Energy and Climate Change CommitteeWritten evidence submitted by Policy Exchange (SMR116)

Policy Exchange is an independent think tank. We are an educational charity whose mission is to develop and promote new policy ideas that will deliver better public services, a stronger society and a more dynamic economy. We generally favour market and localist solutions to policy problems.

We support policy to reduce the UK’s carbon emissions, including the Climate Change Act’s target to reduce UK emissions by 80% by 2050 against a 1990 baseline. We advocate policy that will allow the UK to meet its targets as cost-effectively as possible, protecting the poorest consumers and the wider economy.

Our work in the Environment and Energy Unit over the last two years has focused on a range of energy and climate policy issues. Of particular relevance to this consultation is our report:

Smarter, Greener, Cheaperi, which looked at policy options to improve the energy efficiency of the domestic sector, in particular how to help households stop wasting energy. This included an examination of the role of smart meters.

For more information contact Guy Newey, Head of Environment and Energy. guy.newey@policyexchange.org.uk. 020 7340 2650.

Key Messages

1. Smart meters offer significant potential for helping UK households reduce energy waste and improve energy efficiency. Through changing behaviour, they also offer a potentially cheap way of cutting carbon emissions, compared to new low carbon generation.

2. International and UK evidence of smart meters suggests simply installing the meters will not, by itself, lead to savings and the full benefits to customers.ii They are an enabling technology. An in-house display will help, but the most successful interventions using smart meters have also used other methods, such as improved and tailored information, to deliver energy savings.

3. As a result, smart meters will require additional policy and communications support if the full potential of the technology is to be realised in changing household behaviour.

4. Evidence on the potential of smart meters to help reduce household energy use remains uncertain.iii There is also a shortage of evidence about the costs of programmes that try to change how households use energy. Our research found that the best available evidence suggests costs of “behavioural energy programmes”, some of which are enabled by smart technology, range from £11 to £27 to reduce a MWh of energy use.iv This is cheaper than new gas-fired power stations (around £80/MWh) and much cheaper than some low carbon technologies that currently benefit from support (offshore wind is around £150/MWh, although it is hoped costs will come down).v However, there is still considerable uncertainty about whether savings from behavioural energy programmes can be delivered at scale and whether they can be sustained over many years.

5. Policy Exchange advocates further pilots of behavioural programmes to improve the evidence base and establish if energy savings can be sustained at a reasonable cost. The roll-out of smart meters should make it easier to prove that real energy savings have been delivered by behavioural energy programmes. At the same time, a better understanding of how to change household behaviour will increase the potential benefits of smart meters.

6. We think the best mechanism for the piloting of such measures is to adjust the Energy Company Obligation to allow behavioural measures which can demonstrate real savings to compete for the available subsidy. This would allow larger-scale pilots to be rigorously tested and methodologies for assessing whether or not energy savings are additional and verifiable to be established.

7. Public acceptance of the programme is crucial to its success. The communication of the roll-out is a huge challenge for Government to overcome concerns about privacy, health and trust. It is right to set up a Central Delivery Body to support this measure.

8. There needs to be a national advertising campaign that reassures people about the risks of smart meters and underlines their potential benefits. This should be co-ordinated with other energy efficiency policy interventions, such as the Green Deal. Alongside this, there should be an effort to engage civil society and community groups to act as champions for the technology. The Digital Switchover provides the best available model for this dual approach, although the smart meter roll-out will be much more disruptive and invasive. Wherever possible, the communications strategy should be co-ordinated with energy companies so that it reflects where the roll-out is taking place. This means working on a city-by-city or regional basis where possible (without compromising the operational efficiencies that suppliers can deliver).vi

Answers to Specific Questions

Are the Government’s cost and timescale predictions for roll-out realistic and will it deliver value for money?

9. If the hoped-for reductions in consumer energy use are not achieved, it is likely the smart meter programme will have a very low or negative NPV. DECC estimates put the cost of the programme at £10.8 billion with £15.7 billion of benefits. 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.vii

10. However, international examples of smart meter programmes, where available, suggest that reductions in household energy use could range from 0 to 20%. DECC’s central estimate of 2.8% is rightly prudent, as it is not clear whether such savings can be delivered in a UK context and whether such savings benefit from selection bias (ie those who participated were more likely to be interested in saving energy). But UK policymakers should aim to achieve greater reductions than the 2.8% (2% for gas).

What are the potential benefits of smart meters for consumers, and what barriers need to be overcome in order for consumers to realise them?

11. The potential benefits to consumers, apart from an end to estimated bills, come mainly through smart meters enabling energy saving. It is hoped that making information about energy use more immediate, it will allow people to work out where they are wasting energy (if they turn on the kettle, they will see a sharp spike on their in-home display (IHD)). While this will deal with one important barrier, other information barriers will still exist. These include:

What can I do to reduce the energy use of a particular activity?

How much difference will a particular measure make?

What is “normal” energy consumption for a similar property, with similar occupancy?

Answering such questions often requires further intervention and information, perhaps in the form of energy visits or audits by experts. It could also include comparative billing, where a person’s energy use is compared to that of an efficient neighbour living in a similar property.

12. While the market will likely deliver a certain amount of activity in this area beyond what is a regulatory requirement (installation of an IHD), if government wants to ensure additional activity, it will require further policy intervention. The key tests for such intervention are: Is it cheaper to reduce energy than to pay for new generation? Does it offer a cheaper way of decarbonising the economy than technologies that currently benefit from support? While evidence remains weak on the full cost of behavioural energy programmes, the best available evidence on rigorously tested programmes suggests costs are considerably cheaper.viii

13. Our research compared three different policy options to incentivise demand reduction programmes in the home (capacity mechanism; Premium Payment or EEFIT, and changes to ECO). We concluded that the ECO was the most appropriate instrument for the following reasons:

It would deal with both gas and electricity use at the same time, rather than just electricity.

It was already focused on households and could be introduced relatively easily (changes in ECO rules).

It could allow a wide range of participants, including charities and the private sector, to compete for the subsidy through the ECO Brokerage Mechanism. This would allow innovation in how energy savings could be achieved, with the only metric being that they can demonstrate energy savings.

It offers the possibility of reducing the overall cost of ECO, which could potentially be a very expensive intervention.ix

What is the best way of involving third-party trusted messengers, such as charities, consumer groups, community organisations, local authorities and housing associations in roll-out?

14. There are two aspects to this. We suggest that the ECO brokerage mechanism would allow charities, local authorities and others to compete for the subsidy if they can demonstrate energy savings (see 13). Secondly, such bodies have a crucial role in how the smart meter roll-out is communicated. A national advertising campaign, while important, is not enough on its own. Civil Society groups will need to be harnessed to help all households, but vulnerable consumers in particular, take full advantage of smart meters. The model of the Digital Switchover is a good example of co-opting local community groups to provide trusted sources of advice (although the extra complexity and level of intervention of smart meters should not be underestimated).

Additional Points

Retail Market Review and Government intervention in the energy retail market

15. The current debate over Ofgem’s attempts to simplify the retail energy market and the Government’s late intervention to end dead tariffs and possibly force energy companies to put people on to the cheapest tariff seems oblivious to the changes that smart meters will bring to the retail market. Smart meters, if effective, should allow switching to be easier. They will also allow greater innovation in tariffs, including “time of use tariffs” that reward people for using energy at times of low demand. Restricting such innovation ahead of a potentially dramatic change in how households use energy is not just economically efficient (see Littlechildx), but also risks punishing consumers who could benefit.

References

i Newey, G (2013). Smarter, Greener, Cheaper. Policy Exchange

ii Ofgem (2011). Energy Demand Research Project Final Analysis; Also see Darby, S (2006). The Effectiveness of Feedback on Energy Consumption. Environmental Change Institute, University of Oxford

iii DECC (2012). How much energy could be saved by changing everyday households behaviours

iv Dolan, P, Metcalfe, R (2012). Neighbors, Knowledge, and Nuggets: two natural field experiments on the role of incentives on energy conservation [Working paper available on request from metcalfe@uchicago.edu].

v Mott MacDonald (2010). UK Electricity Generation Costs Update.

vi See Phillips, R & Scott, F (2012). Smarter communications: strengthening consumer engagement on smart meters. Green Alliance.

vii DECC (2012). Smart meter roll-out for the domestic sector: Impact Assessment

viii Allcott, H and Mullainathan, S (2010). Behaviour and Energy Policy. Science: 327 (5970), pp.1204-1205. Also see Dolan & Metcalfe (2012). Other examples of costed behavioural programmes are collected in Newey (2013).

ix NERA (2012). The cost of the Energy Company Obligation. Prepared for Energy UK

x Littlechild, S (2012). “Ofgem’s Procrustean bed”. Oxera agenda. Available from: http://www.oxera.com/Oxera/media/Oxera/downloads/Agenda/Ofgem-s-Procrustean-bed_1.pdf?ext=.pdf

February 2013

Prepared 26th July 2013