4.1 Cost Estimation

It is reasonable to expect that the cost of installing consumption monitoring and information processing capabilities in households would contribute most significantly to the cost of implementing the REACT system. Hence, to assess the financial feasibility of this system, we produced an estimate on the cost of installing these capabilities based on the cost of available products that provide similar features. The following table provides a summary of current market prices and our estimated costs.

^ Estimation based on the production and mean market price of middle class tablets possessing the approximate required computing power and connectivity (16) (17)

^^ Estimation based on similar products available in the market (8)

* Actual number depends on the size of the house

Table 1:  Cost breakdown for household components in the REACT system

In the process of producing our estimates, it was necessary to make certain reasonable assumptions. Firstly, since capabilities are integrated into a single dedicated system in each household, it is estimated that their associated costs will be significantly lower than the current market prices presented in the above table. Furthermore, it is assumed that if the components of the system were to be mass-produced in the future, unit costs could be further reduced substantially.

It is also estimated that it may be costly to develop, maintain and update the software required for the REACT system, particularly the firmware for the processing module and the software for the smartphone application. Nevertheless, it is expected that the bulk of these costs will be incurred during the initial phases of implementing the REACT system, and that the subsequent costs involved in the maintenance and the updating of the software will be significantly lower. Furthermore, the high initial costs will be spread increasingly thin as a larger number of households opt to incorporate the REACT system in their homes.

Finally, since the project demands heavy initial capital investments and yet is not expected to generate benefits for a prolonged period during its inception, it may be necessary for the government to subsidise the project’s initial investments. Hence, despite the REACT system being a significant household investment, government subsidy may nevertheless encourage households to incorporate the system in their homes. The subsequent section evaluates the viability of government subsidy by assessing the potential benefits that the REACT system could deliver.

4.2 Estimation of Potential Benefits

This section provides a comprehensive analysis of the estimated benefits of implementing the REACT system to both consumers and producers.

4.2.1 Estimated Cost Savings to Consumers

Firstly, by altering consumers’ wasteful consumption habits and shifting consumption to non-peak periods during which electricity is cheaper, the REACT system can potentially deliver significant cost savings to households.  In the Netherlands, a similar smart meter based energy management project conducted by IBM showed that customers who participated in this project were able to save up to 14% on electricity and 9% on gas, which comes to approximately £200 per household per year (16). These results provide some insight into the potentially substantial cost savings that the REACT system may achieve.

In addition, the REACT system goes beyond the pilot project implemented by IBM, by also incorporating RTP and automatic control of individual electrical appliances. In particular, research has shown that RTP has the potential of saving up to 6.25% of consumers’ total electricity bills (17) as documented in the table below:

Table 2: Projected Custom Savings under the RTP Scheme (17)

Figures from the above table highlight the importance of RTP, and emphasize the strong potential of the REACT system. Although it remains difficult to estimate the precise cost savings, results from the various research sources presented above support the expectation that the potential cost savings will cover the initial capital investments within a few years.

4.2.2 Estimated Benefits to Producers

From another research source, it is predicted that the adoption of RTP would reduce peak energy demand by 22.9% averaged across all consumer groups (18). This result reflects the potential of the REACT system in smoothing peaks in electricity demand, hence bringing about a myriad of benefits to energy producers. In the short run, lower demand volatility and less pronounced consumption peaks lead to producers having to incur lower switching costs associated with the switching of additional generation capacity. In the long run, lower demand volatility allows for a slower rate of growth of peak generation capacity, thereby reducing the intensive capital investments required in the industry for electricity supply. These savings on the supply side are evidenced by past research data depicting that a 5% reduction in peak electricity demand in the United States would give rise to a saving of $2.4Bn annually (18).