The Brattle Group Estimates Additional euro 53 Billion in Savings Possible from Deployment of Smart Meters in the EU

LONDON -

A Brattle Group discussion paper released today estimates that EU policy-makers could potentially save an additional euro 53 billion over the next twenty years through the increased deployment of smart meters. The increase in savings depends on the ability of policy-makers to boost the adoption of tariffs to encourage consumers to reduce their demand at times when power is expensive (so-called “dynamic pricing”). The authors, Brattle economists Ahmad Faruqui, Dan Harris and Ryan Hledik, explain that dynamic pricing creates savings by reducing the capacity of plants that are required to serve peak load.

International experience shows that customer adoption rates for dynamic tariffs can range from a low of 20 percent to a high of 80 percent depending on program design. The authors estimate that if 80 percent of customers reduce their demand at peak hours due to dynamic pricing, the reduction in associated capacity and transmission costs would be euro 67 billion. However, if the uptake of dynamic tariffs is only 20 percent, then savings are only euro 14 billion. The euro 53 billion difference is the reward that awaits policy-makers if they can persuade customers to sign on to dynamic tariffs in greater numbers.

The paper identifies a number of barriers to customers choosing dynamic tariffs, including insufficient financial incentives, difficultly in estimating the benefits of switching to a dynamic tariff, risk-aversion and uncertainty about how to respond to dynamic prices. The authors point out that both policy-makers and energy suppliers need to be innovative in order to overcome these barriers. Quantifying and stressing the environmental benefits of dynamic tariffs, ensuring transparent and adequate financial rewards and offering customers a lower flat tariff in return for providing “automatic” demand response could help boost customer participation. For some Member States, setting a dynamic regulated tariff could significantly increase demand response. Countries without regulated tariffs could implement dynamic transmission and distribution tariffs that would vary according to when the customer uses power.

The report notes that adoption of dynamic tariffs could make or break the payoff from the EU’s investment in smart meters. The authors estimate the costs of installing smart meters in the EU at euro 51 billion, with operational savings from easier meter reading and other measures at euro 26 to euro 41 billion. This still leaves a savings gap of euro 10 to euro 25 billion between benefits and costs - a gap that might not be filled if uptake of dynamic tariffs is at the low end of typical customer participation rates.

Brattle principal and dynamic pricing expert Ahmad Faruqui suggests that “the EU has made bold steps in beginning to roll out smart meters. It should capitalize on this investment and take steps to ensure that customers embrace smart prices, as the savings could be substantial.”

Dr Faruqui and Mr Harris will present their findings at a seminar in London today. The workshop, “Smart Meters, Smart Prices,” is co-sponsored by eMeter, Siemens, ElectraLink, and The Brattle Group, and will discuss the experience of utilities in North America and Asia Pacific with dynamic prices for small commercial and residential customers.

The discussion paper, “Unlocking the euro 53 Billion Savings from Smart Meters in the EU,” is available at www.brattle.com.

The Brattle Group provides consulting services and expert testimony in economics and finance to corporations, law firms, and public agencies worldwide. Areas of expertise include antitrust and competition, valuation and damages, utility regulatory policy and ratemaking, and regulation and planning in network industries. For more information, please visit www.brattle.com.

Source: The Brattle Group

Laura A. Burns of The Brattle Group, +1-617-864-7900, Laura.Burns at brattle.com