Energy and Climate Change CommitteeSupplementary written evidence submitted by Alex Henney

1. On 9 November I asked for a copy of the Assessment of the smart meter project by the Cabinet Office’s Major Project Review Group. After two delays because DECC was “thinking” I received four pages of specious Whitehall gibble gabble. Graciously I was provided with a 15 page report of which 14½ pages had been redacted. But significantly the only part not redacted makes a misleading assertion. Namely it states:

“The European Union gas and electricity market Directives require that EU member states implement ”intelligent metering systems that shall assist the active participation of consumers”. The Directives require member states to roll out smart electricity meters to 80% of households by 2020 (with certain exceptions).”

In fact Annex 1, 2 of Directive 2009/72/EC states:

“Member States shall ensure the implementation of intelligent metering systems that shall assist the active participation of consumers in the electricity supply market. The implementation of those metering systems may be subject to an economic assessment of all the long-term costs and benefits to the market and the individual consumer or which form of intelligent metering is economically reasonable and cost-effective and which timeframe is feasible for their distribution.” [Italics added]

I wonder what else is misleading in the Assessment? Are there more errors? Is this another rail franchise type job? So much for Cameron’s claim in a letter to all Departments dated 31/5/10 “The government must set new standards for transparency.”

2. DECC has just published (yet) another Impact Assessment of the roll-out of domestic smart meters. The net present value (NPV) (best estimate) of the benefit has marginally reduced from the August 2011 Assessment (from £16.0bn to £15.9bn) but the NPV of cost has increased slightly from £10.9bn to £11.5bn. In consequence the alleged the net benefit has decreased from £4.9bn to £4.1bn. (Although it is claimed that the price base has changed from 2009 to 2011, curiously a major proportion of the basic figures remain exactly the same). The benefits have now been enumerated in a table, and show how DECC has scraped the barrel to stack the numbers up, ranging from £101m for a reduction in customer lost minutes to a generation benefit of £745m from time-of-use pricing. Both of these numbers are speculative (or a fiction of DECC’s modeling) and bear out the comment which Ms. Vicky Pryce told my colleague Professor Anderson that the numbers were politically maniupulated.

3. The Impact Assessment contains exactly the same main errors as previously, notably:

Some of the optimism bias figures are fanciful, especially that of the IT capex and opex at 10%.

The discount rate of 3.5% real is unrealistically low for this type of project; it inflates the net benefit by valuing distant benefits more highly than if a higher—and more realistic—rate were used.

The proposals still include the unnecessary in-home display, many of which will not be used, consequently wasting £00Ms. The Federal Energy Regulatory Commission’s Staff Report for 2012 on “Demand Response & Advanced Metering” notes that while nearly 18 million customers with smart meters (out of a total of 38 million) use the internet to access consumption information a negligible number use an in-home display. (The report also notes that only 2 million—about 1½%—of residential customers are on time of use tariffs).

The cost of the electric meter and comms remains about twice the cost of the Italian and Spanish roll-outs.

The proposed roll-out is the most complex in the world.

With half the costs and half—if not a third—of the complexity with the DNO roll-out the project would pay-off. As it stands it is very likely to be both a mess and a waste of money. But who in the dream factory of Whitehall Place cares?

4. It would provide a good discipline if the senior civil servants who prepare, and Ministers who signed off, these Impact Assessments had their pensions negatively correlated with the actual net benefit of the outcome.

March 2013

Prepared 26th July 2013