Smart meters generate revenue, improve efficiency for public utilities

About 15 years ago, electric utilities started to replace the analog meters invented in the 1800s to monitor household consumption with modern smart meters capable of remotely transmitting high-resolution data.

The new devices promise to help utilities reduce operational costs and enhance billing accuracy, forecasting, asset and load management, and system monitoring. Their potential is considerable, given that the U.S. electricity grid consists of roughly 7,300 power plants, 160,000 miles of high-voltage power lines, and millions of low-voltage power lines and distribution transformers — all designed to provide service all day, every day, to 145 million customers.

Nearly 120 million smart meters had been installed in the U.S. as of 2022, but until now, nobody has really known whether they have been helping as intended.

“In the electricity sector, there has been this mass deployment of digital technologies, in the U.S. and many other countries,” said Jacquelyn Pless, an assistant professor at MIT Sloan. “But despite all of this investment, there has not been a widespread study of the effects of these meters on things like the quality of service and utility performance.” Working with Robyn Meeks of Duke University and North Carolina State’s Zhenxuan Wang, Pless looked at precisely this question.

As detailed in their paper, “Can Digitalization Improve Public Services? Evidence From Innovation in Energy Management,” the researchers found that the adoption of smart meters increased the efficiency of electricity distribution and, in turn, generated revenue for the providers.

“There has been substantial cost savings for utilities, on average, which in theory can translate into investment in infrastructure and operational improvements, leading to fewer poor-quality-power incidents,” Pless said. That’s a notable outcome, given that power outages in the U.S. cost between $28 billion and $169 billion every year, according to a report from the American Society of Civil Engineers.

Filling an information gap

For decades, the private sector has been investing in digital technologies across all dimensions of business operations. And for decades, researchers have studied the ways in which this revolution has benefited — or failed to benefit — corporate performance.

Far less research has examined digitalization in the world of public services, like health care, education, and electricity.

“There are two things we’re trying to close the gap on in our research,” Pless said. First is the lack of information on how digitalization impacts public services, especially electricity provision. “Second, we also want to understand the impact on quality of service as opposed to just provider performance. But measuring quality of service across an entire sector is often hard,” she said.

Pless and her colleagues gathered information on the deployment of smart meters by every utility with distribution assets in the U.S. from 2007 to 2017. 

They used this data to compare what’s known as the electricity loss rate — essentially, the proportion of power that is lost between its generation and final use — before and after a utility deployed smart meters. High electricity loss rates can signal that the grid is suffering from various potential inefficiencies, which in turn can contribute to poor power quality.

They also controlled for factors like how innovative a utility might be or whether it had a high or low loss rate before the deployment of smart meters.

The benefits of smart meters

The use of smart meters contributed to “a pretty substantial decrease in electricity losses,” Pless said.

Looking at the entire sample of utilities, the researchers found that electricity loss rates decreased by an average of 4% after the installation of smart meters. When they weeded out utilities that were already performing well and focused on those with the biggest margins for gain, the loss rate decreased by about 5% – 7% following smart meter deployment.

Two main factors that broadly relate to energy management seem to be driving this improvement.

First, electricity consumption measurement improves, which is likely due to a combination of the technology itself and reduced “nontechnical losses” (i.e., losses incurred as a result of behavior rather than physical infrastructure losses, such as bill nonpayment or power theft).

Second, smart meters allow utilities to optimize their operations with granular, real-time information about supply and demand. And the researchers found that utilities installing smart meters often make complementary organizational investments by hiring computer scientists and other “quants” who can help them fully realize the benefits of the technology. Utilities also typically begin to introduce new innovative products following smart meter deployment, such as demand response programs and dynamic pricing programs.

This increase in efficiency was paired with average revenue increases of 1% – 2% for utilities that deployed smart meters. “It’s important to think about the financial side of things, as utilities need to be paid for the electricity that they provide,” Pless said. “This recovered revenue is something the utilities can ultimately use to reinvest in the grid.

“The increase in revenue appeared to come from more accurate measurement of consumer electricity use, compared to analog meters, which slow down as they age," she said. Utilities also no longer have to pay meter readers to go into the field and manually record the electricity used by each household — another source of cost savings, although the researchers did not capture that benefit in their study. Importantly, they found no corresponding rise in average electricity prices.

Finally, in order to understand how smart meters affected the consistency of electricity supply, the researchers homed in on the Texas market. While the number of outages didn’t change, the length of outages decreased by 5.5% following the deployment of smart meters.

“This makes sense, given how smart meters send automated notifications when an outage occurs, along with much more precise information about where it originated,” Pless said.

A balm for the aging grid

When looking at which types of utilities were reaping these benefits, the researchers found that the loss declines were achieved by government-owned utilities as opposed to private utilities — those either owned by investors or structured as cooperatives operated by their members.

“Even when we limit our sample to public and private utilities that had similar loss rates prior to adopting smart meters, or those that were similar along other dimensions, like size, we still see these results being driven by government-owned utilities,” Pless said.

“We couldn’t disentangle why, exactly, in this research, but we suspect there is something about the organization and decision-making processes of these public utilities” that allows them to reap the longer-term potential benefits of smart meters beyond the more immediate benefits of improved accuracy, Pless said. Further understanding this nuance could be important to future success, assuming that digitalization of the power sector continues, Pless said.

Given the age of the U.S. power grid — roughly 70% of transmission and distribution lines are in the second half of their lifespan — and the growing damages inflicted by extreme weather, electricity infrastructure is only becoming more susceptible to disruption. Governments are investing in grid modernization globally, and Pless and her colleagues’ work provides some of the first empirical evidence of the benefits of smart meters.

“Whether it’s to free up finance to upgrade the wires and other aging components of the grid, or it’s being able to manage power better such that the grid is not overloaded and failing, smart technology and data-driven decision-making could help avoid some of the really costly and dangerous situations that we’re seeing more and more often,” Pless said.

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