It's been a busy and turbulent few years for advanced metering provider Arc Innovations.

Arc is one of Meridian Energy's wholly-owned subsidiaries and over the last two and a half years it has rolled out some 115,000 smart meters in Christchurch and 6,000 meters in Central Hawkes Bay, all to Meridian retail customers. It also has deployed 9000 legacy prepayment meters spread around the country.   

The Christchurch rollout is the largest of its kind in the southern hemisphere and somewhere north of $50m has been tipped into Arc it by Meridian. At a time of increased scrutiny on the governance and financial performance of state-owned enterprises, the financial performance of Arc has attracted some negative attention from the financial community and other competitors in the energy sector.

In New Zealand, Arc competes with AMS (Vector/Siemens joint venture) and Metrix (Mighty River Power business unit).

Critics of Arc point to the high costs of the technology deployed, the variety of telecommunications protocols used, high organisational costs, the failed venture into Canada, and the potential for Arc's metering technology to be leap-frogged by second generation smart meters - did Arc and Meridian bolt too early?

New broom

New chief executive officer, Simon Clarke    , replaces Helen Bremner who resigned in March of this year.

Based in Christchurch and an internal Meridian appointment, Clarke has been quick to downsize and refocus the organisation, pulling Arc back from tendering for international projects and putting the focus for now on New Zealand and near-term profitability.

Clarke sees the organisation as having an early mover advantage in smart metering deployments with invaluable knowledge and experience in the area. He believes Arc is well positioned now to consolidate its leadership position before thinking about overseas growth options again. But he needs to prove the company can operate sustainably from a financial point of view.

"We are focused this financial year on creating smart metering value for our customers and on being a cashflow-sustainable business," he says. "We've had a bit of a trim back on costs and are no longer chasing big international RFPs nor developing international products, so we've resourced the business accordingly."

Clarke has closed its Wellington office and reduced the company headcount to 65 people, down from around 90 people including contractors.

First smart meter pricing plans begin to surface

Meridian is aiming to launch a range of new service offerings utilising its smart meter customer base in Christchurch shortly and Clarke says that preparing for this now represents the main focus of Arc.

"The focus for now is on delivering new services over the network in Christchurch and proving the value of smart metering," Clarke says.

Another Meridian subsidiary, retailer Powershop, recently launched a product into the Christchurch market over Arc's meters that passes through to customers weekend price discounts from local lines company Orion.

Arc and Meridian lay plank for longer term gains from advanced metering

On criticism by the financial community of the investment in Arc to-date, Clarke points to the longer payback period typical of infrastructure investments.

"The vast majority of the money that has been invested in Arc relates to the infrastructure and the meter," he says. "These are big infrastructure capital investments of $200-350 per meter plsu installation and infrastructure costs of $50-90 per meter."

"You recover that investment over a long term service contract."

In New Zealand, Clarke says the investment by Meridian needs to be seen for the wider benefits it has for the energy market.

"What Arc has done is catalyze the local market into smart metering," he says. "Without Meridian and Arc doing this we wouldn't be having this discussion."

"In time this will be critical and hopefully lead to the transformation in the market that the retailers are trying to achieve."

Clarke says that Arc is keen to share its experience with the rest of the industry and recently presented to the retailers' forum. "We are also presenting to the other smart meter providers - to make sure their deployment projects are safe and robust," he says.

"We were one of the first places in the world to do this and that inherently has first-mover risk associated with it, but that has upside attached to it as well. I think the timing was about right."

He mentions the exit from the North American market and says while two years ago the international market may have been an opportunity, now the big players such as Landis + Gyr had moved in to smart metering from their legacy metering businesses.

"We invested in product development for the North American market and the sales cycles to utilities are very expensive," he says. "It is a very cash-burning game to play in if you are trying to play from New Zealand and go international."

"We realise now that we need to focus on New Zealand first, second and third, get that right and then go again - Australia probably makes the most sense," he says.

Arc's locally assembled meter

Arc's current generation meters involve a General Electric meter to which Arc adds in an advanced metering smart module which has the business rules, the 'Arc smarts' and links to Arc's back office functionality. Arc then adds in a communications module which is technology it's licensed from Landis + Gyr.

Word of caution for other smart meter deployments

Deployment of new metering technology is a big infrastructure project and easily under-estimated according to Clarke.

He says that nothing would have prepared them for the in-field issues with installing the new meters in Christchurch. "We found about 230 different metering configurations - it was an absolute mess," he says. "We've been touching meter boards that haven't been touched in 60 years and this created big issues in workforce training and general safety around the meter boards."

"It seems to me that the disciplines around meter asset ownership and maintenance have fallen in the gap and we've found some pretty awful things when we've gone to replace meters which we've now tidied up."

Clarke says that these learnings have been critical for Arc and he believes his competitors will be in for a shock. "We think that our other competitors haven't quite come up against that yet and that will be a shock for them."

Choice of communications protocol

It is widely believed now that radio frequency mesh is the best communications protocol for advanced meters to send and receive data in an urban setting. This involves a standards-based technology where each meter forms a part of a communications 'mesh' network, on-sending data via neighbouring meters to a central collection point.

Mobile phone companies have eyed up the smart meter space as an opportunity to lock metering communications into their own proprietary networks but this presents risks around network stranding, proprietary systems and traffic prioritisation.

One of the idiosyncrasies of the Christchurch rollout has been Meridian's desire to reach all of its customers, regardless of the communications protocol required.

Meridian saw complete coverage of the Christchurch market as a means to then mass-market to the entire region, but it meant that where the customer density wasn't substantial enough for the mesh network, other communications protocols had to be used such as GPRS (Vodafone) and satellite.

Arc has 15,000 GPRS connections and 300 satellite connections across its two smart metering networks.

"We believe that radio frequency mesh is the most reliable and secondly it is proprietary, so we own it, control it and operate it," Clarke says. "Vodafone won't guarantee accessibility to its network over the length of the term that you need. So we think there are risks with the GPRS solutions and we found a lot of the coverage maps Vodafone gave us weren't quite accurate."

"The other risk for us is stranding on GPRS as Vodafone upgrades its network," he says.

Lines company suitability to smart meter ownership

When questioned on the business case for lines companies to be the smart meter owner, Clarke believes it is definitely a possibility but says the structure of the New Zealand market means retailers are responsible for the metering purchase decision."

"If the lines companies were the decision makers on metering you would potentially see some different solutions and you'd see more of a focus on load management and network diagnostics," he says. "One of the things that has interested overseas businesses in our rollout is the fact it is being retailer-led which means the solution has been designed with the consumer in mind."

Retailer agnosticism

Normal levels of customer switching between retailers in Christchurch is now seeing Arc providing its service to other retailers, not just Meridian.

Some 5000-6000 of Arc's assets are now with Contact Energy and another tranche with Mercury. Smaller numbers have moved to Genesis Energy and Powershop.

Arc provides the meter reading and Clarke says he hopes in the future to be able to provide other retailers the same service it is developing in partnership with Meridian.

Clarke points out that despite the ownership of Arc, the company is retailer-agnostic and while there is a risk that the incoming retailer may rip out the Arc meter, he is happy to offer the service to them.

Recently a Genesis Energy customer that had switched across from Meridian encountered problems with the service from an Arc meter which resulted in Genesis ripping the Arc meter out for an AMS meter.

Clarke says that situation was regrettable and came down to a number of factors, including the fact Arc hadn't yet agreed commercial terms with Genesis given its small base of customers in Christchurch.

Mercury general manager James Munro says that when they win a customer in Christchurch with either an AMS or an Arc meter, they leave the meter in and receive the data from the meter provider. Munro says that the experience to-date with Arc has been "mixed", put down partly to the different configuration of some of the meters, but he thought these were mainly "teething issues" which were to be expected and was confident moving forwards.

Twelve months out

A successful execution around delivering new services over the smart metering infrastructure in Christchurch remains the focus for Clarke.

The ongoing rollout of Arc meters is ticking over at between 5,000 and 10,000 a year and Clarke says if Arc can start showing some good reference sites here in New Zealand then Australia could be the next opportunity.