(John Kemp is a Reuters market analyst. The views are his own)
By John Kemp
LONDON, July 5 Cannabis farms consume an average of 12,000 kilowatt-hours of electricity per month each, 40 times the power used by a typical household, and account for a third of all electricity stolen in Britain, according to a report by the power market regulator.
Energy suppliers and regional distribution network operators detect 20,000 to 25,000 cases per year, according to the Office of Gas and Electricity Markets (Ofgem)("Tackling electricity theft" July 2013).
The retail value of the stolen electricity is about 20 million to 30 million pounds per year, but once overheads for investigations and equipment replacements are taken into account, the total cost could be double that, the regulator claims.
Some industry estimates put it as high as 200 million pounds ($301.3 million), all of which must be recovered from paying customers.
Estimates are imprecise because it is hard to differentiate between thefts and transmission losses.
In a separate draft impact assessment, Ofgem claims that current investigations detect around 16,000 thefts on domestic premises per year, 750 thefts on commercial premises and over 1,600 illegal cannabis farms. ("Electricity theft: draft impact assessment" July 2013)
Electricity suppliers are already required to take "all reasonable steps" to detect and prevent theft under the terms of their licences. But Ofgem is worried not all suppliers interpret this condition in the same way and that some suppliers may not be spending enough to detect and prevent theft.
Net benefits to an individual electricity supplier from detection and prevention work may be lower than the net benefits for the industry as a whole.
"Electricity suppliers are unlikely to have financial incentives to carry out theft detection and deterrence activities to the extent that is in the interests of the industry as a whole and of honest customers," Ofgem said.
Under the current system, each electricity supplier pays for the costs of generation and transmission based on an estimate of its customers' consumption in each half-hour period.
The shortfall between how much electricity is generated and how much suppliers estimate their customers used based on meter readings is spread across all suppliers and passed on to customers. Electricity suppliers, therefore, face no direct costs (other than missed opportunities to profit) from theft.
Moreover, once a theft is detected, the electricity supplier must estimate how much has been stolen and is then liable for generation and transmission charges on the amount, which it may or may not be able to recover from the thief, potentially leaving it out of pocket.
"Anecdotal evidence shows that suppliers do not always enter a reasonably accurate estimate of the volume of units that have been stolen following detection of electricity theft" into the settlement system, according to Ofgem.
If theft is discovered, the supplier has an incentive to do so as quickly as possible to minimise its settlement liability. If theft is not discovered at all, however, the costs are borne not by the individual supplier but by all suppliers, and ultimately customers.
In ordinary thefts, the supplier may hope to recover at least some payment through court action or by fitting a prepayment meter, in effect charging the customer more for future consumption to recoup under payment for past use.
But in the case of cannabis farms, the amount of electricity stolen is so huge from an activity that is inherently illegal that there is no realistic prospect of recovery.
Ofgem proposes introducing a more explicit requirement for each supplier to detect and prevent theft at premises registered with it and duty to investigate once theft is suspected.
The watchdog has also floated the idea of new financial rewards for suppliers who detect thefts, modelled on similar arrangements introduced recently in the gas market.
Suppliers could be rewarded with a fixed fee for each confirmed theft detected (with higher fees for large-volume thefts such as cannabis farms) to be funded by the entire industry according to market share.
Or an industry-wide target could be established with an "incentive pot" distributed according to how many thefts are detected by each supplier, again funded by a levy on suppliers as a whole.
In both cases, the system could be designed to be revenue neutral across suppliers as a whole. Effective investigators would gain at the expense of the laggards.
Similar measures could be introduced to encourage suppliers to admit and enter accurate estimates of the amount of stolen electricity into the system and compensate them for every stolen unit detected.
Under the proposal, suppliers would be required to pay for a centralised Theft Risk Assessment Service (TRAS) to pool data across the industry and from sources such as the police in order to identify the most promising targets for investigation. Suppliers would be expected to investigate all cases identified by TRAS or provide good reasons for not doing so.
Ofgem also wants a 24-hour theft hotline, a register of stolen meters and a forum for sharing best practices and improving coordination among the agencies and firms charged with revenue protection.
The introduction of smart meters, which Britain's government wants to roll out to every household between 2015 and 2020, should also help: removing some of the existing stock of tampered meters and giving electricity suppliers much more detailed consumption data, which can be integrity-checked to identify anomalies.
Despite the fanfare with which the consultation was launched, honest customers are unlikely to see much benefit. Thefts currently cost electricity customers an average of just 7 pounds per year, assuming the total cost really is as high as 200 million pounds. Cannabis farms cost just 2 pounds per customer. Bills are unlikely to fall by as much as that, since revenue protection costs will rise.
In the context of Britain's soaring bills to cover the cost of phasing out coal-fired power plants, investing in more renewable generation from offshore wind, and rebuilding the transmission grid over the next couple of decades, savings from improved theft detection will be a drop in bucket.
The biggest benefits are likely to accrue to law enforcement agencies, which will get extra help in identifying illegal cannabis farms.
Ofgem's consultation documents are available on the internet at: link.reuters.com/zyq49t
($1 = 0.6638 British pounds) (editing by Jane Baird)