India is in the midst of a frenetic rush into smart metering of electricity connections on the belief that this technology is the solution to the deep-rooted problems that bedevil the electricity distribution sector.
The Central Electricity Authority has amended its metering regulations to define an electricity consumer meter itself as "smart meters with prepayment mode" instead of the generic "meter used for accounting and billing of electricity supplied to the consumer". The electricity meter thereby becomes a bi-directional smart meter that both relays consumption data and allows for disconnection of service.
The Smart Meter National Program (SMNP) aims to replace 250 million conventional meters with smart meters by March 2025. These smart meters enable bi-directional communication to acquire data and communicate information, and also control supply. The central government entity, Energy Efficiency Services Ltd (EESL) is the designated nodal bulk procurement agency for smart meters. The program is being funded as part of the Government of India's Revamped Distribution Sector Scheme (RDSS), with an incentive grant of Rs 900-1350 per meter. The meters are to be installed on a Design-Build-Finance-Own-Operate-Transfer (DBFOOT) model by private operators through totex (capex plus opex) contracts. The contracts offer a part of the meter cost in the form of upfront payment and the rest is amortised in the monthly bills.
Accordingly, distribution utilities across the country have called tenders for the installation of smart meters. It's estimated that over 50 million meters are at different stages of procurement. The meters have three cost components - the fixed cost consisting of the cost of the meter and its allied materials (including the meter reading software), and the recurring billing cost. The meters are procured by the discoms on a hybrid totex model where a part of the fixed cost is paid upfront and the rest is paid out along with the monthly billing.
It has recently been reported that the Maharashtra discoms have awarded tenders for the installation of 17 million smart meters, in addition to an earlier tender awarded by BEST for Mumbai consumers. This is part of the state government's plan to install 23.6 million smart meters in the first phase. These meters are to be installed over a period of 30 months and maintained over the following 90 months.
A few observations on this issue.
1. In Europe and elsewhere, smart metering was motivated by the desire to allow demand response that would improve grid management, conserve electricity use, and also minimise consumer bills. It was aimed at improving the effectiveness of the Time of Day (ToD) pricing of electricity. Smart meters are essential for such functions. Accordingly, the smart meters there don't have pre-paid or remote disconnection features.
In contrast, in India, smart metering is being driven primarily by the desire to lower distribution losses and improve the quality of supply. In a system where atleast one unit of electricity is lost for every four units delivered and where supply interruptions are all too common, it's believed that a technology solution like smart metering can be effective at addressing these problems. But this may be a questionable premise.
2. The functional functional effectiveness of smart metering depends on several assumptions. One, the smart meter's telemetry is always synchronised to the grid and it reliably delivers information. Two, the smart meter itself is operational and does not suffer from technical problems and failures. Three, the smart meter is not tampered with or even bypassed at the consumer level. Four, even if the data is acquired and processed to make available actionable decision support, the discoms have the capabilities to undertake rigorous energy audits and monitor and enforce them. Five, the discoms are able to disconnect errant connections.
These assumptions will struggle to stand the test of real-world scrutiny. There's little to suggest that the specific technology of smart meters has changed any of these conditions.
3. In Europe, the smart meter procurement follows a simple model. The meter cost is amortised over a long period and added to the monthly consumer bills. The meters are owned by metering companies, who lease out the meter operation and maintenance to distribution supply companies. The metering contracts are backed by a regulatory mandate that requires the meter cost to be billed and paid to the metering company by the consumer's supply company. The meters reside on the balance sheets of these metering companies.
Private equity investors have been attracted by the stable and low risk nature of this regulated revenue stream. It's an easy business to deploy large volumes of accumulated raw powder.
In India, in the absence of private supply, the cost of the meters has to be borne by the public monopoly distribution companies. The discoms, through the totex DBFOOT model, have sought to off-load maintenance to private companies like Adani Transmission which itself is estimated to have won a third of all smart meter tenders finalised nationwide till date.
However, given the complex political economy and poor state of discom finances, these companies may be assuming insurmountable risks through such contracts. Despite the risks, these contracts are valuable assets with stable and long-term revenue streams which are both monopoly and virtually backed by a sovereign commitment. But some contractors, for undesirable and unhealthy reasons, may be well-placed to bear such risks and bid aggressively to bag such contracts.
This may be an opportunity to transition to a model of supply competition while retaining the distribution company as a public sector wires company. Supply competition is the simplest (in terms of structuring the reform) and least problematic (in terms of political economy) approach to introduce private sector efficiencies into the power sector. It's also (along with power generation) the dominant model of private participation in electricity across continental Europe. This model would also allow for the adoption of the well-tested European model of shifting ownership of the meters to private metering companies on the back of regulatory commitment to the underlying revenue streams from meters.
4. The biggest problem with amortisation of the meter cost into consumer bills is the math behind the meter cost and monthly electricity bills. In the UK, for example, with an average monthly electricity bill of £250 per household, the fixed cost of less than £1500 is easily recovered in affordable instalments. But in India, where over 80% of consumers pay less than Rs 500 (perhaps even Rs 300) and fixed cost is over Rs 12000, affordable and acceptable (politically and for the regulator) amortisation becomes difficult. To put this in perspective, the monthly billing cost itself is comparable to the monthly bill for a large portion of household consumers. The unit economics of amortisation just does not exist, except for a small share of consumers.
This is insurmountable for now with the vast majority of Indian consumers, leaving the discoms or governments to bear the subsidy. Neither are clearly in any position to bear this subsidy.
5. Further, in the absence of any consumer welfare case for the replacement of existing meters with smart meters, there are questions about the legal tenability of amortisation. How can regulators be convinced about allowing the recovery of the smart meter cost from existing consumers through amortisation? What's the value addition? Neither the discoms nor the state governments are in any position to bear the cost as a subsidy.
Then there's the issue of prepaid metering, which is effectively an interest-free loan to the discom. It's inevitable that at some point (as prepaid smart metering scales) the regulators would have to take this into account, thereby forcing a possible reduction in tariff due to the associated interest cost borne by the consumer. The reality of both the discom or government bearing the cost of the meter and also offering a reduction on the tariffs due to pre-paid smart metering can be fatal for the distressed sector.
6. In light of all the aforementioned, a more appropriate strategy would be to confine smart metering to higher value consumers, perhaps those using more than 500 units per month or those with a monthly bill of more than Rs 2000. This would make cost recovery amortisation realistic.
Besides, these higher value consumers can be offered useful value added services that utilise the smart meter's features. This would help enhance the effectiveness of grid management. It can also help address the regulator's concerns about amortisation of meter costs in monthly billing.
7. But even before we get into such details, it's useful to adopt a nuanced strategy for the phased installation of smart meters. As a phasing of installation, a prudent policy would be to target metering of all 11 kV feeders on priority. In fact, the biggest low hanging fruit for the distribution system improvement is to be able to monitor feeder-wise supply on a real-time and uninterrupted basis, and be able to use this information as a decision support to both improve quality of supply and undertake energy audits (to detect losses).
This is important since in practice the intermittent telemetry synchronisation troubles ensure a large portion of feeder data is unavailable at any time, thereby making effective monitoring impractical. The poor quality of telecommunications connectivity means that highly sensitive smart meters with their need for always-on synchronisation will struggle to function with any degree of efficacy.
The next priority should be to undertake smart metering of high value consumers, who form a small proportion of all consumers (and are more likely to be located in areas with acceptable enough telecommunications coverage quality). This could be supplemented with smart metering of distribution transformers that do not have consumer-level smart meters. If these two are completed, it would be more than sufficient to create a platform for sustained reduction in losses and improvements in the quality of supply.
8. Then there are the critical (but often overlooked) issues of privacy of data collected and the security of such networks. The large volumes of data collected are a treasure trove of monetisable information that can be siphoned off by private metering companies in the absence of safeguards to control its ownership and management. Such safeguards will involve data management processes and protocols, encryption techniques, sanitised data access systems, and data sharing pathways. Similarly, a smart meter network can become a tool to control and destabilise the electricity grid, thereby raising strategic concerns.
Mandating safeguards and monitoring their implementation is beyond the capabilities of discoms or the Ministry of Power. Neither do they have any incentive. It's therefore essential that the Government of India prioritise these by defining standards and safeguards through its technically competent agencies and also ensure its independent surveillance and monitoring for compliance. All discom smart grids should be mandatorily certified by an independent government agency (yes, I don't think it's a good idea to outsource this to a private agency in the Indian context for a variety of reasons, primarily concerns of capture and corruption) for adherence to privacy and security safeguards. Besides these certifications should be revisited with some periodicity.
9. The smart metering network provides an excellent opportunity for harvesting data that can catalyse a host of markets. For example, while granular household or business electricity consumption data trends can provide sufficient information for credit assessment, aggregate data trends can help with macroeconomic and business forecasting. The network should be seen as a platform for flowering numerous B2B and B2C business opportunities and models. This can be a dedicated stream to encourage entrepreneurship under the Startup India program.
However such data sharing has to protect privacy and ensure security concerns are safeguarded. This is a non-trivial task and requires significant public investment to develop templates and digital plumbing for data sharing by the discoms. For example, the US Bureau of Labour Standards and Census Bureau spends several hundred million dollars just on standardisation techniques for sharing data. Nothing like this exists in the Indian context.
10. Finally, given all the aforementioned, it's hard not to come away feeling that smart metering of all 250 million households in India is an overkill. It's a classic example of relying on technology-based solutions to skirt around the deep-rooted and intractable governance and political economy challenges that must be addressed to realise any sustainable solution to the problems facing the electricity distribution sector. It cannot be a substitute for the hard and painstaking struggle to deliver good governance and overcome political economy challenges.
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