Energy and Climate Change CommitteeWritten evidence submitted by Department of Energy and Climate Change (DECC)

Executive Summary

1. The Government welcomes the opportunity to contribute to the Energy and Climate Change’s Committee’s inquiry into the smart meter roll-out.

2. The Government’s vision is for every home in Great Britain to have smart electricity and gas meters and for smaller business and public sector premises to have smart or advanced metering suited to their needs. The roll-out of smart meters will play an important role in Britain’s transition to a low-carbon economy and help us deliver an affordable, secure and sustainable energy supply. The Government’s Energy Efficiency Strategy1 identifies smart metering as one of the most cost-effective measures available to reduce energy consumption.

3. Smart metering is a major programme. It aims to replace 53 million meters with smart electricity and gas meters in all domestic properties, and smart or advanced meters in smaller non-domestic sites in Great Britain, by the end of 2019, impacting approximately 30 million premises. Consumers are at the heart of the programme.

4. The Government is working collaboratively with a wide range of stakeholders to take forward the programme. Good progress is being made against the programme plan, which is published on the DECC website.2 Mass roll-out is expected to begin in late 2014, and the Government has placed obligations on suppliers to complete roll-out by the end of 2019. Significant progress has recently been made against Programme milestones:

Regulations setting the overall requirement to roll out smart meters, and to operate in line with a Code of Practice when installing smart meters, took effect in November;

Regulations on monitoring and evaluation, data access and privacy, and consumer engagement were laid in Parliament in December;

A second version of the Smart Metering Equipment Technical Specifications (SMETS) was notified to the European Commission in January; and

Competitions for procurement of the Data Communications Company, Data Service Provider and Communication Service Providers are approaching their final stages.

5. The Government will continue to work closely with stakeholders to ensure that this momentum is maintained and that we deliver against our ambitious timetable.

6. This Memorandum is organised into the following key themes, which together address the questions in the Committee’s terms of reference:

A robust business case.

Learning lessons from other roll-outs—putting consumers at the heart of the programme.

Consumer engagement.

Commercial model—the Data and Communications Company.

Monitoring progress to ensure success.

A Robust Business Case

7. DECC’s Impact Assessments have been developed and updated over the last four years, supported by extensive analysis, consultation and detailed discussion with stakeholders. They are a robust assessment of the costs and benefits of the roll-out of smart meters and demonstrate a strong, positive business case. The latest updated Impact Assessment,3 published in January 2013, estimates a positive net present benefit of £6.7 billion over the period to 2030, by delivering total benefits of around £18.8 billion and costs of around £12.1 billion.

8. The consumer energy savings assumed in the Impact Assessment are conservative, falling at the lower end of the range of findings from pilots and large-scale trials observed internationally and in Great Britain. In addition to the direct consumer benefits, energy suppliers, generators, and network operators will realise efficiency savings of around £11 billion.4 We expect suppliers to minimise the costs and maximise the efficiency savings from the roll-out. Given the competitive pressures in the retail market and the action the Government and Ofgem are taking to promote competition, we expect both costs and efficiency savings to be passed through to customers. Overall, and taking into account all costs and benefits, we expect the average dual fuel household to realise an annual bill saving of around £24 by 2020, in comparison to a situation without a smart meter roll-out. For non-domestic dual fuel customers, we expect annual bill savings of £164 by 2020.

Ensuring that all consumers will benefit

9. To help consumers realise benefits, the Government is requiring energy suppliers to offer in-home displays (IHD). IHDs will give consumers easy access to information on their energy consumption in pounds and pence that will help them manage and control their energy use. This requirement was informed by evidence that provision of real-time information is important in delivering energy savings.5

10. Consumers will also be able to see the impact of energy saving measures, such as those introduced under the Green Deal. Smart meters will bring an end to estimated billing, helping consumers to budget better, and will make switching between suppliers smoother and faster.

11. The Government will monitor the smart meter roll-out to ensure that all consumers benefit and that no one group is left behind. In the results from the Energy Demand Research Project (EDRP), all types of consumers were shown to benefit, including groups in areas of fuel poverty and consumers with prepayment meters.6 A separate in-depth qualitative study shows a broadly positive picture of vulnerable and low income consumers’ experience of the installation of smart meters and their subsequent use of the IHD to control their energy use.7 However, some vulnerable consumers potentially face additional barriers in accessing the benefits from smart meters and IHDs, such as those with visual or other impairments that make it difficult for them to understand the IHD or communications from suppliers about the installation process. The Installation Code of Practice and the Consumer Engagement Strategy therefore include requirements to ensure that the needs of vulnerable consumers are recognised and met throughout installation and in wider communications. The Smart Metering Equipment Technical Specifications (SMETS) include a requirement to ensure that the design of the IHD is easily accessible to as many consumers as possible.

12. Smart metering has the potential to bring significant benefits to pre-payment customers, including improvements to the service that pre-payment customers receive. Every smart meter will enable quick and easy switching between credit and pre-payment modes. There will be a range of more convenient ways for pre-payment customers to top up, such as through mobile phones, cash points and the internet. The IHD will be capable of displaying information about outstanding debt to help consumers manage repayment. All pre-payment meters will have capacity for emergency credit and will support the configuration of non-disconnection periods to prevent customers losing supply when sales outlets are closed.

13. The question of whether certain groups of consumers should be prioritised was considered in the consultation on the Smart Metering Implementation Programme Prospectus in 2010.8 Consumer groups pointed out that prioritising fuel poor and vulnerable consumers would potentially expose them to a disproportionate extent to teething problems that might be associated with the early stages of the roll-out. Early targeting of such consumers would also make it less likely that they could benefit from support of neighbours and relatives who have experience of smart meters.

Wider benefits

14. Smart metering is expected to create new, UK-based employment opportunities. The National Skills Academy for Power (NSAP) has estimated that by 2017 at least 6,000 meter installers will be required. However, the final peak requirement for the roll-out may reach 10,000 people (three times existing levels), including extra support staff (for example on distribution networks).

15. The roll-out of smart meters is also expected to provide a platform for the development of smart grids and the wider energy services market. For example, smart meters may enable the growth of the high-value energy services market, whereby companies provide energy-monitoring equipment and/or services to households and businesses which help them to improve their energy efficiency. In support of a smarter grid, the smart metering system will be able transmit voltage and power data at premises level to network operators—on a programmed or on-demand basis—which will give much greater visibility of network conditions. The full benefits of these types of development are yet to be quantified.

Learning Lessons from other Roll-outs—Putting Consumers at the Heart of the Programme

16. Many countries are installing, or planning to install, smart metering equipment, and individual states in the US, Canada and Australia have their own roll-out programmes. Lessons from international experience point in particular towards the importance of putting consumers at the heart of the roll-out from the outset. Ahead of mass roll-out in Great Britain, the Government is establishing policy and regulatory frameworks to address potential barriers to consumer acceptance, protect consumers, and ensure that consumers are able to realise the benefits of smart metering.

17. Concerns about privacy and data access played a key part in the consumer backlash against smart metering in the Netherlands, and an expectation has been set at EU level that all countries should seek to address these issues before implementation. The Government is undertaking “privacy by design”, meaning that privacy issues are considered and embedded into the programme from an early stage. Building on international experience, evidence provided through a Call for Evidence and public consultation, a set of regulations has been put in place to govern smart metering data access and privacy.9 The core principle is that consumers will have control over their energy consumption data, apart from where this is required for billing or other regulated duties. Energy suppliers are working with consumer groups to develop a Privacy Charter to explain in clear, simple, standard terms what consumers’ rights and choices are.

18. Some groups and individuals have raised concerns that the radio waves from smart meters may affect their health. The Health Protection Agency (HPA) has advised that the evidence to date suggests that exposures to the radio waves produced by smart meters do not pose a risk to health. Smart meters are covered by UK and EU product safety legislation. Equipment is assessed and, if necessary, tested against agreed EU standards. DECC is working with consumer groups, suppliers, the HPA and Department of Health to ensure that clear and easily understood information on the evidence relating to smart meters and health is available to all consumers. However, we recognise that there will be a small number of consumers who will continue to have concerns about receiving a smart meter, including people with concerns about electro-sensitivity. As the programme develops, we will be considering further, together with the energy companies who will be responsible for the roll-out, how best to respond to individual consumer concerns. We will continue to monitor progress in addressing this issue in other countries, which could provide lessons that are transferable to Great Britain.

19. The installation visit offers an important opportunity to provide consumers with advice on how to use their smart meter and IHD to improve their energy efficiency. At the same time, it is essential that inconvenience to consumers is minimised. The Government is therefore requiring suppliers to develop and comply with an Installation Code of Practice.10 Amongst other things, the Code requires suppliers to demonstrate the smart metering system and offer energy efficiency advice, but, in order to protect consumers from being hassled and from mis-selling of goods and services, suppliers must obtain prior consumer consent to carry out face-to-face marketing at domestic installation visits, and suppliers will not be allowed to conclude sales at the visit itself. In addition, suppliers must not charge their domestic customers any upfront or separate costs for standard smart metering equipment, including the in-home display.

20. Meter installations need to be undertaken with due regard to safety. Although the types of safety risk associated with smart meter installation are essentially the same as those for any other meter installation, the scale of activity during the smart meter roll-out warrants some additional actions. Energy suppliers are embedding new practices ahead of mass roll-out and are exploring opportunities for meter installers to raise consumer awareness of more general safety issues, such as by completing a visual inspection of electrical equipment and fixing warning labels about fire risks, where appropriate.

Consumer engagement

21. A key lesson from international (especially North American) experience is the importance of consumer engagement in overcoming potential barriers to delivering benefits of smart metering, by building consumer acceptance. Consumer engagement is particularly important in Great Britain because we are aiming to deliver significant benefits direct to consumers by enabling behaviour change.11

22. Levels of awareness about smart metering in Great Britain have remained static since April 2012, with around half of energy bill-payers having heard of smart meters.12 This is about the level of awareness that we would expect at this stage of the programme, given that mass roll-out does not start until 2014. Indeed, in undertaking engagement activities prior to mass roll-out, the Government has been mindful of the need to strike the right balance between increasing awareness and controlling demand ahead of all suppliers being ready to deploy smart meters.

23. Encouragingly, evidence gathered to date also shows that the more respondents felt they knew about smart meters, the more likely they were to support the roll-out. The perceived benefits of having a smart meter installed include: being able to budget better; help avoiding waste; and a greater accuracy of billing. The evidence also reveals low levels of consumer concern about issues such as privacy.

Consumer Engagement Strategy

24. The Government has produced a Consumer Engagement Strategy13 to direct work to raise levels of consumer awareness and support for smart metering as well as to enable energy saving-behaviour change. The Strategy was developed in close consultation with stakeholders and has been informed by a range of UK and international evidence.14 Its strategic aims are:

Building consumer support for the roll-out by building confidence in benefits and by providing reassurance on areas of consumer concern;

Delivering cost-effective energy savings by helping all consumers to use smart metering to better manage their energy consumption and expenditure; and

Ensuring that vulnerable and low-income consumers can benefit from the roll-out.

25. The first part of the Strategy is dedicated to explaining current understanding of what constitutes effective engagement in the context of smart metering and what further learning the Programme intends to undertake in this area. For example, it identifies four main engagement levers to deliver energy-saving behaviour change:

Direct feedback in near real time (through an In-Home Display);

Indirect feedback (aggregated or non-real time data, eg comparative information on bills);

Advice and guidance on energy and energy reduction; and

Motivational campaigns designed to raise energy literacy and motivation to reduce consumption.

26. Suppliers will have the primary consumer engagement role as the main interface with their customers before, during and after installation. Supplier engagement will be supported by a programme of centralised engagement undertaken by a Central Delivery Body (CDB). The CDB will be funded by larger energy suppliers, with smaller suppliers contributing to fixed operating costs. Larger suppliers will be required to set up the CDB by June 2013 and will be accountable for ensuring that it delivers its objectives (which broadly align with the aims of the Consumer Engagement Strategy). The body will have an independent Chair and consumer groups will be represented on the board of directors.

27. Trusted third parties, such as charities, consumer groups, community organisations, local authorities and housing associations will also have an important role to play in delivering effective consumer engagement. Many of these groups will not have the resources to work with each individual supplier. It is therefore expected that the CDB will facilitate and coordinate their involvement by producing materials for them to use when engaging consumers or potentially by working with them to undertake localised engagement campaigns. The Government will help prepare third party organisations to work with the CDB. This support could take the form of training, advice, the provision of physical materials or brokering of relationships.

28. The Government will have an ongoing role in engaging consumers and is currently working with key stakeholders to raise levels of consumer awareness and support in the run up to mass roll-out. A key element of this work is ensuring that accurate information on smart meters is easily accessible for consumers on the Government website. The Government also welcomes Energy UK’s efforts in advance of the CDB being operational to seek wider media engagement and monitor and respond to social network activity on smart metering. It is anticipated that this work will continue until such time as the CDB is able actively to engage consumers.

Commercial Model—The Data and Communications Company

The Programme’s commercial model will put in place the necessary shared infrastructure to deliver the Programme’s benefits in a way that allows consumers to switch energy supplier without changing meters or communications equipment.

29. This infrastructure will provide a wide area communications network connecting the business systems of users of the DCC to smart meters via a common data handling system. DECC is conducting a competition to put in place a licensed Data and Communications Company (DCC) which will be responsible for managing this service. DECC is also undertaking the procurement of a Data Services Provider and up to three regional Communications Service Providers on behalf of the DCC that will deliver the data handling system and wide area communications network.

30. All three of these competitions are well advanced. The procurements of both the Data Service Provider and Communication Service Providers are approaching the final tender stage and will conclude this June. DECC has received initial proposals from applicants for the DCC Licence and will evaluate these before negotiating improvements and inviting final proposals with a view to awarding the licence in July. The Department has worked with future service users to develop service and technical requirements and to establish evaluation criteria designed to select reliable, secure and flexible solutions which provide good value for money.

31. A range of communications technologies has been proposed for the wide area network including cellular, mesh radio and long range radio. Regardless of the technology we will be requiring CSPs to commit to eventual coverage levels of at least 97.5% of properties across Great Britain in line with our aim of maximising benefits.

32. The selected Communication Service Provider or Providers (CSPs) will also provide a communications hub for each premise which will establish a home area network connecting the electricity and gas meter to the wide area network and enabling an in-home display of energy consumption. In due course this will permit consumers to connect smart appliances and electric vehicles to their electricity meter to respond automatically to time of use tariffs and to benefit from other in-home innovations led by the market.

33. Bids for the data application state that the solutions proposed will also achieve the security, reliability and scalability that we seek. The single Data Service Provider (DSP) will not store smart metering data but will have the central role in integrating the flows of data between smart meters and the business systems of service users as well as linking to the wider industry systems necessary to permit effective switching. We have worked with government security advisers and energy industry counterparties to put in place a robust security and privacy model to protect consumers’ data.

34. The Data and Communications Company will sit above the CSP(s) and DSP and will ensure that collectively they provide an effective service. We recognise that consumers, energy suppliers and energy service companies will find new ways to use smart metering data and the DCC will be responsible for meeting these needs. The DCC will be regulated by Ofgem to ensure that it meets its licence obligations and provides an economic and efficient service.

Monitoring Progress to Ensure Success

35. The Government holds overall accountability for delivery of the Smart Metering Programme business case. Monitoring and evaluation of the roll-out will provide an essential feedback loop to inform decisions by the Government and other parties on smart metering implementation and benefits realisation. The Programme’s Monitoring and Evaluation Strategy, published in May 2012, set out four core objectives:15

To ensure that sufficient evidence about consumer impacts and the effectiveness of different approaches to consumer engagement is available, to inform the ongoing development of the approach to consumer engagement including an early review before the end of the Foundation Stage;16

To report on the full range of costs and benefits attributable to the Programme and inform actions to optimise benefits realisation;

To monitor the capability and readiness of industry participants to meet their roll-out obligations; and

To track progress towards completion.

36. In addition, two broader objectives were set out:

To publish sufficient information on the Programme’s progress and benefits, to enable Parliament and other stakeholders to scrutinise and engage with the Programme; and

To carry out a comprehensive evaluation of the overall success of the Programme in delivering its objectives, to inform future policy development.

37. The Government will be monitoring progress in delivering the roll-out and in each of the key areas of benefits identified in the Programme’s Impact Assessment. The key delivery indicator for domestic premises is the number of smart meters installed, and for non-domestic premises the number of smart and advanced meters installed. The broader indicators for the overall success of the Programme will look at the extent to which it has enabled benefits to be realised. For example, we are establishing evaluation processes that will allow us to monitor the direct consumer benefits arising from reductions in energy use and improved customer experience. We will also be collecting information directly from energy suppliers throughout roll-out to allow us to monitor expected efficiency savings in back office support functions and meter management, and the costs of delivery.

38. Where the monitoring and evaluation activity identifies risks to benefits realisation, or opportunities to enhance benefits, the Government could pursue a range of actions. These may include: encouraging stakeholders to take certain actions; amending the regulatory framework that governs the smart meter roll-out, where the Government retains powers until the end of 2018; or adjusting wider DECC policies, such as on energy efficiency obligations.

39. To enable stakeholders to scrutinise and engage with the roll-out of smart metering, the Government will regularly publish information on progress. A first annual report was published in December 201217 and we plan to publish quarterly statistical updates in 2013 as well as research and other evaluation outputs.

February 2013