Energy and Climate Change CommitteeWritten evidence submitted by Ofgem

1. Introduction

1.1 Ofgem is the regulator of Britain’s gas and electricity markets. Our principal objective is to protect the interests of current and future energy consumers. The roll-out of smart meters is a government policy that will affect every home and smaller business1 in Britain. We have an interest in ensuring that consumers remain protected, both during the transition to smart meters and once the roll-out is complete.

1.2 Government has decided to implement the smart meter roll-out through regulation. This will include new obligations on suppliers requiring them to roll out smart meters, and establishing a new licensed entity (the Data and Communications Company, DCC) to manage data and communications to and from smart meters. There will also be regulation to help ensure that consumers are protected. For example, there will be new rules to ensure appropriate access by suppliers, networks companies and authorised third parties to consumers’ smart meter energy consumption data.

1.3 Ofgem E-Serve managed the policy design phase (Phase 1) of the Smart Metering Implementation Programme (SMIP) on behalf of the Department of Energy and Climate Change (DECC). This phase ended with the publication of the Response to Prospectus in March 2011,2 which set out a robust high-level policy design for the smart meter roll-out, consistent with protecting the interests of consumers.

1.4 Since April 2011, DECC has been directly responsible for managing the implementation phase (Phase 2) of the SMIP. We have been engaging with the SMIP by providing independent regulatory advice, to help ensure that changes to the regulatory framework are managed efficiently and effectively, and that the new rules operate in the interests of consumers. We will also monitor and, where appropriate, enforce compliance with new regulatory obligations put in place by government to mandate the roll-out. This runs in parallel to our work with government in considering the opportunities and issues associated with the development of a smart grid.

1.5 Some suppliers have been providing “smart-type”3 or compliant smart meters4 to their domestic and smaller business consumers in advance of any formal obligations being introduced. We have therefore already put in place measures to help ensure domestic and smaller business consumers who receive either “smart-type” or compliant smart meters early are protected. We will also approve, and oversee changes to, the Smart Metering Installation Code of Practice (SMICoP). The SMICoP will be an important consumer protection measure during the roll-out, setting out rules and standards of conduct for suppliers installing compliant smart meters.

1.6 Looking forward, we will continue to introduce new measures to protect and empower consumers in response to the roll-out of smart meters5 where appropriate. Longer-term, we also want to ensure that the wider benefits of market developments facilitated by smart meters are realised. We have therefore established our Smarter Markets Programme to help ensure that these developments happen in a co-ordinated and timely way.6

1.7 The remainder of this submission sets out:

how smart meters can improve on existing arrangements for consumers;

a summary of our research in relation to smart meters; and

what we have done, and are doing, to help ensure domestic and business consumers remain protected during the transition to smart meters and beyond.

2. How Smart Meters can Benefit Consumers

2.1 Smart metering has the potential to be an important catalyst for change in the energy sector. As recognised by the Committee when launching this inquiry, smart metering can lead to significant improvements to existing metering arrangements for consumers, and the market more widely. Potential improvements for consumers beyond those referenced by the Committee include:

improved customer service, such as an end to estimated billing;

easier and quicker switching between different methods of payment (credit or prepayment); and

a wider range of payment options, for example top-ups to prepayment meters over the internet, which may facilitate the development of a wider prepayment market. This in turn may benefit consumers, for example by helping them to budget.

2.2 Smart meters also have the potential to stimulate competition by providing opportunities for innovation. For example, companies may emerge that offer consumers tailored analysis of their energy consumption data and new services or products based on that analysis. Smart meters can also enable reform of existing industry processes, for example by making it quicker and easier for consumers to change supplier.7

2.3 However, given the scale of the roll-out—a programme to modernise the entire stock of gas and electricity meters in Great Britain by the end of 2019—there are challenges ahead. Positive consumer engagement will be vital to ensure that the full benefits of smart metering are realised. And as well as consumer, supplier and wider benefits from the roll-out, there are significant costs which will ultimately be borne by consumers. Competitive market pressures should help to ensure that suppliers control their costs, with cost savings passed through to consumers. Our Retail Market Review (RMR) set out evidence that there are significant barriers to effective consumer engagement in the retail energy market, which contributes to weakened competition. For example, research carried out as part of the RMR indicates that there are a significant number of domestic consumers disengaged from the energy market.8

2.4 We are therefore developing and implementing proposals through the RMR which will offer a simpler, clearer and fairer retail energy market that works in the interests of all consumers. One aim of our proposals is to improve effective consumer engagement in the market. This improved engagement now will provide a strong foundation for consumers to be able to engage with future innovative products and services facilitated by smart meters.

2.5 Effective consumer engagement in the market will also increase competitive pressures on suppliers to keep costs, including metering costs, at efficient levels. We will keep monitoring closely the development of the retail energy market and the effect of our RMR proposals. In our October 2012 consultation we committed to review formally the impact of our RMR proposals no later than 2017, subject to the new measures coming into effect in line with our published timetable9.

2.6 The RMR has a strong focus on addressing current problems with the consumer experience of the retail energy market. All of this work, however, is being undertaken in the context of supporting longer-term development of the market. We recognise that future innovation may bring challenges. For example, a potential increase in the number, variety and sophistication of tariffs on offer may make it harder for consumers to find one that meets their needs. More engaged consumers may find they are offered customised deals, while disengaged consumers struggle with the complexity of the market.

2.7 Our Smarter Markets Programme is considering both longer-term opportunities and risks for consumers from the smart meter roll-out. Our objective is to help ensure that regulatory arrangements empower and protect all consumers so that they can participate effectively in “smarter”, more sophisticated retail energy markets (Section 4 below provides further detail).

3. Ofgem Research Relating to Smart Meters

3.1 This section summarises research we have undertaken, or been involved in, in relation to smart metering. Much of the research described below was undertaken during Phase 1 of the SMIP, ie in 2010 and 2011.

3.2 Trials of smart metering in homes undertaken as part of the Energy Demand Research Project (EDRP)10 were found to be more successful in reducing energy consumption than non-smart meter trials. However, the EDRP also showed that a smart meter alone may not be enough to influence behaviour. Consumers need to know how to access the data that their In-Home Display (IHD) provides, understand what to do with that data and have an interest in doing so.11

3.3 In 2010, we commissioned qualitative research into domestic consumer awareness of, and attitudes towards, smart metering.12 This focus group-based research was published alongside the Smart Metering Prospectus13 in July 2010. About a third of participants claimed to have heard of smart meters, though their understanding of what a smart meter is was often inexact. Participants generally focussed on the energy saving and monitoring elements of the meter, rather than remote readings. Perceptions of smart metering were positive and there appeared to be extremely few, if any, negative misconceptions. Typical reactions were cautiously positive. There was slightly more interest in smart meters among those for whom bills were an issue, but these differences were not that consistent between groups.

3.4 We have also undertaken two pieces of qualitative research into domestic consumers’ views of smart meters using our Consumer First Panel.14 The first took place in late 2010 and considered consumers’ views of the smart meter roll-out in general.15 This found that Consumer First Panellists had some awareness of smart meters. However, only a few had a detailed understanding of what they are, and there was no understanding of the difference between a smart meter and an IHD. Reactions to smart meters were neither overwhelmingly positive nor negative when they were discussed at some length.

3.5 Panellists welcomed certain benefits that would help them reduce and regulate energy usage and save money on energy bills. However, the cost of the roll-out was mentioned as being potentially very high and some were concerned about data privacy and security. Panellists expressed some anxiety about feedback on expenditure, and the effects it may have on the behaviour of some consumer groups such as the elderly, to the extent that they thought some might stop using their heating when they really need to. Panellists also thought that some consumers would be disadvantaged because they may find the smart meter and IHD difficult to understand or use.

3.6 Secondly, we undertook a specific piece of research on smart metering data privacy issues in early 2011.16 Overarching points from the research included that Panellists did not want more “noise and confusion” in their lives as a result of sharing their smart meter data, such as increased levels of direct marketing. On balance, however, most Panellists indicated that these concerns were generally no more pronounced than in other industries in terms of the governance of data. They wanted choice about how their data is used—and clear information about who is using their data and for what purposes.

4. Consumer Protection in a Smart World

4.1 This section summarises what we have done, and are doing, to help ensure that domestic and business consumers remain protected during the transition to smart meters and beyond. We have focussed on issues that are specific to smart meters, rather than broader consumer protection issues. The measures described below are in addition to other existing consumer protections. We also describe in more detail our work to shape market development through our Smarter Markets Programme.

4.2 The wide range of activity described below, as well as our independent regulatory advice to the SMIP, contributes to promoting value for money for all consumers (one of the four key themes set out in Ofgem’s draft Forward Work Programme for 2013–1417).

Taking a proactive approach to addressing consumer issues

4.3 A key first step in addressing consumer issues relating to smart metering was our Smart Metering Consumer Protections Package (“Spring Package”). As part of this, we introduced licence modifications in October 2011 that strengthen existing protections for domestic consumers, especially vulnerable consumers.18 These new protections relate to disconnection and the use of meters operating in prepayment mode.

4.4 These changes will ensure that existing safeguards for such consumers continue to apply in relation to smart meters. Suppliers now have to have regard to detailed guidance on identifying vulnerability before taking the decision to disconnect any domestic consumer. The “Big Six” suppliers already voluntarily commit never to knowingly disconnect a vulnerable consumer and have undertaken to pay compensation on a voluntary basis to any domestic consumers who are disconnected in error. The Spring Package measures also introduced rules governing the use of load limiting functionality (where the flow or amount of electricity supplied to a consumer is restricted19) and credit limiting (where the supplier limits the amount of credit available to the consumer).

4.5 Business consumers do not have the same levels of protection in relation to debt and disconnection as domestic consumers. We do not currently see that similar, enforceable licence protections are necessary or desirable for business consumers. However, suppliers should treat business consumers who are in payment difficulties and face disconnection fairly, including where the business consumer has a smart meter.

4.6 As part of the Spring Package, in November 2011 we put forward a set of self-regulatory requirements for suppliers to apply to help ensure that businesses receiving smart meters are treated fairly.20 This included steps suppliers should take before and after disconnection, steps suppliers should take to remedy cases of wrongful disconnection, and compensation to smaller business consumers in cases of wrongful disconnection. In addition, we reminded suppliers of their obligations to issue statutory notices before disconnecting a business consumer or installing a prepayment meter. We have monitored these issues by collecting quarterly data from January 2012 on disconnections and use of prepayment functionality for smaller business consumers with smart meters.

4.7 We also published an open letter setting out our expectations more generally in relation to disconnection of business consumers in December 201221. This confirmed that we expect to see suppliers applying good practice in these areas for all business consumers, including those with smart meters. We also committed to review the quarterly information we have been receiving from suppliers on disconnection rates in Spring 2013, with a view to publishing this data in the future.

4.8 In December 2012 we reviewed suppliers’ practices in relation to load-limiting in the domestic sector.22 Load limiting may bring benefits to consumers. Prepayment consumers might, for example, find load limiting functionality useful in allowing them to continue using basic appliances on running out of credit. However, we are keen that the use of load limiting functionality does not expose consumers to disconnection “by the back door”. We also wish to see load limiting functionality introduced in a way that is clear and easy for consumers to understand.

4.9 Our review did not identify plans to trial or introduce load limiting in the domestic sector in the near future. We understand that the majority of suppliers are some way off developing plans for the use of load limiting in the domestic sector, if they intend to utilise the functionality at all. We are therefore not proposing the introduction of new measures in this area at present, having already introduced measures targeted at load limiting as part of our Spring Package. However, given the importance of this issue to consumers we will continue monitoring developments.

4.10 We have also put in place new licence conditions to support effective switching for domestic consumers that have smart meters installed.23 These are intended to be a transitional measure, which will no longer be needed when all consumers have fully interoperable24 smart meters.

The new rules cover two areas. The first set is designed to help domestic consumers understand if the smart services they are receiving will be maintained if they switch supplier. The second set removes some of the barriers that could prevent the new supplier from operating the meter in smart mode, if they wish to do so. These rules took effect in November 2012 and January 2013 respectively.

Consumer protection during the roll-out

4.11 We support government’s decision to establish a licence-backed Smart Metering Installation Code of Practice (SMICoP) to govern installers’ behaviour when installing a compliant smart meter in domestic and micro-business premises.25 The installation visit will provide a unique opportunity for consumers to access the benefits offered by engaging with their smart meter and, for domestic consumers, the IHD. The SMICoP should help to facilitate this engagement, while also ensuring that consumers, particularly vulnerable consumers, are fully protected.

4.12 Government published its decision on the high-level policy design for the SMICoP in April 2012;26 the associated licence conditions came into force in November 2012. Decisions taken included that suppliers will be obliged to comply with overarching principles to ensure, among other things, that installation visits are conducted in a fair, transparent, appropriate and professional manner. In addition to existing obligations in relation to sales and marketing, the SMICoP will prohibit sales to domestic consumers during the installation visit. Domestic consumers must also give prior consent for face-to-face marketing to take place during the installation visit.

4.13 The licence conditions made by government require Ofgem to approve the first version of the SMICoP. We will therefore shortly be consulting on the draft SMICoP submitted to us by suppliers in December 2012, in advance of publishing the final approved version later this year. Once the SMICoP is in place, we will be responsible for monitoring and, where appropriate, enforcing suppliers’ compliance with its requirements. We will also be able to instigate changes to the SMICoP if we think these are needed.

4.14 We are currently developing our strategy for regulating the new rules that will underpin the mandated roll-out of compliant smart meters. This includes monitoring the roll-out by suppliers and checking that obligations regarding the installation visit are fulfilled. We want to ensure that suppliers are held accountable for delivery of the roll-out and that there are practical and effective safeguards against poor delivery. We therefore welcome the government’s proposals to give us new powers to implement an interim monitoring regime which would enable us to take action during the roll-out if appropriate. Subject to the underpinning licence conditions successfully completing the relevant Parliamentary processes, we will be consulting in relation to these powers later this year.

Shaping market development

4.15 Smart meters can enable reform to existing market arrangements, such as change of supplier processes, which can in turn make the market work better for consumers. Our Smarter Markets Programme aims to proactively identify, and see implemented, changes to these arrangements to enable the development of smarter markets. By “smarter markets”, we mean those which are more efficient, dynamic and competitive, delivering better outcomes for all consumers.

4.16 Following consultation with stakeholders, we have prioritised four key projects: change of supplier processes, electricity settlement arrangements,27 the regulatory and commercial framework around demand-side response (DSR)28 and arrangements for consumer empowerment and protection. The consumer empowerment and protection project will look forward to identify both risks and opportunities for domestic and business consumers from the smart meter roll-out in the medium to long term. It will also look at whether new rules, or changes to existing rules, are needed to protect consumers or facilitate innovation in light of these risks and opportunities. We intend to consult on the workplan for this project later this year.

4.17 We will continue to take a proactive approach to addressing consumer protection issues in relation to smart metering. We will also be developing appropriate next steps to help ensure that the wider regulatory framework empowers and protects consumers to participate effectively in smarter retail energy markets.

February 2013