By Sir John Mogg

In 2006 ERGEG undertook a “Status Review Report on Smart Metering in European Countries” in order to identify the “state of the art” in automated meter reading and automated meter management systems in ERGEG member countries. In the report, “Smart metering with a focus on electricity”, which has just been published, policy options that may be available to regulators have been identified and a number of recommendations made.

Only a limited number of EU countries have smart meter policies in place. However, a growing number of member states are in the process of preparing (or planning to prepare) policies in the (near) future. In the coming years, at least three European countries (Italy, Sweden and the Netherlands) will have completed a full rollout of smart meters to all of their residential customers. In many other countries, pilot projects and public consultations on this topic are on the agenda.

But introducing a smart metering infrastructure for smallscale consumers is not an objective in itself. International experience indicates that the reasons for metering innovation vary among countries. Therefore, for regulators, the first step in assessing the case for a policy that favours investments in more innovative metering is to weigh carefully the potential costs against the expected benefits.

As the legal framework and the powers of regulators differ in member states, the actual implementation of smart meter policies will differ from country to country. Broadly speaking, there are two metering market models established in EU member states: the regulated metering market model, where the grid operator, or a regulated meter service provider, has the monopoly of providing meter services; and the liberalised metering market model, where either the customer or supplier can mandate an independent (from grid operation) meter service provider, which is responsible for meter services. Here, meter service is open to competition.

Currently, and with a few exceptions, metering services in Europe are a monopoly business carried out by grid operators and therefore paid by the final customer by regulated metering tariffs. It is a key task of energy regulatory authorities to decide whether the additional costs for smart metering for customers are justified by the benefits. The following policies can either be introduced individually, or in combination with other policies:

  • Obligatory rollout of smart meters: This policy requires the regulated meter service responsible party to install and operate smart meters within their monopoly area. The role of the regulator here is to define one or more of the following aspects: scope of meters affected (customer group, demand threshold, etc.); timeframe within which the meters have to be replaced by new smart meters; basic functionality of smart meters.
  • In a regulated meter market, metering tariffs are set by the regulator or they are part of the grid tariffs. By allowing for higher meter tariffs for smart meters, incentives can be given for the installation of these meters.

Where the meter market is open to competition, it is up to the consumer or the supplier to decide on the type of meter to be installed. Metering services are carried out by an unregulated third party. This may result in a non-homogenous meter infrastructure with different levels of functionalities within grid areas. It is therefore necessary to provide for a certain level of standardisation and interoperability of the meters installed. On a more general level, regulatory policies could also help remove barriers to smart meters such as more frequent calibration periods for electronic meters, assistance in meter data communication standardisation, etc.

Irrespective of the market model, there is always the possibility of introducing minimum functional requirements or technical standards for meters installed. The meter responsible party would be able to choose freely a meter type, as long as it meets the given criteria. It is important to underline that these requirements should secure nondiscrimination of customers or suppliers.

Another option is to require more frequent meter reads or bills based on actual consumption. This approach puts an obligation on the meter responsible party to ensure frequent (daily, monthly) data retrieval and access. As frequent meter reads cannot be carried out manually in an efficient manner, it forces indirectly the meter responsible party to install at least AMR (automated meter reading) systems. However, this approach might fall short when it comes to the benefit from additional functionalities of smart meters such as remote tariff change, transferring price signal to the customer, etc.

ERGEG recognises that the development of smart metering must be analysed within its national context, taking into account the characteristics of the national markets and the regulatory model for metering. Notwithstanding market models, ERGEG would recommend that functional requirements for smart meters are established in order to guarantee minimum services for customers and reduce investment risk for meter operators. The use of technical standards both within and between countries needs to be promoted and third party access to metering data should be established.

OTHER AREAS OF WORK
Since its creation in 2003, ERGEG has looked into customer issues and last year published three sets of Best Practice Propositions (BPPs) aimed at helping consumers switch supplier, safeguarding and enhancing customer protection and improving price transparency.

Since 1 July 2007, in all EU countries, customers have been free to purchase gas or electricity from the supplier of their choice.

Considerable resources are also being devoted to gas and electricity (wholesale) issues. Several sets of guidelines have been prepared, including the Congestion Management Guidelines (electricity), Guidelines for Good Practice for Transparency and Information Management (electricity), and Guidelines for Good Practice for Storage System Operators (gas).

Where there is a legal basis, the European Commission has made the guidelines binding (e.g. the Congestion Management Guidelines). In other instances, the guidelines have been implemented on a voluntary basis (e.g the Good Practice for Storage System Operators). The role of ERGEG is to monitor implementation of such guidelines, and to alert the European Commission if compliance is not satisfactory.

ERGEG’s Regional Initiatives, launched in 2006 as a vehicle for removing obstacles at regional market level, as a stepping stone towards single gas and electricity markets in Europe, are also developing well. In each of the regions (seven for electricity, three for gas), the regulators cooperate on a voluntary basis and consult the industry, involving them as much as possible to drive progress forward. One successful outcome is the “market coupling” between France, Belgium and the Netherlands. A particular concern is convergence and coherence and ERGEG is not losing sight of the final objective, the single European energy market.

COMPETITION
The Commission’s Sector Inquiry showed clearly that competition is not working in EU energy markets. The key issues raised in the conclusions, which were published in January 2007 as part of the EU Strategic Energy Review were: market concentration; collusion between incumbents; vertical integration; lack of access to infrastructure; and lack of or delayed investment. Putting structural remedies in place to overcome these issues – both through the current proposals and the rigorous application of competition rules – is vital. But the problem goes deeper than a handful of large companies not playing by the rules: it is that the rules themselves are inadequate and incomplete.

The fragmentation of national markets is caused in part by a “regulatory gap”, which undermines the confidence of market participants and investors in delivering the single European energy market. This “gap” has a number of causes. The implementation of existing EU rules has been mixed and at times ineffective, as the Commission’s benchmarking reports have identified. There are significant variations in the powers of national regulators. Moreover, political interference in regulatory decisions remains a major concern.

The gap is also, however, created by the limitations of the current system. Within their own jurisdictions national regulators oversee the investment activities of the monopoly networks: ensuring the interests of the consumer are protected whilst providing certainty on a fair rate of return for the networks. As statutory bodies national regulators are only able to act within their national duties and legal framework. There is no equivalent framework to establish a “regulatory contract” for cross-border investments. As a result, interconnectors and similar projects are generally funded through long term capacity contracts and ad hoc inter-governmental arrangements. As the Sector Inquiry identified, the lack of investment, particularly in the infrastructure needed to facilitate cross-border trade, is a major impediment to the development of single energy markets. Put differently, joining together national grids better than they are today to create an integrated EU grid is a prerequisite of integrated markets. The aim of the current proposals must also therefore be to promote competition by filling the regulatory gap – hence the need for an EU-level regulatory framework to supplement, and complement national rules.

For these reasons, the Commission has placed energy regulation at the heart of their proposals. More specifically, the Commission’s proposals address the following issues:

  • Strengthening of the powers and independence of energy regulators at national level
  • Creation of an EU Agency for the Cooperation of Energy Regulators (ACER), essentially as an advisory body but with some individual decision making powers
  • Setting up a framework for the cooperation of TSOs at EU level
  • Effective unbundling of competitive and monopoly activities, with ownership unbundling being the preferred option. As a derogation, member states may opt for the Independent System Operator (ISO) model instead
  • Improving the functioning of the markets, including clarifying the exemption regime and improving transparency and access conditions for storage and LNG.

The Commission’s proposals are welcomed by the European regulators, although the limited powers proposed for the Agency are disappointing. Indeed, ERGEG has repeatedly advocated that a comprehensive regulatory framework at EU level is needed to realise Europe’s stated energy objectives of competition, security of supply and sustainability. In April 2007, ERGEG presented preliminary advice to the Commission on the key elements for creating such a framework, the three main concerns being:

  • The scope of the new EU “technical and market rules” appears too broad and the interaction between the EU and national frameworks must be clarified, and subsidiarity properly reflected
  • In addition, there does not appear to be sufficient regulatory oversight of the EU TSOs bodies
  • The principles that the Commission have rightly required for regulators at national level must be similarly upheld in respect of the Agency. The constitutional and legal constraints at the EU level are appreciated but political interference in regulatory decision making will ultimately lead to uncertainty and therefore a higher cost of investment, costs which will be borne by EU consumers.

Now that the EU legislation process has begun, the Parliament and the Council must consider the proposals as quickly and as ambitiously as they can to deliver genuinely independent regulators at EU level as well as at national level.