House of Commons - Smart meter roll-out - Energy and Climate Change

Smart meter roll-out - Energy and Climate Change Contents

2 The cost-benefit case for roll-out

BACKGROUND

5. Some consumers already have a smart meter, but most people will not get one until they are rolled out on a mass scale between 2015 and 2020. More than a million have been installed already, and more than 50 million are expected to be installed in approximately 28 million homes and 2 million businesses during mass roll-out.

Figure 1: How will smart meters work?
Smart meters allow energy suppliers to get remote readings of the amount of electricity and gas used by individual households and businesses. This saves suppliers the cost of visiting properties to read meters manually. Smart meters also enable consumers to see how much energy they are using, in pounds and pence, as they are using it. This is expected to help them manage and reduce their energy consumption and costs.
A new communications system is being set up to handle smart meter communications, and contracts for this are currently being procured by DECC. Under this system, data about consumption will be transmitted from the smart meter to energy suppliers and other authorised parties via a central communications hub, which will be provided and managed by a new Data Communications Company (DCC). The DCC is expected to be up and running in time for mass roll-out in autumn 2015.
Communication between the smart meter and the DCC will happen over a wide area network (WAN) and home area network (HAN). The DCC will oversee the delivery of the WAN, which will enable communication from homes and businesses to the central communications hub. Homes and businesses will have their own HAN and individual communication hub, which will enable the smart meter to connect with the WAN.
Within the home, consumers will be able to see how much energy they have used and the cost of that energy on a device called an in-home display (IHD), which will be offered to them when the smart meter is fitted. The smart meter will communicate with the IHD over the HAN. Eventually, as smart appliances come on to the market, the HAN will enable communication between the smart meter and smart appliances in the home.

6. The smart meter roll-out programme will require significant investment, which will ultimately be paid for by consumers in their energy bills. The Public Accounts Committee (PAC) has described it as "a large complex programme...with significant uncertainties over the estimated costs and benefits involved."[4] Witnesses described many benefits that smart metering could bring to consumers, the industry and more widely.[5] However, some have questioned whether the potential benefits will be realised and whether costs can be kept under control.[6]

DECC's cost-benefit calculations

7. DECC's updated impact assessment of January 2013, estimated a "positive net present benefit of £6.7 billion over the period to 2030, by delivering total benefits of around £18.8 billion and costs of around £12.1 billion."[7] Several witnesses agreed that the projected benefits were achievable, but SSE cautioned that the net benefit of roll-out "should not be exaggerated".[8] Some have questioned how the costs and benefits were calculated.[9] Orsis has stated that there remain "serious concerns with the accuracy of the Impact Assessment and the figures used to calculate the costs and benefits".[10] Alex Henney went further, suggesting that "civil servants cooked the numbers to come up with a net benefit of plus £4.9bn in 2011".[11] When we put this suggestion to DECC, Baroness Verma replied:

Potential benefits

8. DECC's most recent impact assessment lists potential benefits of £18.8 billion, including consumer benefits of £6.3 billion, supplier benefits of £9.07 billion, network benefits of £1.05 billion and carbon-related benefits of £1.46 billion. It also lists non-monetised benefits such as the "potential benefits from the development of a smart grid"; "stronger competition between energy suppliers due to increased ease of consumer switching and improved information on consumption and tariffs"; and improved customer experience from "an end to estimated billing and more convenient switching between credit and pre-payment arrangements".[13] When we asked Baroness Verma what benefits DECC hoped smart meters would deliver, she focused on the projected consumer benefits:

DIRECT CONSUMER BENEFITS

9. DECC lists the benefits of smart meters for consumers as follows:

Smart meters give you near real time information on energy use - expressed in pounds and pence
You will be able to better manage your energy use, save money and reduce emissions
Smart meters will bring an end to estimated billing - you will only be billed for the energy you actually use, helping you budget better
Easier switching - smoother and faster to switch suppliers to get the best deals [15]

10. The provision of accurate bills and up-to-date energy consumption information were widely thought to be the most important benefits of smart meters for consumers.[16] Several witnesses agreed that this information should help consumers to gain a better understanding of their energy use, budget more effectively and reduce their energy consumption and costs.[17] DECC told us that its impact assessment "assumes that domestic consumers will reduce their consumption by 2.8%", but many witnesses have questioned this.[18] Policy Exchange said that DECC's 2.8% estimate was "rightly prudent, as it is not clear whether such savings can be delivered in a UK context".[19] Consumer savings are discussed in more detail in chapter 6.

11. Given the link between accurate, real-time billing information and projected consumer savings, it is concerning that Consumer Focus—now Consumer Futures—has questioned whether consumers with smart meters are currently receiving accurate and up-to-date billing information.[20] It said that the Consumer Direct/Citizens Advice service had received calls indicating that some customers were not getting accurate bills months after their smart meter had been installed, with some being back-billed for usage they thought they had paid for.[21] It suggested that suppliers should be obliged to provide accurate bills once smart meters are installed and should not be allowed to back-bill customers after smart meter installation.[22]

12. When we put these concerns to DECC and Ofgem, they both said that there had been "teething problems" with accurate billing initially but that these had since been addressed.[23] Jacqui Russell of DECC said:

Clearly, the ability of suppliers to obtain up-to-date meter readings remotely from smart meters is central to their ability to provide consumers with accurate bills and consumption data. We return to this issue in chapters 4 and 5. Ofgem said that the "obligations and associated commercial incentives" on suppliers regarding billing meant that suppliers could "be expected to provide accurate bills to their customers using remote reads." However, it agreed to "keep this under review and consider further action if there is any evidence of problems".[25]

13. Ofgem must be prepared to strengthen the requirements on suppliers to provide accurate bills if there is evidence that consumers are not receiving accurate bills and/or that they are being back-billed months after smart meters have been installed.

INDUSTRY BENEFITS

14. For energy suppliers, generators, and network operators, DECC has predicted £11 billion-worth of efficiency savings such as "avoided site visits for manual meter reads, a more streamlined transfer process when consumers switch suppliers, reduced call centre traffic and improved debt management".[26] Some witnesses raised concerns that suppliers would be the main beneficiaries of roll-out.[27]

WIDER ENERGY INFRASTRUCTURE BENEFITS

15. Several witnesses agreed that smart meters were integral to the provision of a secure, reliable, affordable and low-carbon electricity supply for the future and that all consumers would benefit from this.[28] Similarly, a number of witnesses agreed that smart meters would provide a foundation for a smart grid and a future system in which peaks and troughs in energy provision and consumption would be better balanced and managed.[29] Professor Harriet Bulkeley from Durham University outlined some of these benefits:

Dave Openshaw from UK Power Networks described the longer-term benefits that consumers could gain from smart metering and the smart grid if they engaged with the technology and the information that smart meters will provide:

See figure 2, below, for more on smart grids.

Figure 2: What are smart grids for?
Electricity supply must be balanced with demand in real time. This is currently done by matching supply to meet demand, largely by controlling the output of a relatively small number of large power stations.

Changes in our electricity system as a result of the decarbonisation agenda will mean that the grid will have to be balanced differently in future. As old power stations are retired and we increase the amount of electricity generated from intermittent renewable sources such as wind and wave power, there will need to be greater emphasis on managing demand to meet supply. This challenge will be all the greater because electricity demand is expected to rise significantly as our transport and heating needs are increasingly powered by electricity.

A more sophisticated grid is required to enable the complex interactions between consumers, suppliers and network operators that will be needed to balance electricity demand against supply. Demand-side response (DSR) is expected to play a key role in helping to achieve this balance.
The role of demand-side response (DSR)
DSR involves using technology and financial incentives to manage and encourage changes in electricity demand to better match the available supply. Time-based tariffs are one such financial incentive that can be used to encourage such changes in consumption.
Time-based tariffs
Time-based tariffs are used to encourage consumers to use less electricity at peak times, when electricity is the more expensive to produce. Cheaper pricing may also be used to encourage consumption at times when there is greater capacity. For example:

Time-of-use tariffs have fixed prices for different periods of the day with the aim of encouraging people to shift their electricity consumption to off-peak times on a daily basis. Economy 7 is an example of this kind of tariff.
Critical peak pricing sets higher prices during exceptional peaks, when there might otherwise be the risk of blackouts.
Real-time tariffs change the price of electricity on a dynamic basis, perhaps every half hour, to reflect short-term predictions for electricity supply and demand. For example, electricity may be cheaper on a windy day when there is a lot of wind-generated power.

Sources: What is a Smart Grid?, Institution of Engineering and Technology briefing, 2013; Future Electricity Networks, POSTnote 372, Parliamentary Office of Science and Technology, February 2011.

16. Dave Openshaw outlined the early results from the ongoing Low Carbon London trials on critical peak pricing:

See figure 2, above, for more on demand response and critical peak pricing.

17. During our visit to California, we heard how smart metering had been used in conjunction with time-based tariffs and automated demand response (ADR) to manage consumption at peak times and to help prevent blackouts. See box 1 above for more on time-based tariffs and demand response. For example, one utility, Pacific Gas & Electricity (PG&E), outlined how 80,000 of its domestic customers had opted into a critical peak-pricing tariff and 400,000 of its customers, including commercial customers, were on time-of-use tariffs.[33] Both PG&E and another utility—the Sacramento Municipal Utilities District (SMUD)—described how some customers had signed up to a system giving the utility remote access to their air conditioning units so that they could be cycled on and off during critical peak periods in order to manage demand.[34] SMUD also described an arrangement it had with a commercial plant that could be shut down completely on peak days.[35] Staff at the Lawrence Berkeley National Laboratory told us that demand response techniques had been shown to shave the top off expected peaks in demand by a maximum of 2.9% of system demand in 2006 and that this capability was now as high as 10% in some US states and could be as high as 16% by 2032.[36]

Facilitating the introduction of a smart grid

18. In our 2011 report, A European Supergrid, we outlined the challenges of increasing the proportion of the UK's energy mix from renewable sources such as offshore wind and concluded that the Government "must pursue the development of an integrated grid in home waters and begin bilateral negotiations to create new shared infrastructure with our European neighbours".[37]

19. Dr Martyn Thomas of the Institution of Engineering and Technology (IET) described the smart grid as "the real prize" from smart metering and told us:

He also said that "we need smart metering to support the smart grid".[39] Siemens agreed that smart metering "is a critical aspect of the Smart Grid system."[40] However, Alex Henney argued that a smart grid could be achieved without smart meters.[41] Consumer Focus said it was "unclear if the current technology and framework will effectively facilitate the introduction of smart grids in practice and how and if cost savings will be passed onto customers."[42]

20. DECC has recognised that "the future system needs to be more integrated and flexible" to meet the challenges of adapting to "significant changes to both electricity generation and demand", and has outlined its commitment to building a smarter grid:

In its most recent impact assessment for domestic smart metering, DECC said that smart metering "is a key enabler of the future Smart Grid".[44] However, in its written evidence, it was less definite about the role of smart meters in enabling the smart grid, saying only that they were "expected to provide a platform for the development of smart grids and the wider energy services market".[45]

Costs

21. DECC's impact assessment identifies roll-out costs of £12.1 billion, including metering equipment, installation and operation costs of £6.98 billion, communications equipment costs of £2.65 billion, IT systems costs of £1.24 billion and other industry costs (including consumer engagement) of £1.24 billion.[46] A number of witnesses questioned how realistic these figures were.[47] Various individuals and organisations warned that the size and complexity of the roll-out programme meant there was a risk that costs could spiral in various areas.[48] The Institution of Engineering and Technology (IET) said:

Dr Martyn Thomas of the IET told the Committee that a "typical IT project of this complexity overruns its declared timescales by approximately 100% and its costs by about the same."[50] Others agreed that large IT projects of this nature tended to be at risk of cost overrun.[51] For example, the PAC noted in its 2011 report "Preparations for smart meter roll-out" that the data communications service was a "complex IT project", and said that it did not "share the Department's optimism" that it had "adequately accounted for the risks involved in the complex and ambitious smart metering programme, especially cost escalation."[52]

22. We note that DECC has not published the Major Projects Authority's review of the smart meter project on grounds of commercial sensitivity. Given the concerns that have been raised about the risk of cost escalation, we hope that it will make this information available as soon as possible and that the assessment will offer reassurance rather than cause alarm.

INSTALLATION AND HARDWARE

23. Paul Spence of EDF noted that installation costs would be one of the largest elements of roll-out, but felt that DECC's cost projections were "about right".[53] However, Orsis disagreed:

24. The Energy Services and Technology Association (ESTA) and Orsis pointed out that the design and functionality of the meters had a direct effect on their cost and that this in turn affected the cost of roll-out to consumers.[55] Hans Kristiansen of Orsis said that there had been "an unfair focus on the smart meter itself" rather than on "smart metering and smart solutions" and suggested that the design of the meter that most people would receive during mass roll-out—the SMETS 2—contained elements "that will not add value to the consumer, and yet they will ultimately be footing the bill".[56] British Gas noted that although it had "done more than anyone to establish supply chains and use volume to drive down the cost of equipment" there was still a "significant gap" between its costs and those anticipated in the impact assessment, which "assumes that the cost for metering equipment will drop markedly once mass roll-out commences and large orders are placed".[57]

Potential for greater co-ordination between suppliers

25. Consumer Futures has suggested that one way of achieving significant efficiency savings during installation would be to increase co-ordination between suppliers.[58] Audrey Gallacher told the Committee:

Suppliers agreed that there were opportunities for greater co-ordination during roll-out, but views differed on the extent to which such efficiencies could be achieved.[60] Most suppliers agreed that it was important to co-operate regarding the fitting of communications systems in multi-tenanted buildings such as blocks of flats, but some saw logistical problems with attempting to organise a street-by-street, house-by-house roll-out.[61] British Gas, E.ON and First Utility in particular emphasised the difficulties of such an approach.[62] Darren Braham of First Utility noted that there were other ways of achieving savings:

26. We recommend that suppliers work together to achieve efficiency savings during roll-out. This would help to ensure efficiency and the widest possible coverage of the WAN (Wide Area Network). DECC should draw up a co-operation protocol and require suppliers to sign up to it.

Value for money and cost-effectiveness of roll-out

27. Dr Thomas suggested that smart meter roll-out would be cost-effective only if smart meters ultimately enabled the smart grid:

Policy Exchange agreed that "if the energy savings of £4.4 billion are not achieved (and costs overrun, which, for a project of this size, is a likely scenario), this looks an expensive project simply to avoid estimated bills".[65]

28. The IET also raised concerns that because smart grid benefits "are not currently included in the business case…we do not have an accurate picture of smart metering costs and benefits".[66] Professor Bulkeley noted that "it is quite difficult to put a cost" on such benefits and said that they therefore usually are not "taken into account".[67] Indeed, the "potential benefits from the development of a smart grid" are listed as a non-monetised benefit in DECC's most recent impact assessment, and DECC has stated that the "full benefits" of such developments are "yet to be quantified".[68]

Passing on costs and benefits to consumers

29. Consumer Focus said that it remained to be convinced "that the shape of the current roll-out will deliver smart metering at lowest cost, minimal hassle and maximum benefit to consumers" and has highlighted that there is "no mechanism in place to limit the financial risk to consumers should costs start to rise".[69] Similarly, the Federation of Small Businesses has suggested that Ofgem should "be tasked with ensuring the costs savings that the energy suppliers are likely to experience are being passed on to consumers through lower bills".[70] ScottishPower and RWE npower noted that they were obliged to report their costs and benefits for roll-out to DECC and Ofgem and said that these would therefore be subject to review.[71]

30. We asked DECC, Ofgem and energy suppliers how they would ensure that roll-out costs were kept down and that benefits were passed on to consumers. We were surprised to hear that competition in the energy market was seen as sufficient to achieve these aims.[72] Baroness Verma told us:

31. Consumer Focus questioned whether competition would be sufficient to keep costs down and ensure that benefits were passed on:

The PAC has also questioned whether competition would be sufficient to ensure that supplier benefits were passed on:

32. Ofgem acknowledged that there had been concerns about competitiveness in the retail market, but suggested that the steps it was taking through the Retail Market Review would help to ensure that savings were passed on to consumers:

33. We made several recommendations regarding competition in our Consumer Engagement with Energy Markets report and recently revisited this issue in our Energy Prices, Profits and Poverty inquiry and report. This most recent report found that there is currently insufficient measurement of performance against agreed indicators to determine whether competition in the supply market has increased. In its response to our Consumer Engagement report, Ofgem outlined the need for "a robust and comprehensive suite of indicators" to inform the "review of the retail energy market and the impacts of the RMR" that it will conduct in 2017.[77] It is therefore difficult to understand how it can confidently assert in 2013 that the market "should look very different", in terms of competition, by the start of mass roll-out in 2015.[78]

34. Smart metering has the potential to bring wide benefits to our energy infrastructure and to consumers, and we welcome this investment in the UK's energy system. The development of a smart grid will be key to meeting future energy challenges, but the extent to which smart metering will facilitate that is unclear, and not enough has been done to quantify the benefits of a smart grid. Greater transparency is needed for the true costs and benefits of roll-out to be assessed. DECC should clarify the extent to which smart metering will facilitate the development of the smart grid and should publish its analysis of the financial costs and benefits of a smart grid.

35. There is a clear risk that the £6.7 billion net benefit projected by DECC may not be achieved if costs spiral or if consumers do not realise the expected energy and bill savings. There is also a risk that the benefits that accrue to suppliers as a result of roll-out will not be passed on fully to consumers. We are not convinced by the argument that competition in the market will ensure that costs are kept down and benefits are passed on to consumers. Until Ofgem can provide concrete evidence that competition has increased—for example by publishing its analysis of market performance against agreed indicators of competitiveness or by publishing a review of the impact of its RMR reforms—serious concerns about competition in the market will remain.[79] The responsibility for keeping roll-out costs under control and ensuring that benefits are passed on to customers rests with the Government and Ofgem. They must demonstrate how reforms to the market will achieve this and what action they will take if this is not achieved.

36. If consumers do not believe that they are benefiting significantly from roll-out, they could rightly perceive it as a costly project that they have paid for but gained little from. As we outlined in our Consumer Engagement with Energy Markets report, we are concerned that not enough is being done to make consumers aware of the need to invest in the UK's energy infrastructure. DECC has been focusing its consumer messaging on the relatively small energy and bill savings of around 2.8% that smart meters may help consumers to achieve. We recommend that messages around smart metering should place greater emphasis on the wider benefits it will bring to the UK's energy infrastructure. We reiterate the call in our Consumer Engagement with Energy Markets report for greater transparency regarding the "contribution that consumers are being expected to make to ensuring that we have safe, secure and affordable energy supplies in future".[80]

4 Public Accounts Committee, Sixty-third Report of Session 2010-12, HC 1617, Preparations for the roll-out of smart meters, summary, p. 3 Back

5 Ev 65; Ev 71; Ev 27; Ev w47; Ev 74; Ev 80; Ev 85; Ev 87; Ev 89; Ev 93; Ev 99; Ev w118; Ev 106; Ev w122; Ev 110; Ev 121; Ev 126; Ev 146; Ev w127; Ev 150; Ev w134; Q 59 [Audrey Gallacher]; Q 79 [Sean Weir]; Q 114 [Dr Sarah Darby]; Q 162 [Professor Harriet Baldwin]; Q 163 [Dave Openshaw]; Q 193 [Dr Martyn Thomas] Back

6 Ev 93; Ev 58; Ev w75; Ev 80; Ev 87; Ev 99; Ev 126; Ev w127; Alex Henney and Ross Anderson, Smart Metering - Ed Milliband's Poisoned Chalice, (2012), http://www.cl.cam.ac.uk Back

7 Ev 93 Back

8 Stuart Rolland, Darren Braham and Don Leiper, Qq 266-67; Ev 85; Ev 87; Ev 99; Ev 106; Ev w118; Ev w122; Ev 110 Back

9 Ev 58; Ev 87; Ev 92; Ev 99; Alex Henney and Ross Anderson, Smart Metering - Ed Milliband's Poisoned Chalice, (2012), http://www.cl.cam.ac.uk Back

10 Ev 92 Back

11 Ev 58 Back

12 Q 331 Back

13 DECC, Smart meter roll-out for the domestic and small and medium non-domestic sectors (GB): Final Impact Assessment, January 2013, p. 3 Back

14 Q 329 Back

15 Smart meters: a guide, DECC website, 19 July 2013, https://www.gov.uk/smart-meters Back