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Committee publishes report on Update on preparations for smart metering

Public Accounts Committee publishes its report on the Update on preparations for smart metering.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“The costs of installing 53 million smart meters will be borne by consumers through their energy bills. It will cost around £215 per home or small business over the next 5 years to install the meters – an additional cost people can ill afford.

Despite consumers footing the bill, they can on average make a saving of only 2% on the average annual bill of £1,328 by the time the roll out is complete. 

Even this is conditional on consumers changing their behaviour and cutting their energy use. The Department of Energy and Climate Change is relying on the consumer becoming more “savvy” in making decisions about using energy.

The Department is depending heavily on assumed competition in the energy industry to control costs and deliver benefits. Relying on market forces to keep costs down may not be enough on its own to protect consumers.

This is something energy companies don’t have a great track record on. Ofgem’s referral of the energy market to the Competition and Markets Authority reflected serious concerns about the lack of real competition in the industry.

Energy suppliers are concerned that it may cost more to persuade more reluctant customers to accept the new meters to ensure near 100% coverage.

DECC should require suppliers to provide a clear breakdown for consumers of the cost of smart meters, their operational cost savings from stopping meter readings and whether consumers are achieving the expected reductions in energy consumption.

The lack of clarity on the impact of smart meters on vulnerable and low income consumers is particularly concerning. Many of those consumers currently use prepayment meters, but there is no regulatory obligation on companies to provide prepayment smart meters. DECC must ensure vulnerable and low income households get the benefits available from smart meters.

DECC also needs to ensure that smart meters are fully interoperable so that customers can switch easily between suppliers and that suppliers don’t replace meters unnecessarily when customers switch.

Some aspects of the Programme could be out-of-date by the time it is rolled out. Evolving technology suggests that customers could receive the information on their smart phones, making the in-home display redundant. Energy suppliers will be required to offer in-home displays, even though customers may not want or use them. Consumers will have to pay for them even though they might already be out of date.

The Department must monitor progress, costs and benefits during roll-out to identify whether changes are needed to secure the delivery of smart meters at minimum cost to consumers.”

Margaret Hodge was speaking as the Committee published its 12th Report of this Session which, on the basis of evidence from Stephen Lovegrove, Permanent Secretary, Department of Energy and Climate Change, Daron Walker, Senior Responsible Officer, Department of Energy and Climate Change, Dermot Nolan, Chief Executive, Ofgem, examined the subject of smart metering. 

The Department of Energy and Climate Change’s (the Department’s) Smart Metering Implementation Programme requires energy suppliers to replace 53 million meters in homes and small businesses with smart electricity and gas meters by 2020. The costs of installing smart meters, some £10.9 billion, will be borne by consumers through their energy bills. We are concerned that the Department is primarily relying on assumed competition in the industry to control costs and deliver benefits. This may well prove insufficient on its own to protect consumers. There is also a danger that the Government gets locked into an existing technology when technologies are changing fast – leading to consumers paying for investment in a system which is already out of date. The Department must monitor progress, costs and benefits during roll-out to identify whether changes are needed to secure the delivery of smart meters at minimum cost to consumers and ensure vulnerable and low-income households benefit.

Conclusions and recommendations

The Department expects smart meters will help consumers reduce their energy consumption, encourage them to shift demand away from peak times, make it easier to switch between suppliers, and encourage take-up of new tariffs. The Government estimates that £26 will be saved on average by consumers who pay average bills of £1,300 per annum – a saving of just under 2%. This saving has to be set against the cost of £10.6 billion which will be met by consumers at an average cost that will peak at £11 per annum in 2017. The Department is relying on the consumer becoming more “savvy” in making decisions about using energy. It also expects smart meters to reduce costs for suppliers, network operators and generators. The Department has established the shared data and communications infrastructure required to ensure that smart meters work consistently for all consumers, regardless of their energy supplier. It has also established the regulatory framework requiring suppliers to install the meters and to establish and fund a new central body whose role is to increase consumer awareness of the Programme and to promote long-term energy consumption behaviour change. The mass roll-out of smart meters is due to start in late 2015. The regulatory framework requires energy suppliers, under licence conditions that will be overseen by Ofgem, to take all reasonable steps to install smart meters in all households and small businesses by the end of 2020.

Some aspects of the Programme design may prove to be too costly. The Department requires energy suppliers to install smart meters in virtually all homes and small businesses by the end of 2020. While energy suppliers are planning on this basis, they are concerned that a near 100% per cent roll-out may not be feasible and that extra costs may be involved in persuading their more reluctant customers to accept the new meters. Suppliers also need to develop alternatives to the radio systems for the Home Area Network linking smart meters to in-home displays and other devices, which will not work in some 5% of premises.

Recommendation: The Department should keep the design of the Programme under review and, if costs escalate, assess the value for money of the individual components of the design that are causing cost increases, and take action where appropriate.

Some aspects of the Programme could be out-of-date by the time it is rolled out. The current proposal is that every household will be fitted with a smart meter and offered an in-home display that allows consumers to see what energy they are using and how much it is costing. However evolving technology suggests that customers could receive the information on their smart phones, making the in-home display redundant. Energy suppliers will therefore be required to offer in-home displays, even though customers may not want or use them.

The impact of smart meters on vulnerable and low income consumers is unclear. The Department lacks a good understanding of the impact of smart meters on different groups, particularly vulnerable or low income consumers. It plans to remedy this by capturing relevant information during the mass roll-out of smart meters. It is important that customers using prepayment smart meters benefit from the smart meter programme, but not all energy suppliers are yet able to offer a viable prepayment smart meter solution and there is no regulatory obligation on companies to provide prepayment meters. The Department is confident, however, that by the end of 2015 all major suppliers will be ready to offer a prepayment option.

Recommendation: The Department must monitor the impact of the Programme to ensure vulnerable and low income households are obtaining the benefits available from smart meters.

Relying on market forces to control costs and deliver benefits may not provide adequate protection for consumers. The Department is confident that energy suppliers’ commercial incentives and competition in the industry will control Programme costs and deliver benefits to energy consumers. But the Department and Ofgem accepted that Ofgem’s proposal to refer the energy market to the Competition and Markets Authority reflected their concern about the effectiveness of competition in the industry. Subsequently Ofgem announced that it was referring the energy market to the Competition and Market Authority for a full investigation. In doing so Ofgem noted that a recent assessment it had prepared with the Office of Fair Trading and the Competition and Market Authority had showed “increasing distrust of energy suppliers, uncertainty about the relationship between the supply businesses and the generation arms of the six largest suppliers, and rising profits with no clear evidence of suppliers reducing their own costs or becoming better at meeting customer expectations.” Furthermore, one energy company (EDF) believes £1.24 billion could be saved by having a national procurement programme for smart meters.

Recommendation: The Department and Ofgem should set out how each intends to minimise the costs of installing smart meters and ensure that the subsequent operational cost savings to suppliers are passed on to consumers.

Smart meters need to be fully interoperable so that customers can switch easily between suppliers, but there are no regulations preventing suppliers from replacing meters when customers switch. The Department and Ofgem expect smart meters to improve competition in the industry by facilitating switching and told us that new suppliers have already entered the market. While the smart meters technology provides for interoperability, the regulatory requirements do not prevent suppliers from replacing smart meters when customers switch supplier. This may be a particular issue in cases where the smart meters installed are rented rather than owned by the supplier.

Recommendation: The Department should ensure clear regulatory requirements are in place to prevent suppliers from replacing smart meters unnecessarily when they take on new customers through switching.

The Department has not made clear to consumers what the Programme will cost them and what benefits they can expect. The Department estimates that the average cost for the gas and electricity meters and other equipment needed and the cost of installation for each premises will be some £215 and that the average impact on bills of the suppliers’ net costs is expected to peak at £11 a year in 2017. By 2020, once roll-out is complete, the Department expects that savings on energy bills, taking into account consumers’ expected energy use reductions, will average £26 a year for each household, a saving of 2 per cent on the average annual bill of £1,328. This is expected to rise to £43 a year, or 3 per cent by 2030. These estimates are based on consumers changing their behaviour and consuming less energy, and energy suppliers passing on their operational cost savings to consumers.

Recommendation: The Department should require suppliers to provide a clear breakdown for consumers of the cost of smart meters, their operational cost savings and whether consumers are achieving the expected reductions in energy consumption.

The Department has relied heavily on consultants to progress the smart meters Programme, rather than acquiring the skills in-house. In 2013-14 some £14 million of the £19.3 million spent by the Department on managing the Programme was spent on external commercial and technical expertise. The Department also expects to spend around 50% of its 2014-15 budget on external expertise. The Department has a large portfolio of major projects and a need for strong in-house commercial expertise. The Department recognised that some additional pay flexibility may be required to bring in the commercial expertise it needed but had not examined how other departments like the Ministry of Defence were tackling this issue.

Recommendation: The Department should examine how other departments are developing their in-house commercial expertise, particularly the model developed by the Ministry of Defence to provide new pay arrangements outside civil service structures.

Public confidence in the Smart Meters Programme may be undermined by the Department’s refusal to publish the Major Projects Authority’s assessments of the Programme. The Major Projects Authority reviewed the Programme in 2011, 2012, and 2013. The Department maintains that it has followed Cabinet Office advice and is constrained by Cabinet Office rules from placing these reports in the public domain as the reviews were conducted on a confidential basis.

Recommendation: The Department and the Cabinet Office should adopt a more open approach to publishing Major Projects Authority project assessments after they have published the resulting RAG rating and only rarely withhold the most sensitive information

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