Prime Minister Julia Gillard has elevated the humble electricity meter box on the side of the suburban house to the centre of the national political debate. She claimed on Sunday that installing so-called smart or interval meters could save households as much $250 a year on their annual power bill.

The Coalition both federally and in Queensland have responded with scepticism, arguing smart meters may actually push up prices.

“Today’s proposed $250 saving is a dishonest grab for a headline that is not backed up by any details,” said Queensland Energy Minister Mark McArdle. “It should be judged accordingly.”

In fact, the Productivity Commission report on which Ms Gillard based her claim does suggest that smart meters will save consumers $100 to $250 a year but it also says that done wrongly, smart meter technology and the related idea of time-of-use pricing could end up costing them money.

“The actual extent of the estimated benefits depends crucially on the manner in which demand management is implemented – for example, under some implementation scenarios, some initiatives are forecast to deliver net costs,” the commission said in its latest report on electricity networks.

Indeed, a cost-benefit analysis showed that smart meters matched with a system of “time-of-use” or peak tariffs for electricity could deliver anything from $7.60 of benefit for every $1 invested to a net cost of 70¢. It all depends how the scheme is implemented.

The key issues to be decided include how “smart” smart meters need to be and how the costs of power will vary between peak and off-peak times. The power companies are also arguing over who will get to install and monitor the meters. And most crucially, there is an argument over whether it should be compulsory or voluntary to have a smart meter at all.

The fundamental problem smart meters are designed to address is that demand for power spurts on a few hot days each year when households turn up air conditioners and other appliances.

To meet this peak demand, energy companies have to build expensive back-up gas generators and poles and wires that are used for less than 100 hours a year.

All consumers pay the cost of building this almost redundant infrastructure. About 25 per cent of power network spending is used only 1 per cent of the time.

Smart meters are a first step – and only a first step – to reduce this waste by providing some basic information. The “accumulation” meters on most houses today just say how much power you have used in the three months up to the meter reader’s visit and can’t tell when you used the power. But smart meters measure power use in five minute or half-hour intervals.

Once smart meters are in place, the next step is to change the pricing system so that households will pay higher prices at peak times of the day, which in turn should encourage households and businesses to reduce peak power use. To that extent, opposition environment spokesman Greg Hunt is right in saying that the Prime Minister’s embrace of smart meters amounts to increasing power prices at “dinner time”.

But the Productivity Commission says the new pricing should save individual households money because they can easily switch a lot of consumption to off-peak. Pool filters could be altered to work in the morning and air-conditioners could be switched to intermittent use at peak times.

In NSW, where smart meters have been installed in about 400,000 houses and time-of-use pricing already exists, off-peak power can cost about one-eighth that of peak-time.

Longer term, if this change in behaviour slows the growth in peak demand across the whole system, it will allow power network companies to defer billions of dollars of costly infrastructure spending, delivering an even bigger saving.

Frontier Economics has estimated that savings from peak demand reduction are likely to be between $4.3 billion and $11.8 billion over the next 10 years but the benefit will vary considerably from state to state.

In South Australia and Queensland the saving per household could be $500 a year, in NSW $350 but in Victoria only $120. That is because Victoria relies on brown coal power stations that tend to run whether or not there is demand, so the gap between off-peak and peak generation costs is considerably narrower.

That is the theory but it can go badly wrong and Victoria is the prime example. The former Labor government decided that all households would be fitted with smart meters and the cost would be added to their household bills.

Unfortunately, the cost of what was then fairly new technology blew out to over $2 billion or $800 a household. The government was also concerned that some disadvantaged households that did not understand the system or could not adjust their power use might face huge bills. To avoid an outcry, until next July Victoria refused to allow time-of-use pricing, which was the whole point of the exercise.

“It appears that the Victorian decision to roll out smart meters was premature and/or poorly planned, with inadequate knowledge about smart meter technologies, their costs and associated risks,” the commission said.

A swag of reviews has been commissioned to work out how to avoid a repeat of that debacle. Giving consumers more warning and better information about how they can save money by switching to off-peak use is the key. The reviews also call for a security net for low income customers such as age pensioners.

Another question is how to cut the cost of meters. Victoria had very tight specifications for its designs, which raised costs. Some say a more basic “interval” meter will cut the unit’s cost per household to $70. Others say the meters must have displays so people can see how much power they are consuming at any time.

Power companies in Victoria have opened web portals for people to study their consumption patterns and help them prepare for time-of-use pricing. But a trial by NSW power companies Ausgrid and Endeavour Energy found that people tire of the displays and most ignore them after the first two years.

Some say the smart meter should be linked to a switch, so that it can automatically turn off some appliances. And indeed, the Productivity Commission says some consumers may dispense with the meters and just install technology that turns off power at peak times.

Queensland network company Energex offers households $250 to fit new air-conditioners with a device that switches the power to intermittent on a signal from the power supplier. For the energy industry the two crucial questions are whether the roll-out of smart meters should be compulsory and whether it will be run by the network companies or by the electricity retailers such as Origin, AGL and TruEnergy.

A series of reviews has found that one of Victoria’s big mistakes was that it rolled out the meters to all consumers, including those who have little capacity to shift from peak to off-peak power.

The commission found that this sort of compulsory roll-out would in general be much less cost effective than a selective approach, because a lot of households would barely change their behaviour.

A key state and federal adviser, the Australian Energy Markets Commission, which on Friday released a review called “Power of choice” on how to manage demand peaks, has recommended a hybrid approach where smart meters are compulsory for large power customers, which almost always have some flexibility in their time of power use, but where they are optional for smaller consumers.

The latter may choose to stay with an average same-all-day tariff. Alternatively, power retail companies may make it a selling point to offer smart meters to allow consumers to benefit from low off-peak costs. “The onus will be on the retailer… to elicit consumer consent to a smart meter through offering appropriate retail pricing offers and value added services,” the AEMC said.

Ms Gillard seems to be backing this sort of voluntary approach. “No one should be afraid that they are going to be forced with a cost that they don’t want and no one should be afraid that they will be forced to do something they don’t want to do,” she said on ABC Radio on Monday.

Read the rest of the article here http://afr.com/p/national/economy/smart_meters_spark_national_electricity_QV3RDDPWTY0QTBVSdy5YCI

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Michael O’Brian, SP Ausnet, Jemena, Citi Power, etc are you listening – “No one should be afraid that they are going to be forced with a cost that they don’t want and no one should be afraid that they will be forced to do something they don’t want to do,”.