The paper combines elements of regulatory environmental economics with the literature on multi-sided markets and thus creates a new perspective on the optimal regulation for a market-driven rollout of smart (electricity) meters. Smart meters are regarded as a crucial element to increase energy efficiency but hitherto most countries have not seen a comprehensive smart meter rollout. A key economic obstacle to a market-driven rollout is the fragmentation of benefits among multiple stakeholders, which disperses investment incentives. Therefore, the goal of this paper is threefold. First, demonstrate that the smart meter market is a multi-sided market. Second, apply the lessons learnt from multi-sided market economics to the smart meter market. Third, identify the superior market structure and the best design option of this market structure to overcome the investment barrier.
Methods
For the purpose of the analysis the smart meter operator is the defining factor of a market structure. The regulator can either select one market side to operate the smart meter or leave the process of determining the operator to the market. To conduct a thorough analysis, we compare idealized forms of market structures. There are three groups of agents that could perform the smart meter operation and, in fact, are asked to do so in different countries: (1) retailers, (2) (independent) meter operators as a consequence of a market-driven process, and (3) distribution system operators.
We qualitatively assess each of these three market structures with respect to five common evaluation criteria reflecting classical regulatory considerations of static and dynamic efficiency as well as aspects resulting from multi-sided market economics.
After having identified the optimal market structure, we qualitatively analyze four variations in terms of design. These four design options differ only in the degree to which they allow for a socialization of costs for the smart meter investment:
• No socialization of costs
• Socialization of operating costs
• Socialization of investment costs
• Total socialization of costs
The aim of this comparative study is to identify, which design option is best suited to yield the possible benefits of the optimal market structure.
Results
The market structure analysis yields the result that having a combined grid and smart meter platform operator (market structure 3) offers significant advantages. Overcoming the chicken-egg problem is facilitated and it is possible to achieve a sensible price structure around the smart meter platform. The characteristics of multi-sided markets are thus accounted for, albeit at the expense of having fewer incentives for platform efficiency and innovation.
Comparing the four design options, neither a total socialization of costs nor a complete lack of socialization appears suitable to foster a market-driven smart meter rollout. An intelligent regulation combines elements of a market-driven approach with incentives for investment. In deciding between socialization of operating costs and socialization of investment costs, the latter seems superior since it allows for the pay-per-transaction logic of multi-sided market economics. Furthermore, it diminishes investment obstacles to the consumer more effectively and thereby will make it easier to create this market.