The report states
In 2006, the Victorian Government committed to the Advanced Metering Infrastructure (AMI) program which involved replacing existing electrical metering infrastructure in all Victorian residential and small business premises with digital smart meters by December 2012. At that time, this was expected to involve the rollout of 2.6 million meters to 2.4 million sites. Before the rollout commenced in 2009, the deadline for completion was changed to December 2013. The 2005 business case anticipated a net incremental benefit of $79 million relative to a 2004 cost-benefit analysis for the rollout of interval meters.
Key expected benefits of smart meters were to:
- improve consumers’ ability to monitor and control their electricity use, potentially allowing for cheaper and more efficient energy use
- reduce the cost to industry of planning and managing power supply, potentially leading to lower retail prices for consumers
- increase retail competition through new services, potentially resulting in a greater choice of retail offerings to consumers.
In 2009, VAGO released its report, Towards a ‘smart grid’ — the roll-out of theAdvanced Metering Infrastructure, which was highly critical of the original business case. It also made a number of recommendations including to improve governance and stakeholder engagement, reassess the economic viability of the smart meter program by updating the cost-benefit analysis (CBA) to reflect existing and emerging risks, and to assess the impact of changes to scope and underlying assumptions.
In 2011, the government reviewed the AMI program and decided to continue to roll out smart meters to all Victorian residential and small business customers by 31 December 2013.
This audit assessed whether the Department of Economic Development, Jobs, Transport & Resources (DEDJTR) has effectively addressed recommendations from VAGO’s 2009 audit, and can demonstrate that the AMI program is delivering expected consumer benefits and is set up to maximise longer-term benefits.
By the end of 2015, Victoria's electricity consumers will have paid an estimated $2.239 billion for metering services, including the rollout and connection of smart meters.
The net position of the program has changed significantly since its inception, and there is now expected to be a substantially increased net cost to consumers over the life of the program.
In contrast, while a few benefits have accrued to consumers, benefits realisation is behind schedule and most benefits are yet to be realised. Current estimates suggest that approximately 80 per cent of the expected benefits could be achieved. However, there are significant uncertainties and risks associated with achieving these benefits, which are not within the control of the state.
There is a risk that the AMI program's most recent 2011 estimate of a net cost of $319 million to consumers may worsen as costs are projected to increase and benefits remain decidedly uncertain. Other factors increase this risk even further, such as the move to national competitive retail metering from 2017, which could further diminish the benefits of the AMI program and expose those consumers who choose to have the smart meters installed under the AMI program replaced by other, competitively provided meters to additional costs.
The 2011 CBA is the fourth time that the costs and benefits of the AMI program have been analysed in just 10 years. In each analysis since our 2009 audit the estimated costs have increased and the benefits have diminished. This continual change highlights the serious flaws in the program’s original business case which we identified in our 2009 audit, as well as the unrealistic assumptions around the achievability of the costs and benefits which were beyond the control of the state. DEDJTR has advised that it is now reassessing the expected benefits of the program for a fifth time, as many of the 2011 assumptions have materially changed.
The three departments which have administered the AMI program have taken action to address most of the recommendations from VAGO's 2009 audit. They have strengthened program governance structures, the oversight and management of risks, improved communications with consumers and regulators, and increased the scrutiny of costs to inform regulatory decisions. However, these changes have not been sufficient to overcome the manifest problems with the estimation and control of costs and benefits, and to ensure the realisation of the projected benefits for consumers.
By the end of the 31 December 2013 deadline, 92.79 per cent of the installation of smart meters was completed. By June 2014, the installation was 98.62 per cent complete, however, approximately 13.5 per cent of households and small businesses did not have a smart meter that could be remotely read. Given that consumers have been progressively paying for the program since 2009 and ultimately pay the full costs, DEDJTR must focus now on actions that will accelerate the achievement of any benefits to consumers and avoid any further increase in the net costs of the program.The report's Findings are -
Costs will increase
The average residential household has paid around $760 since 2009 in metering services, which included the costs associated with installing and maintaining smart meters and related infrastructure and systems. These fees are applied to electricity bills but are not itemised. Despite departmental action to influence the Australian Energy Regulator’s (AER) scrutiny of metering costs, total metering charges imposed on consumers over the period 2009 to 2015 have been approximately $28 5.7 million , or 11.4 per cent,over the distributors' original forecasts. The costs for 2014 and 2015 are forecast to be 88 per cent and 28 per cent over budget respectively due to a delay in the installation of meters. Costs are forecast to reduce from 2013 to 2023 but increase again sharply from 2024, if the meters are replaced from that time as anticipated by the 2011 CBA. Consequently, there is a risk that the expected net cost to consumers over the life of the program may increase above the most recent estimate of $319 million. Benefits realisation is falling behind schedule In 2011, the government commissioned a CBA which has become the benchmark against which DEDJTR measures benefits realisation. Benefits realisation as at 2014 had already fallen behind the 2011 CBA forecast and current projections are that consumers can only expect to achieve approximately 80 per cent of the full benefits to 2028. However, achieving these benefits is subject to many assumptions that have not materialised, and is dependent on the actions of many stakeholders.
The single largest benefits category of the AMI program relates to the avoided cost of replacing and manually reading the old accumulation meters. However, accumulation meter costs have been replaced with smart meter costs that are much higher. While the program has reported $591.99 million in these avoided costs to 2014, which is in line with the 2011 forecast schedule, this does not represent any additional value generated by the AMI Program. Meanwhile, the other benefits categories, which represent actual added value from the AMI program, are falling well behind schedule. This is due, in part, to the delay in the finalisation of the smart meter rollout, the fact that initial flexible tariffs did not necessarily compare favourably with flat tariffs and a perceived waning interest in flexible pricing. These are: • benefits associated with the uptake of innovative tariffs and demand management ― which has achieved only 2.5 per cent of expected benefits to be realised by 2014 • benefits that come from network operational efficiencies ― which have achieved 49.32 per cent of expected benefits to be realised by 2014.
Benefits realisation by consumers is uncertain
Few of the benefits accrue directly to consumers, and they clearly rely on consumer action to take advantage of these services. For instance, consumers can take up flexible pricing offers that may result in savings on their electricity bills. Similarly, consumers may benefit directly if they move house and take advantage of the cost reduction in de-energising and re-energising power supply, arising from the ability of power companies to now do this remotely using smart meters. The majority of expected benefits for consumers from the AMI program are cost savings that accrue first to distributors and to retailers that must be passed on to consumers through a chain of action, including regulatory decisions and competitive action. However, the state cannot directly control these processes. As an example, consumers' reaction to flexible pricing — which provides higher electricity prices at peak times — is assumed to reduce overall peak electricity consumption. This is expected to reduce or defer distributors' need to upgrade electricity networks to meet demand, which results in cost savings for distributors. However, these cost - savings can only be realised by consumers if they are passed on to retailers through regulatory pricing decisions made by the AER. Retailers must then pass these savings on to consumers through competitive pressures. As such, the actual transfer of these types of benefits to consumers is unclear as these actions cannot be fully determined in advance.
Most of the cost savings achieved by distributors from smart meters are yet to flow through to retailers and on to customers. The AER is currently preparing for its next Victorian distribution pricing decision which will take effect from 1 January 2016.
This provides an opportunity for cost savings achieved by distributors to be passed on to retailers and then to customers. DEDJTR should be vigorously prosecuting this process with its own rigorous analysis of the distributors' ongoing costs to determine the benefits that should be flowing to retailers and to consumers.
The amount of expected benefits may no longer be valid
The amount of overall benefits from the AMI program as calculated in the 2011 CBA relied on many assumptions being met. For instance, the 2011 CBA estimated that $778 million of benefits associated with the uptake of flexible tariffs and demand management would be realised by consumers over the life of the p rogram to 2028. However, this figure is based on complex assumptions around the rate at which households will take up new pricing offers. These assumptions are not currently being met. By 2014, the 2011 CBA expected 4 per cent of consumers to have taken up flexible electricity price offers, however, only 0.27 per cent have done so. This is due to a slower than expected smart meter rollout, the moratorium on the introduction of flexible pricing, the fact that initial flexible tariffs did not necessarily compare favourably with flat tariffs and perceived waning interest in flexible pricing. At this rate, it is unclear whether the expected uptake of 15 per cent by 2017 will be achieved. Accelerating the uptake and benefits from flexible price offers relies on retailers providing better value - for - money options compared to the existing flat tariffs, and increasing consumer awareness of the availability and benefits of such offers.
The department is re-evaluating the expected benefits
DEDJTR now acknowledges that some key assumptions underpinning the expected benefits realisation as defined in the 2011 CBA may no longer be valid. It proposes to review these assumptions but remains committed to achieving the targets outlined in the 2011 CBA. This review is again likely to change the value of anticipated benefits through to the end of the program. We acknowledge that the nature and amount of benefits may change — especially as the technology is rolled out and market participants, policy makers and customers experience and better understand the potential of AMI over time. In this context, it is encouraging that DEDJTR will actively review the expected benefits. However, it is concerning that the fundamental assumptions underpinning the 2011 CBA, which were used to justify the continued rollout of smart meters, have become so uncertain as to require, yet again, a review of future targets for benefits realisation.
Program governance and risk management
DEDJTR has recognised its leadership role with respect to the AMI program and has put in place governance structures to strengthen its oversight and management of program risks. It has established clear accountabilities and responsibilities to enable it to better identify and manage risks, including establishing the AMI Program Steering Committee, Ministerial Advisory Council, and Program Management Office. DEDJTR has also developed a risk management plan to identify, evaluate and mitigate future risks, which is reviewed regularly by its Program Steering Committee. DEDJTR has taken action to address program issues. For example, it has provided distributors with an incentive to complete the rollout by requiring them to pay a rebate of $125 to customers at premises where: • the distributor had failed to attempt to install a smart meter by 30 June 2014 ―this rebate was payable by 31 October 2014 • the smart meter installed was not functioning as required by 31 March 2015 ―this rebate was payable by 30 June 2015. Six hundred and eighty households have received the first rebate as they do not yet have a smart meter installed, and approximately 90 per cent of eligible account holders received the tranche two rebates. DEDJTR has also been effective in influencing the AER in its scrutiny of distributors' metering costs that are recovered from customers through charges.
Consumer engagement and education
DEDJTR has demonstrated a strong focus on improving communications with consumers, including addressing consumer issues arising from the AMI program. Various evaluations of DEDJTR’s communications campaigns have found that they have increased consumer awareness, and consumer use of My Power Planner as a tool to find a better electricity plan and save money. However, despite the work to date, market research conducted in early 2014 found that two - thirds of Victorians did not understand what the benefits of smart meters were and many were still unaware of the link between their smart meter and saving money on their electricity bills. A very small number of Victorians still had a negative perception of smart meters due to misinformation and a lack of understanding. DEDJTR needs to improve its communications to further promote the active use of smart meters to inform household energy consumption, and to encourage the uptake of flexible pricing. Consumer action is a key determinant of any future benefits realisation.
Future developments impacting on smart meter benefits
The amount of benefits that are expected to be achieved by the AMI program may be impacted by the introduction of competitive metering and network tariff reform. National reforms to metering that are expected to be introduced from mid - 2017 could mean that smart meters installed under the AMI program may be replaced by other, competitively provided meters, under nationally agreed arrangements. DEDJTR has acknowledged that the removal of distributor exclusivity in Victoria is a risk to the realisation of the benefits of the AMI program. It may also expose consumers to increased costs. Network tariff reform, enabled by smart meters, is intended to create a fairer cost structure for consumers by removing cross - subsidies that exist in the current cost structure. However, the impact that network tariff reforms will have on different community groups is not yet well understood, and for some consumers network costs could increase. DEDJTR should focus on developing a customer engagement program to explain the reasons behind these reforms, but also to protect vulnerable consumers from potential adverse impacts. It should also engage with the AER to introduce metering competition in a way that maintains AMI benefits for Victorian consumers.
Future actions to enhance benefits realisation
Despite expecting significant consumer and other benefits when the AMI program commenced in February 2006, the state has few options to influence — and no ability to directly control — costs to consumers and drive many of the benefits. Nevertheless, DEDJTR has a responsibility to take an active role in implementing the AMI program to contain any further costs and adverse impacts and to maximise and accelerate the available benefits for consumers, who have paid for the rollout and connection of smart meters to date. The recommendations in this report highlight the key areas on which DEDJTR must focus its efforts so as to protect consumers and maximise their benefits realisation.
Public reporting
Reporting on the AMI program has been inadequate. While consumers pay for the costs of the smart meter rollout on the promise of future benefits, there is limited public reporting on the program in DEDJTR's annual report and in the Budget Papers. In particular, there is little clear and transparent knowledge of costs to consumers to date and no public reporting of either the costs or benefits of the program. What exists does not provide sufficient information for consumers to assess the program 's performance in terms of the costs incurred to date and whether benefits have been realised. This reduces transparency and accountability for this program.The report offers the following Recommendations
That the Department of Economic Development, Jobs, Transport & Resources:
1. develops Budget Paper measures that report performance against the objectives of the Advanced Metering Infrastructure program, and publicly reports annually on costs incurred and benefits achieved
2. improves its consumer education to focus on the opportunities to use smart meters to reduce energy consumption, and to take up flexible retail pricing offers, and use other tools, to reduce bills
3. works with distributors and retailers to identify and implement clear syst ems and processes for monitoring the changes in energy consumption and peak demand
4. works with distributors and retailers to develop and implement systems and processes to more effectively measure and track network benefits to enable these to be passed on to consumers
5. effectively influences the Australian Energy Regulator’s: • decisions related to the passing on of network efficiency benefits to consumers in the 2016 – 2020 distribution price review • annual process for assessing whether excess costs are efficient and prudent and should be passed on to consumers
6. works with relevant stakeholders to analyse the impact of network tariff reform on consumer groups, particularly vulnerable consumers
7. develops a strong and persistent cu stomer engagement program in relation to network tariff reform that: • enables consumers to make informed decisions to realise the potential benefits of more cost - reflective network tariffs and to assist in reducing the load on electricity infrastructure during peak periods • educates vulnerable sectors of society so that they can minimise any unfair disadvantage
8. identifies and implements actions to protect Victorian consumers from additional costs associated with the pending rollout of new competitive metering processes, and ensures that essential Advanced Metering Infrastructure program benefits are preserved
9. in conjunction with industry and the Essential Services Commission, considers options to improve the information available to consumers on electricity bills.
