Background to the Problem
Overview of the
As shown in Figure 1, the
Electricity retailers purchase electricity from generators and sell it to consumers. They pay the lines companies for the use of the power lines required for delivering the electricity to their customers.
Each consumer site (for example, a household or small business) has a meter which measures its energy usage in kilowatt hours and displays this figure for meter-readers to read and record. The meter, which a retailer rents from a metering company, is read periodically and consumers are charged by their electricity retailer according to their usage, as well as a fixed daily service charge.
Electricity retailers are charged by metering companies for rental and readings of their customers’ meters. Most of this charge is passed on to the consumer as part of the retailer’s daily service charge.
The metering equipment currently used by the client employs a remarkably robust and durable design, based upon 80 year-old technology. However, the information recorded by these meters is limited. A reading provides no data on when the electricity was used, despite the fact that this information is considered to be potentially useful, both to electricity retailers and to consumers themselves.
Figure 2: Old and New (‘Smart’) Meters
New ‘smart’ meters have been developed, which are capable of recording more data. This information includes aspects of timing, such as when the electricity was actually consumed at each consumer site, allowing them to take consumer behaviour into account when designing pricing profiles. If desired, incentivising schemes based upon such information could influence consumers to change their consumption patterns. For example, ‘time of use’ pricing could be implemented for residential customers, to encourage consumption in off-peak times, thereby reducing peak loads. This would also benefit electricity retailers, as electricity is relatively more expensive to provide in such periods.
It is likely that this technology will ultimately become standard in the metering market. There are large potential revenues associated with these meters and a substantial loss of market share to other metering companies if they implement the technology first. For these reasons, the client has decided that it will replace all of its current meters with the new smart meters. The important question they face is when and how to begin a phase in of these new meters.
It is important for the client to consider the actions of their competitors when making the decision on when to begin installing the smart meters. Delaying the installation process is attractive since they can take advantage of the likely reductions in cost over time. At the same time, they wish to ensure a first-mover advantage in the metering market with respect to this new technology, as they expect failure to do so will lead to a decrease in their market share. Delaying installation also results in foregoing the revenue streams that would have resulted from having the new meters installed.