House of Commons - Update on preparations for smart metering

Update on preparations for smart metering - Public Accounts Committee Contents

1 Securing the benefits of the programme for consumers

1. Under the Smart Metering Implementation Programme (the Programme), which is being led by the Department of Energy and Climate Change (the Department), energy suppliers must replace 53 million meters in homes and small businesses across Great Britain with smart electricity and gas meters by 2020.[1] Smart meters are intended to give consumers near real-time energy consumption information and allow suppliers to collect meter readings remotely. The Department expects smart meters to help consumers reduce their energy consumption, shift demand away from peak times, facilitate switching between suppliers and encourage take-up of new tariffs to reduce bills and carbon emissions.[2] The Department estimates that the Programme will cost £10.9 billion and bring economic benefits of £17.1 billion by 2030, giving estimated net benefits of £6.2 billion.[3] It also expects smart meters to bring further, as yet unquantified, benefits from stronger competition between energy suppliers resulting from easier switching and enabling a smart electricity grid.[4]

2. On the basis of an update report from the Comptroller and Auditor General on preparations for smart metering[5] and a progress report from the Department[6], we took evidence from the Department and the Office of Gas and Electricity Markets (Ofgem) on the progress that has been made on smart metering since our previous report on preparations for the roll-out of smart meters published in January 2012.[7]

3. The Department's analysis of the impact of smart metering on energy bills assumes that the costs to energy suppliers of rolling out smart meters will be recovered through higher energy bills. Furthermore the Department assumed that the extra costs will be offset by consumers changing their behaviour and using less energy, and the expectation that competition will lead to energy suppliers passing cost savings to consumers.[8] The Department estimates that the impact of suppliers' net costs will peak at £11 a year in 2017, and, when expected consumer energy use reductions are taken into account, that smart meter roll-out will result in short-term transitional energy bill increase that is expected to peak in 2015 at around £6 a year for the average dual-fuel consumer. By 2020, once roll-out is complete, the Department predicts net savings on energy bills to average £26 a year, rising to £43 a year in 2030 based on changed consumer behaviour. The Department acknowledged that, against a background in which the average household energy bill is £1,328 a year, these are quite small savings.[9]

4. The Department's estimates of average energy bill impacts are net impacts and do not provide information about the extra costs of smart metering versus the savings over time. The Department told us that the capital cost of smart metering equipment and the installation process costs amounted to £214.80, but it has not provided separate figures on how the gross costs of smart metering would impact on bills and what savings consumers would expect to achieve.[10]

5. The Department has not put a cap on the costs consumers will bear. The Department stated that it was "reasonably confident" that suppliers' own commercial incentives and industry competition, in combination with regulation, would keep Programme implementation costs within the cost envelope it has set and deliver the expected benefits to consumers. But Ofgem confirmed that it had proposed referring the retail energy market to the Competition and Markets Authority in March 2014 for a market investigation reflecting its concerns about the effectiveness of competition in the industry. The Department also expressed the view that there were problems with competition in the industry.[11]Subsequently Ofgem announced that it was referring the energy market to the Competition and Market Authority for a full investigation. In doing so Ofgem noted that a recent assessment it had prepared with the Office of Fair Trading and the Competition and Market Authority had showed "increasing distrust of energy suppliers, uncertainty about the relationship between the supply businesses and the generation arms of the six largest suppliers, and rising profits with no clear evidence of suppliers reducing their own costs or becoming better at meeting customer expectations."[12]

6. Both the Department and Ofgem maintained that they have a wide range of powers to require energy companies to give them information and that they were using those powers to obtain data from suppliers to monitor Programme implementation; and to verify that the business case for smart metering was being delivered. The Department told us that, if they were not satisfied that plans were on track, they would consider the case for either tightening licence obligations or, in certain cases, fining the companies concerned.[13]

7. HM Treasury Green Book guidance recommends that departments should consider how policy interventions will affect different sectors of society, for example low income households. The Department admitted that it did not have enough robust evidence from international or national trials to undertake the necessary analysis and was therefore not in a position to quantify the potential distributional impacts of smart metering. The Department added that, based on the small amount of evidence it had, it was reasonably confident that smart meters would be welcomed by less wealthy consumers. The Department told us that it was doing research on consumer behaviour, to be published this summer that would help provide a better understanding of the impact of smart meters on different groups. The Department also stated that it would work closely with Ofgem to capture and analyse information on distributional impacts during mass roll-out and that it was developing its methodology so that it has the data it needs to monitor the Programme, and make sure that it is delivering the business case set out.[14]

8. The Department confirmed that all smart meters would be able to accommodate prepayment but not all energy suppliers have yet developed viable systems to allow them to offer prepayment services to customers.[15] The Department told us that it was very important that prepayment customers were capable of benefiting from smart meters and it was confident that, by the end of 2015, all major suppliers would be ready to offer a prepayment option.[16] However, while the Secretary of State for Energy and Climate Change has urged suppliers to provide smart meters to prepayment customers by the end of 2016, it is not a regulatory obligation for them to have prepayment options available.[17] The Department said that a regulatory requirement could be introduced if suppliers were not making sufficient progress, but believed there were strong commercial incentives for suppliers to provide smart meters to prepayment customers, because the cost of providing the service through traditional meters was much higher. [18]

9. The Department and Ofgem expect smart meters to facilitate switching between suppliers and encourage take-up of new tariffs.[19] The Department said that since 2010, 12 new energy suppliers had entered the market and there were now 19 independent suppliers in the domestic market.[20] The Department told us that smart metering technology provides for interoperability so that when consumers switch suppliers, the new supplier will be able to use the existing smart metering equipment and will not have to replace the equipment with its own. But this may be a particular issue in cases where the smart meters installed are rented rather than owned by the supplier. The Department considered that there were strong commercial incentives for suppliers to carry on using the existing equipment when consumers switched, rather than installing £200 worth of new equipment. However, neither the Department nor Ofgem could confirm that existing regulatory requirements would prevent suppliers replacing smart metering equipment when customers switched from one to another.[21]

1 C&AG's Report, para 1 Back

2 C&AG's Report, para 5 Back

3 C&AG's Report, paras 3 and 2.2 Back

4 C&AG's Report, paras 5 and 2.5 Back

5 Comptroller and Auditor General, Update on Preparations for the roll-out of smart meters, Session 2014-15, HC 167, 5 June 2014 Back

6 Department of Energy & Climate Change, Smart Metering Implementation Programme: Progress update report to the Public Accounts Committee, March 2014 Back

7 House of Commons Committee of Public Accounts, Preparations for the roll-out of smart meters, Sixty-third Report of Session 2010-12, HC 1617, January 2012 Back



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