May 16, 2005

Smart metering will yield environmental, economic benefits, says CD Howe study

Ontario's decision to introduce smart electricity meters will help reduce consumption, lessen the need for new generating capacity and lower consumers' electricity costs, says a CD Howe Institute commentary. Successful implementation of the smart-meter program would have both financial and environmental advantages.

"The construction of new power plants and transmission and distribution investments would be deferred, reducing the need for capital expenditure. The use of fossil fuels would be reduced and in all cases the environment would be improved," says the study, Preventing Electrical Shocks: What Ontario-and Other Provinces-Should Learn About Smart Metering

Authors Ahmad Faruqui and Stephen George, economists with Charles River Associates, say "evidence from a major electricity pricing experiment in California strongly supports the Ontario government's decision to begin introducing smart meters and more economically rational pricing."

They caution, however, that for the program to be effective, the value of the reduction in peak loads must be greater than the costs of the meters. This may require governments to introduce significant price increases, as relatively modest increases are unlikely to induce sufficient demand response to offset the costs of smart metering.

The study points out that Ontario, which was historically a winter peaking province, has become a summer peaking province over the past five years, due to increased use of air conditioners and slow growth of heating loads. The province's Conservation Task Force estimated that demand-side measures could offset as much as 1,350 megawatts of peak demand growth forecast to occur over the next decade.

Smart meters provide an effective way of repairing the current system, under which users who consume most of their power during off-peak periods subsidize those who consume more power during peak times. Faruqui and George point out as well that "in addition to being economically inefficient, prices that do not vary by time period create a social equity problem."

Faruqui and George call for carefully designed pricing experiments that would test consumers' reactions before implementing a full system. They say that when consumers try the new system, "the vast majority will stay with the time-varying option." An important lesson from the California experience, they note, is that critical-peak pricing rates are likely to be more effective than traditional time-of-use rates.

The commentary may be viewed on the CE Howe Web site, www.cdhowe.org/pdf/commentary_210.pdf.

More information is also available from Ahmad Faruqui, 925/743-0353, E-mail: afaruqui@crai.com.

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