Smart metering Estonian case study · Why to install smart meters 1. Commercial losses especially in electricity. But also in DH. 2. Customers comfort. No need for reading. 3. Demand

www. erranet.org 1st Educational workshop: Energy Capital Investment Programs March 5-6, 2018 //Budapest, Hungary

Smart metering Estonian case

study

Dr. Märt Ots

Estonian Competition Authority

1st Educational workshop: Energy Capital Investment Programs March 5-6, 2018 //Budapest, Hungary

2

Estonia – north-eastern part of Europe

http://upload.wikimedia.org/wikipedia/commons/0/0c/EU_location_EST.png


3

General information about Estonia

Small country:

area: 45 227 sq km;

population: 1,3 million.

Member of EU since 2004

Member of Eurozone since 2011


4 4

Competition Authority – the regulatory authority in Estonia

Administrative reform in 2008. 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.


5

Regulation in Estonia, relevant to smart metering

Electricity

Gas

District heating (DH)

Water


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 m3 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.


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Legislation Estonia

Electricity- by 31.12.2016 each customer shall be equipped with a smart meter.

Gas – by 01.01.2020 each customer with annual consumption at least 750 m3 (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.


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.


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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.


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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).


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Power losses in distribution

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

20,01

99

8

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16


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Heat losses in larger DH utilities

15

17

19

21

23

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Arithmetical mean Weighted average


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SAIDI of Elektrilevi (DSO)

469

266

201

443

204

446

380

187

413

127

0

50

100

150

200

250

300

350

400

450

500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

min

ute


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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.


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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.


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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.


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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.


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Mai goal of economic regulation: RPI-x

pt

pe

ROIC=WACC


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Tariff calculation DSO

Input to the network MWh 104 176

Sales MWh 100 000

Losses MWh 4 176

Losses % 4%

Electricity price €/MWh 30

Power losses € 125 281

OPEX € 1 000 000

RAB € 20 000 000

WACC % 4,50%

Depreciation € 800 000

Profit € 900 000

Total € 2 825 281

Tariff €/MWh 28,3


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Regulatory asset base (RAB)

Defining the value of RAB is essential subject in price regulation.

Capital intensive.


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Price components of Tallinna Vesi the Water Company of Tallinn

OPEX 51%

DEPRECIATION

15%

OPERATINAL PROFIT

34%


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Price components of power TSO

Running costs;

3,4%

OPEX; 15,8%

Depreciation;

34,7%

Profit; 46,1%


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Regulatory Asset Base

OP= WACC × RAB

𝑅AB1= 𝑅AB0+𝐼−D

RAB=RAB0+RAB1

2+CC

k =RV

n; k =

I

n

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


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Value of RAB

Different methods for evaluation of RAB

Historical Cost – book value.

Replacement cost

Market value – privatisation value

LRAIC – hypothetical network


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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


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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.


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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.


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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.


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Tariffs in real terms of larger power utilities

0

20

40

60

80

100

120

140

2004 2006 2008 2010 2012 2014 2016

VKG elektrivõrk Elering Elektrilevi Imatra elektrivõrk


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Tariffs of power TSO in real terms

0

20

40

60

80

100

120

140

160

180

2004 2006 2008 2010 2012 2014 2016

incl. International links excl. International links RAB


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Smart metering project in power distribution

Power DSO-s initiative in 2006-2007.

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.


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Legislation

Political decision by 2010. Power input and output shall be measured on-line by 01.01.2017.

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.


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Project description

Elektrilevi – the largest DSO in Estonia, with market share of 90%

The total cost of project 100 m€.

The number of meters 630 000.

Start of the project by 2008, active start by 2011. End of the Project by 2016.

Saved electricity losses 200GWh.

Saved on operational costs 3 m€ per annum.


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Project estimate and results

max min 2018

Investment cost m€ 100 100 100

WACC % 4,5% 7,0% 4,5%

Depreciation periode years 15 15 15

Saved electricity MWh 200 000 200 000 200 000

Electricity price €/MWh 37 30 30

Savings on electricity m€ 7,4 6 6

Savings on OPEX m€ 3 0 3

Capital expenditure (standard annuity) m€ -9,3 -11,0 -9,3

Project result m€ 1,1 -5,0 -0,3


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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%


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Endcustomers tariff

Generation38,5%

Supply margin2,6%

Network42,3%

Taxes5,1%

Subsidies11,5%


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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.

W

THANK YOU FOR YOUR

ATTENTION!


Märt Ots

E-mail: [email protected]

Web: www.konkurentsiamet.ee

Please feel free to change the logo!

Documents

Smart metering Estonian case study · Why to install smart meters 1. Commercial losses especially in electricity. But also in DH. 2. Customers comfort. No need for reading. 3. Demand