Energy and Climate Change CommitteeWritten evidence submitted by RWE npower

Key Messages

RWE npower supports the Government’s rollout of smart meters. This is being led by DECC and therefore it is essential that the central DECC Programme remains in place until the DCC is fully implemented, if the success of the Programme is to be guaranteed. We also believe that the current approach contains the appropriate incentives to facilitate the delivery of customer benefits;

In order to secure maximum benefit from the deployment of smart meters, consideration must be given to optimising the supply chain for GB manufacturers, technology providers and installers and how this can be delivered;

Customer awareness is key and Government, suppliers, consumer groups and others must work together to get this right. Messages should stem from, and align with, understandings gained from wider, honest conversations with consumers regarding energy prices, the costs of delivering Government Policy objectives and the need for customers to engage with energy suppliers to manage and reduce their energy costs;

The Programme must ensure a coordinated alignment with other Government policies to secure maximum benefits and consumer engagement. For example, the link between tariff reform and smart is fundamental and must not limit customers’ ability to realise the benefits of smart;

The smart Impact Assessment recognises the net cost to suppliers of implementing smart. However, the competitive market will drive suppliers to find the most efficient ways of managing and reducing these costs. Notwithstanding this, the sheer scale of capital outlay on suppliers’ balance sheets should not be underestimated. This has implications for their credit worthiness which is continually monitored by rating agencies; and

It is critical that we secure the right outcomes from rollout to capture the benefits of smart for customers, suppliers and GB PLC. However, meeting the requirements of the 2019 completion date is both challenging and partly contingent on the timely implementation of the fully-functioning DCC and the availability of SMETS 2 metering systems. A well considered rollout, with a robust end to end design, is more likely to secure consumer benefits than one that is driven by tight deadlines.

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

1.1 The Government’s Impact Assessment (IA) (24/01/13) suggests that the top [5] cost drivers identified by their analysis are:

Cost of meters and IHDs (£4.135bn);

Installation of smart Metering equipment (£1.746bn);

Communication Service charges for the Wide Area Network (£1.291bn);

Communication equipment (£1.150bn); and

Energy costs of running new smart metering equipment (£734m).

Whilst we agree that these are key cost drivers and that they generally align with our own analysis, we have also highlighted others that we believe need to be considered. In particular:

Security—the overall costs required to ensure that complete, end to end system and process developments are established to provide secure data handling systems and processes for both the metering equipment and the supporting communication infrastructure;

IT development—the overall costs associated with the end-to-end, system and process changes and updates required to accommodate the new smart metering arrangements; and

Meter disposal and stranded assets—the current IA covers the costs associated with disposing of meters as they reach the end of their life-time. However it does not take into account any premature meter replacement costs. This will be a substantial cost for suppliers.

1.2 The cost-benefit case for the smart metering Programme rests on the benefits to customers of being better able to manage their energy consumption, control their bills and so reduce CO₂ emissions. Value for money will only be realised if these benefits can be achieved and this will require the following:

Consumer engagement—a strong consumer engagement must be established in order for customers to understand the smart meter opportunities and the benefits that can be achieved if they are able to change their behaviour;

A robust end to end design—that is clearly and consistently communicated, understood and appropriately controlled is a priority requirement. Higher levels of certainty reduce investment risk and encourage appropriate and timely development and procurement activities. This is particularly true for a Programme such as this where an approach of parallel design and build has been established to better meet the timescales that have been set; and

Reporting and Monitoring—to continually monitor the Programme as it develops to manage it holistically.

1.3 Timescales—We are keen both to commence and complete deployment and build upon the opportunities that smart can bring to our customers. However, this is a complex technology of which consumers are unfamiliar. Consequently, meeting the requirements of the 2019 completion date is both challenging and partly contingent on the timely implementation of the fully-functioning DCC and the availability of SMETS 2 metering systems. We must not compromise on the integrity of the end-to-end design nor jeopardise our customers’ trust by rushing the implementation.

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

2.1 A number of benefits that are likely to accrue over time, as the market develops, will depend on the increasing maturity of:

The technology of metering equipment and communications infrastructure;

Industry systems, processes, customer services and change of supply activities;

Consumers, their engagement and the value to them; and

The energy market and product developments such as, smart homes, energy management and domestic appliances.

2.2 We anticipate that smart metering will enable a range of benefits to be realised throughout the Programme life-cycle, these will include:

Short-term:

Bills based on meter readings;

Provision of useful “customer-specific” consumption information;

Some operational cost reductions; and

Shift in consumption patterns to reduce overall peak demand.

Longer-term:

Enabling increased micro-generation;

Industry process efficiency improvements;

Proactive management of customer debt;

Integration of intelligent devices and appliances for demand management—smart homes; and

Services beyond the meter.

2.3 Barriers that need to be overcome include:

Trust and awareness—Independent research1 has found that consumers currently see energy supply more as a form of taxation than a fundamental service that is required to improve the quality of life. DECC’s own qualitative research2 estimates that around 30% of consumers are in favour of smart meters, 20% are against and the remaining 50% are undecided. Whilst these perceptions remain the full benefits of the smart programme will not be realised.

Technology—enabled by ensuring that robust end-to-end design is developed, and technical solutions and equipment are appropriate, understood and accepted to ensure good customer experience is achieved. It is important that technological developments keep pace with the Programme and do not overtake and drive it; and

Supplier Performance—the reasoning behind aborted installations need to be clearly understood and used to improve products and processes where possible and that the increase in exceptions that will arise during the early stages of roll-out are properly identified and managed;

3. Is there a possibility that suppliers will gain considerably more than consumers from smart meters? Is enough being done to ensure that any financial benefits accruing to suppliers will be passed on to consumers?

3.1 The Government’s IA indicates estimated costs of £11.7bn, the majority of which are expected to be met by suppliers with stated supplier benefits of £9bn. Therefore, we do not currently see a positive benefits case for suppliers. Indeed some of these costs will need to be passed on to customers in line with the self-regulation that competitive markets will bring and this is stated within the 2010 Prospectus relating to Consumer Protection (section 5.3). We would ask that the following points are also taken into consideration:

The IA assumes “full capability” from day 1, but benefits will be realised over time and later in the Programme.

The IA does not fully consider the range of equipment and solutions that will be developed in a competitive market, that will have time and cost implications.

The impacts of issues that have arisen since the IA was last published (April 2012) have still to be communicated to the Industry.

3.2 The competitive market drives suppliers to better and more innovative ways to manage the costs of smart and these benefits then flow to customers. Further consideration should be given to the following:

Mandatory reporting and monitoring—Suppliers have a series of obligations placed upon them via Licence Conditions outlined by DECC to report on progress and benefits;

Stranded asset costs—the Programme will mandate Suppliers to replace traditional meters ahead of their scheduled lifetime with a metering system that is considerably more expensive. The considerable value of these stranded assets will need to be met by Suppliers, which undermines any benefits case; and

Cost and alignment of DECC policies—the overall cost for suppliers of smart, Green Deal and ECO initiatives is considerable. As these programmes of work form part of DECC’s overall strategy it would be useful to identify and align any complementary aspects in order to account for costs and benefits appropriately.

4. What lessons can be learned from successful smart meter implementation and usage elsewhere in the world?

4.1 The majority of other smart implementations have been geographically led rollouts conducted by Network Operators. The main lessons learnt to date are with regard to operational efficiencies, privacy and metering technology issues. These include managing firmware updates and the premature introduction of complex tariffs. We have yet to understand and so benefit, from lessons arising from consumer engagement, changes in consumer behaviour and the further development of the energy market.

4.2 Further consideration should also be given to the following:

Privacy and security—We acknowledge that the Government is seeking to learn from international experience and that this has been reflected in their approach to consumer privacy and security issues and recognise that these areas are now being dealt with.; and

Central Delivery Board (CDB)—is building on the success of the digital switchover (bearing in mind the differences) and recognising the importance of good consumer engagement in terms of a successful rollout.

5. Will smart meters empower customers to take greater control of their energy consumption?

5.1 Not by themselves, the following should also be considered:

Customer education—initiated by co-ordinated, consumer engagement activities by the CDB nationally, that brings legitimacy to the Programme and individual suppliers locally, and which will be responsible for the introduction and support of new propositions. However, ultimately it will be for the customer to accept and act on these messages;

Customer empowerment—will only be fully realised through the development of a better working relationship with their supplier who will be able to help them understand the new technology and how best to use the new information that will become available, in order to assess the way that they use their energy;

Smart meter enabler—the meter and to a greater extent for the customer, the in-home display, is just the enabler to realise any benefit from better energy consumption management and the development of smarter, more energy efficient appliances etc; and

Impact of competitive market—will enable the development of a range of new smart applications and technologies designed to optimise energy consumption in the home.

6. Will consumers on pre-pay meters obtain the same benefits from smart meters as other consumers?

6.1 We believe that prepayment customers will have the same opportunities to obtain smart benefits as any other customer groups.

Benefits—Our expectation is that there should be no difference in the potential benefits that pre-payment customers can obtain. However, current behaviour is essentially driven by price and budgeting and it is yet to be seen what effect(s) new consumption information will have, but we anticipate that these will be positive; and

Prepayment—is simply a method of payment that some customers prefer. The popularity of prepayment is growing as new Pay As You Go style tariffs are introduced and an increasingly positive view of this form of payment is emerging. Prepayment customers will be treated the same as any other group under new smart arrangements and as such should have the same opportunity to alter their consumption behaviour.

7. Should vulnerable customers and the fuel-poor be first in line for smart meters so they can get the benefits sooner?

7.1 Whilst we understand the logic behind the suggestion, we do not believe that early roll-out of smart metering to vulnerable customers is appropriate. Suppliers must choose customers carefully against an evolving backdrop of rollout activity and ramp-up in available technologies. We ask that the following aspects are also taken into account:

System and process instabilities—that may be present during the early stages of this large-scale Programme may adversely and disproportionately impact vulnerable customers;

Ramp-up of technology—Suppliers will have to manage a ramp-up of DCC WAN coverage and metering system HAN coverage; and early technology releases may present firmware and hardware issues to manage;

Customer support—Government’s Response to the Prospectus Consultation, Supporting Document 2 of 5, Rollout Strategy, March 2011, section 2.71., stated that, the majority of consumer groups stressed that vulnerable consumers in particular may not have the support they require in the early stages of rollout; and

Adverse Public Relations—negative impacts on vulnerable customers would seriously impact the customer—supplier relationship and generate negative PR for the Programme.

8. 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?

8.1 A well planned and coordinated range of national and local customer engagement activities to raise awareness of the Programme and its aims and to address customer concerns, with a view to optimising the customers’ experience:

Central Delivery Board—must initiate engagement with third party groups in the first instance in order to develop appropriate working relationships based on clear and consistent concepts and messages from Government, the Programme and Suppliers;

Suppliers—making local arrangements and contacts with the various groups to establish an understanding of roll-out activities and associated propositions; and

Third parties—need appropriate support from the Programme to be able to endorse and consistently communicate the range of messages, particularly to vulnerable groups. Experience gained should be used to inform and enhance further Programme activities.

9. What are the potential obstacles to rolling out smart meters in the UK and how should these be addressed? What pitfalls have hindered roll-out programmes elsewhere and are we doing all we can to avoid them?

9.1 Potential obstacles include:

Over—promising of benefits—careful and co-ordinated messaging from both CDB and Suppliers is required to ensure that unrealistic expectations are not created;

Adverse media coverage—addressing these issues is a key role for the CDB that must be openly supported by all stakeholders, including the Government;

Enduring technical, end to end design—needs to be established quickly to generate certainty and ensure that equipment is developed and manufactured to provide the industry with the capability to provide 100% coverage, in a consistent and timely manner;

Customer acceptance—whilst there will always be customers who will not wish to make lifestyle changes for a variety of reasons, we envisage that the expectations and understanding of these customers will be managed by the range of central and local messages that will be developed. Further support for these customers, where required, will also need to be considered; and

Difficult installations—will always be present either as a result of physical or equipment constraints. It is envisaged that a form of continual assessment for these sites will be required to manage them effectively and provide appropriate management information.

10. Are levels of public awareness of and support for smart meter roll-out increasing?

10.1 Levels of public awareness are increasing and the evidence that we have so far obtained suggests that there will be a good level of support for the Programme if the customer can be assured of a positive experience:

Level of awareness—we believe that the current level of awareness of smart metering is appropriate for this stage of the Programme. Customer awareness initiatives need to be carefully designed to strike the right balance between informing customers whilst not raising unrealistic expectations early in the Programme;

Customer—Supplier relationship—is being undermined as a result of negative Government, customer focus group and press activities and messages. It should be noted that these messages will adversely influence customers’ decisions to readily adopt new and “un-tested” technologies;

Negative campaigns—such as StopsmartUK has gained some ground (around 700 instances nationally) and these need to be managed by central Government Press Office until such time that the CDB has been fully established; and

Smart priority queue—is our own initiative to capture positive, early interest has received in access of 100,000 enquiries and we hope to be developing this concept further.

11. Is enough being done to increase consumer awareness about smart meters? Could DECC’s consumer engagement strategy be improved?

11.1 Yes, we believe that enough is being done:

Central Delivery Board—the establishment of the CDB will become the corner-stone for customer engagement. The development of these roles and the initiatives that will emerge are well timed to coincide with mass roll-out. The key is to ensure that appropriate and timely messages are produced and that these are communicated accordingly; and

Balance of engagement—it is important that messages are set to increase customer awareness, improve knowledge and understanding of the Smart Programme, but do not create an untimely, artificial market for smart products that may not be available and that could de-stabilise roll-out strategies. The balance of the content and timing of messages therefore needs to be carefully considered.

12. Are consumers’ concerns about privacy and health being addressed adequately?

12.1 Yes, we believe they are:

Privacy and consent—a number of Licence Conditions placed on Suppliers are due to come into effect, which oblige suppliers to capture customer consent, or otherwise, for access to new smart meter data. These records will be subject to independent audit;

Data Protection Act—this overarching Act covers all aspects of Data Control and Processing, with serious penalties for breach;

Privacy charter—to be published ahead of Licence Conditions is currently being drafted by Energy UK in consultation with stakeholders including networks, consumer groups, privacy advocates, Government (both DECC and Ofgem) and the Information Commissioner’s Office. The charter will be publicly available to customers via suppliers and the Central Delivery Body; and

Health—CDB and suppliers will be taking expert advice from the Government’s Health Protection Agency (HPA) on health issues to ensure accurate and consistent messages are provided to consumers on this subject.

13. Is there any evidence that consumers’ concerns about smart meters are declining or growing?

13.1 We have not obtained any evidence, to date, that suggests that customers have any major concerns at this early stage:

Negative Campaign—There is however a small protest group that appears to have come from the US (StopsmartUK) that has proved attractive to a very small number of customers. Consideration must therefore be given to addressing the concerns that this group has raised.

14. Will the commercial benefits of smart meter roll-out be captured within the UK?

14.1 We believe that there are opportunities for some commercial benefits to be captured:

Parent companies—we anticipate that parent companies that reside outside of the UK will expect to realise some form of return on the significant investment they are being asked to provide;

Customer benefits—we anticipate that a successful smart programme that delivers any commercial benefit to customers will ultimately benefit the UK economy;

Employment—the smart programme will ensure and probably create a number of new jobs within the areas of meter manufacture and meter operation services, particularly during the early stages of the Programme as smart meter installation volumes ramp-up to meet supplier roll-out strategies; and

Benefit timescales—commercial benefits to the UK may be impacted when mass roll-out is completed in 2019 reducing the volume of metering equipment and installations required. This situation is likely to continue until recertification and policy exchange activities begin again around 2023. This approach may also result in a loss of knowledge and experience.

15. Will DECC’s current approach to roll-out, including on procurement and establishment of the central Data and Communications Company, deliver an optimal data and communications strategy?

15.1

The role of the DCC—is vital for an efficient and effective smart energy supply market in the UK. It will form part the critical national infrastructure that is required to provide a secure, reliable conduit for data in the new smart environment. It will create a wide area communications technology across GB and has the potential to reduce industry complexity and to minimise the duplication of functionality between Suppliers;

Contestability and simplicity—the Programme must recognise the balance that must be struck between the need to procure a simple and ubiquitous UK communications solution and to maximise the contestability of the procured services to suppress costs. The country has been divided into three zones, each of which could theoretically end up with a different mix of primary and infill communications technologies. Increasing the variety of assets for suppliers to manage reduces economies of scale and introduces complexity and cost into the supply chain;

Scope control and industry costs—we recognise the importance of DECC’s procurement process and the establishment of the scope of the services that will be provided by the DCC. Again, there is a tension between scope control and ensuring that key requirements are not dropped in order to de-risk DECC’s delivery. Consequently, we warmly welcome DECC’s decision to require the DCC to own and provide the communications box rather than risk disparate procurement of devices by suppliers. Similarly, we believe that customers in multi-occupancy dwellings would benefit from the installation of one, common WAN/HAN communications infrastructure. This would minimise disruption to consumers and lower support costs; and

An end to end view of costs—The issues above illustrate the importance of considering the total costs to the industry and the customer impact when procuring DCC services.

16. What criteria should DECC use to measure the ongoing success of roll-out?

16.1 We believe that it is first important to understand that we cannot measure success until the appropriate building blocks are in place for the Programme. With this in mind we suggest that the following should be considered:

Capability:

Suppliers have an appropriately trained and sized workforce;

Full and approved end-to-end testing and trialling has been completed;

DCC in place with full services including full coverage WAN and HAN solutions that support suppliers’ rollout deployment profiles;

Roadmap to full capability with a shared view of key stages of the Programme;

Appropriate change control systems and processes are in place; and

A complete supply chain is in place.

Consumers:

Fully engaged and supportive of Smart Metering;

Consumer requirements to facilitate behavioural change have been identified;

CDB and local supplier engagement activities are in place; and

An understanding of the links with other Government policies are understood (eg Green Deal).

Cost Effectiveness:

Monitoring of Programme costs and benefits;

Ensure that industry manages change effectively and collaboratively; and

Suppliers have appropriate capability to learn from their deployment and the ability to amend strategies and to share these experiences where appropriate.

Smart Meter Rollout:

Ensure that metering equipment roll-out is tightly managed; and

Installation and customer engagement issues are identified and used for continual improvement.

February 2013