Energy and Climate Change CommitteeWritten evidence submitted by SSE

1. About SSE

1.1 SSE (formerly Scottish and Southern Energy) is a UK owned and based energy company investing £4 million a day in the UK’s energy infrastructure. It is the UK’s second largest supplier of electricity and gas, serving over 9.5 million customers in the UK and Ireland. SSE is also the second largest generator of electricity and has interests in both electricity and gas networks in the north of Scotland and south central England.

1.2 As the second largest energy supplier, SSE is due to install around nine million of the 53 million smart meters being installed across Great Britain within the next seven years. As a generator, supplier and distributor of electricity and gas, SSE is aware of the benefits that smart meters can bring—but is also aware of the challenges that delivering the roll-out could have on existing infrastructure.

2. Summary

2.1 SSE fully supports the smart meter roll-out and is currently working with DECC and the industry through EnergyUK, to ensure the roll-out proves to be a smooth customer experience. SSE is keen to engage with third parties, including consumer groups, think-tanks and academia to incorporate any learnings in to our approach to delivering the roll-out whilst maximising efficiency and minimising disruption. SSE would make the following recommendations for consideration by the Committee and, in turn, Government:

Clarify deadline flexibility—Suppliers have had a delivery target introduced to their licence conditions, but this target has been put in place before all of the institutional frameworks and arrangements are in place. We would welcome clarification of the ambiguity about how “all reasonable steps” towards meeting targets is defined; otherwise there is a risk of cost escalations if there are delays outside of suppliers’ control.

Only SMETS2 compliant smart meters should be enduring—The full and final smart meter specification has yet to be completed (Smart Meter Equipment Technical Specifications version 2 or SMETS2). To ensure security, interoperability, minimise asset stranding and customer disruption and to realise the benefits in the impact assessment, the only enduring meters should be compliant with the final specification under SMETS2.

2.2 Other issues that SSE raise in this submission are:

Implications for networks need to be considered—Smart meters are crucial for development of a smart, efficient and flexible grid. To achieve this, the views of the network businesses need to be taken account of fully to ensure that the roll-out helps realise the smart grid benefits as set out in the Government’s impact assessment.

All suppliers must pay their share of costs—There has been a tendency for Government to exempt small suppliers from costs of Government schemes with the intention to remove a barrier to market entry. This may be well-intended, but these exemptions have a distortionary effect on competition in the retail market and are funded by the large majority of UK consumers.

Co-ordinate central communications—Given the plethora of Government policies that are being launched over the next few years, it would be an efficient use of limited resource for Government to work toward a co-ordinated communications strategy to efficiently inform consumers about smart meters, energy efficiency under Green Deal and ECO and available fuel poverty assistance.

3. SSE’s Strategy for the Smart Meter Roll-out

3.1 SSE has consistently had a strategy of developing scalable, strategic solutions for smart metering, avoiding interim solutions and asset stranding wherever possible. SSE is actively looking at developing partnerships to gain learnings and share knowledge and ultimately improve its approach to delivering the roll-out.

3.2 The Government’s original intention was that the smart meter roll-out would take place in two phases; the foundation stage and full mandated roll-out. The foundation stage would allow testing and trialling of metering systems whilst the delivery capacity of suppliers was ramped up.

3.3 The full mandated roll-out itself was anticipated to commence in 2014, once all of the institutional arrangements and frameworks were in place. There are a number of these arrangements and frameworks yet to be finalised, most notably a full and final smart meter specification and the establishment of the Data Communications Company (DCC), which will provide secure and interoperable communications between meters and suppliers and other relevant parties such as network operators. If suppliers install significant numbers of meters ahead of establishment of institutional frameworks and arrangements, it seriously risks damaging the reputation of the programme at an early stage, and its overall efficacy. This could have serious implications for suppliers’ ability to deliver the roll-out and delivery of other Government policies such as Green Deal and ECO.

3.4 As part of EnergyUK, SSE has been working to develop agreement by all suppliers, network operators and consumer groups to a set of high level principles to be adopted by the programme. This agreement sets out the required institutional frameworks and arrangements or key enablers that need to be in place before the full roll-out can begin in earnest. SSE has always maintained confidence that it can complete its proportion of the roll-out within five years of these key enablers being in place.

4. Potential Cost Escalations

4.1 Under the EU Third Package Member States are obliged to ensure that at least 80% of consumers should be equipped with intelligent electricity metering systems by the end of 2020. For gas, Member States are required to prepare a timetable for the implementation of intelligent metering systems within a reasonable period of time. The Government has set ambitious targets to deliver 53 million smart meters to over 30 million premises by the end of 2019, this represents an additional six million electricity smart meters a full year ahead of the national target set by the EU. SSE would also have completed the gas smart meter roll out several years ahead of any requirement.

4.2 SSE welcomes the ambition that the UK Government has shown to ensure that the benefits of smart metering will be realised as early as possible, and on balance, supports including gas smart meters in the roll-out to minimise potential further visits to homes and ensuing consumer disruption. SSE and the industry are concerned that Government have imposed a target in suppliers’ licence conditions before all of the institutional frameworks and arrangements are in place. This risks creating a delivery bubble towards the end of the decade, causing unnecessary cost escalations which will ultimately be borne by consumers.

4.3 Whilst SSE welcomes the clarity over the timescales for programme delivery, it is damaging to new entry in the retail market to impose a target with significant financial implications in supply licence conditions, ahead of development of the required institutional frameworks and arrangements.

Supply Licence Condition 39

“The licensee must take all reasonable steps to ensure that a Smart Metering System is installed on or before 31 December 2019 at each Domestic Premises or Designated Premises in respect of which it is the Relevant Electricity Supplier.”

4.4 SSE and industry’s concerns over the target principally refers to the wording of the draft licence condition whereby suppliers “take all reasonable steps” to deliver their proportion the roll-out. Any clarity from Government on how “reasonable steps” are defined will alleviate concerns, and prevent the risk of cost escalations on the back of a delivery bubble in 2019, if there are unavoidable delays to key roll-out enablers. This clarification is needed as early as possible, as suppliers’ are currently building up supply chains, which will see SSE alone deliver some 9,000 meters a day at the height of the roll-out.

4.5 There are a number of risks outside of suppliers’ control that could impact upon on the industry’s delivery of the smart meter programme, with cost and reputational implications for SSE, the wider industry and—ultimately—Government. These issues, if unmanaged, could have adverse impacts on the operating environment for the supply businesses and our abilities to deliver on the Government policies, particularly the Green Deal and ECO.

5. Smart Meter Benefits

5.1 SSE views that a well considered rollout with a robust end-to-end design is more likely to secure the noted consumer benefits, than attempting to roll out smart meters ahead of the key enablers required for programme delivery.

5.2 The impact assessment for the roll-out has received criticism for being heavily weighed on energy savings. This is coupled of a number of early difficulties that have not considered a number of the realities of delivering an infrastructure project on this scale and have created a number of programme cost escalations not accounted for in the impact assessment. Although the criticisms have caused an erosion of the net benefits contained within the impact assessment. SSE still views that there is a net benefit from the smart meter roll-out for GB, although its extent should not be exaggerated.

6. Smart Meter Savings Fed through to Consumer Bills

6.1 There is an understandable concern from consumer representatives that the costs of the roll-out will be fed through to consumers, but not the cost savings that suppliers may be expected to achieve. Ensuring that costs are kept to a minimum for all consumers is important to ensure there is a competitive retail market. To achieve this, the Government needs to avoid the temptation of exemptions of additional costs faced by some suppliers. If there are exemption for some suppliers and not others, then additional savings will not be easily visible to consumers in the market, as a lower tariff will be driven by a supplier being exempt from costs, not savings from smart meters.

6.2 As a wider point, all suppliers in the energy retail market should pay their share of mandated Government programmes. There has been a tendency for Government to exempt small suppliers from costs.1 Whilst these interventions are obviously well intended, this has a distortionary effect on competition in the retail market (with small suppliers approaching having over £100 in avoided costs), and actually impacts potential entry from larger new entrants. If the Government is looking to encourage new entrants in the retail market, it needs to address the barriers themselves, not look to introduce and prolong ad hoc exemptions to a section of the retail market.

6.3 The reality is this approach creates a situation where some consumers in the market will benefit from not paying costs that are being paid for by the majority of consumers. SSE believes that to ensure fairness for all of its customers, the costs that customers pay for their energy must be cost-reflective, not cross-subsidised.

7. Central Co-ordinated Communications

7.1 Suppliers are establishing a Central Delivery Body (CDB), which will look to ensure that consumers are given an independent source of information about what they can expect and the benefits they can receive from the roll-out. Ensuring the CDB is in place ahead of the full roll-out will prevent a communication gap where mis-information could appear perpetuated in the media, causing public distrust in the programme, damaging suppliers’ ability to undertake the roll-out.

7.2 Given the plethora of Government policies intended to engage consumers with their energy use that are being launched over the next few years, it would be useful for Government to have a co-ordinated communications strategy to efficiently inform consumers about smart meters, energy efficiency and fuel poverty assistance available. Using the smart meter roll-out as a tool for customer engagement could have positive impacts on take-up of energy efficiency measures and installations of microgeneration.

7.3 Any central co-ordinated communications for wider policy awareness should be operated by the Government, to provide an impartial source of information that consumers can trust. If the Government choose to develop this proposal they should fund it, as it must be remembered that any costs incurred by suppliers will ultimately be paid for by consumers, who are already being asked to pay for number of Government policies through their bills.

8. Networks Perspective

8.1 To ensure the overall benefits identified in the impact assessment are realised, we have maintained that the impact on networks must be fully taken into account. Appropriate arrangements must be implemented to ensure network requirements are accommodated, and that proportionate and timely funding is made available under Ofgem’s price control reviews. In this regard, network operators must be able to plan and manage their workload effectively, which will require industry co-ordination as some elements are currently beyond the networks’ control.

February 2013