intensive. 20

21 Price components of Tallinna Vesi the Water Company of Tallinn OPERATINAL PROFIT 34% OPEX 51% DEPRECIATIO N 15% 21

22 Price components of power TSO Running costs; 3,4% OPEX; 15,8% Profit; 46,1% Depreciation; 34,7% 22

23 Regulatory Asset Base OP= WACC RAB RAB 1 = RAB 0 +I D k = RV n ; k = I n RAB= RAB 0+RAB 1 2 +CC OP- operational profit RAB regulatory asset base D- depreciation CC- current capital; 5% of regulated revenue I- investment n- technical lifetime In Estonian case the RAB is based on historical book value 23

24 Value of RAB Different methods for evaluation of RAB Historical Cost book value. Replacement cost Market value privatisation value LRAIC hypothetical network 24

25 Historical Cost book value. The simplest approach. Used in Estonia. Tariffs are based on companies book-keeping mainly. Stranded assets are excluded from RAB. ECA is checking the depreciation norms. ECA is checking the investments 25

26 Replacement cost (RC) Once prior the price regulation, than regulative accounting. Permanently by each of regulatory period. Problematic especially for water services. The assets are with extremely long lifetime. The RC method may result in extremely high value of RAB and high tariffs. 26

27 Market value Simple market value value on stock exchanges can not be used. Circularity: the higher market value will create higher tariffs. Privatisation value (PV). Can be used once by privatisation. High risk of overbidding especially if the investors know that the PV is going to be the value of RAB. 27

28 LRAIC or hypothetical network Similar to RC, but the network is designed in accordance to the optimal geographical design, by using of optimal new technology. Problematic for water services. The assets are with extremely long lifetime. The LRAIC method may result in extremely high value of RAB and high tariffs. 28

29 Tariffs in real terms of larger power utilities VKG elektrivõrk Elering Elektrilevi Imatra elektrivõrk 29

30 Tariffs of power TSO in real terms incl. International links excl. International links RAB 30

31 Smart metering project in power distribution Power DSO-s initiative in Still relatively high power losses, the technical losses only should be included to the tariff. Strong regulatory guidelines to save on power losses. New technology: smart metering, intelligent demand side management, improving of network quality indicators, etc. Savings on operational and maintenance costs on metering. 31

32 Legislation Political decision by Power input and output shall be measured on-line by All investment cost related to the metering systems shall be included to the network tariff. All savings achieved shall be taken into account by fixing of network tariffs by the regulator. 32

33 Project description Elektrilevi the largest DSO in Estonia, with market share of 90% The total cost of project 100 m. The number of meters Start of the project by 2008, active start by End of the Project by Saved electricity losses 200GWh. Saved on operational costs 3 m per annum. 33

34 Project estimate and results max min 2018 Investment cost m WACC % 4,5% 7,0% 4,5% Depreciation periode years Saved electricity MWh Electricity price /MWh Savings on electricity m 7,4 6 6 Savings on OPEX m Capital expenditure (standard annuity) m -9,3-11,0-9,3 Project result m 1,1-5,0-0,3 34

35 Impact on endcustomer s tariff /MWh exl. smart metering incl. smart metering Generation 30,0 30,0 Supply margin 2,0 2,0 Network 33,0 33,3 Taxes 4,0 4,0 Subsidies 9,0 9,0 Endcustomers tariff 78,0 78,3 Difference 0,4% 35

36 Endcustomers tariff Taxes 5,1% Subsidies 11,5% Generation 38,5% Network 42,3% Supply margin 2,6% 36

37 Conclusions Political decision to implement smart metering. Supported by utilities and regulator. Project result depends on cost of capital and electricity price. Even by the worst scenario the impact on end customers tariff is non significant. Additional benefits: Smart demand side management. Impact on network quality indicators (SAIDI). Customers comfort. 37

38 THANK YOU FOR YOUR ATTENTION! Please feel free to change the logo! Märt Ots W Web:

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