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Technical issues in the energy sector are not new. Generally, it is the case that we do not put technical factors in the legislation. We recognise their complexity and it is the responsibility of Government to work their way through those issues. The advantage of not having it in primary legislation is that we have a degree of flexibility to decide the details of a rollout and implement the licensing and other arrangements in this regulatory area after we have taken final decisions and had an opportunity to identify the optimum, most cost-effective manner of rollout. Secondly, although we have completed a very considerable amount of work on domestic rollout, it has raised a number of very real issues which require detailed analysis. That is why I hope that the Committee will recognise that it would not be right to specify issues in the Bill.
We need to look comprehensively at the three key parameters of the project, which are meter functionality, the speed at which rollout occurs and the model of rollout. Each has very significant implications for the overall costs and benefits of any rollout. As I have indicated to the Committee, the sums involved are very substantial indeed. It would be highly damaging in the long term if a premature decision were taken now to set one of these parameters in primary legislation before we fully understand the subsequent implications that that may have on the other parameters concerned. For example, the implication on the overall cost of fixing the parameters, such as timeframe, now, could deliver benefits—I recognise the benefits from immediate action—but it is quite possible that those benefits will be far outweighed by the overall costs of the project.
The clauses in the Bill set out to indicate that we will be able to act as quickly as possible to roll out smart meters to the small business and domestic sector once and if our final analysis supports that. If we proceed with domestic rollout, the detail, such as timetable and meter function, will be set out in the draft licence conditions. The powers in the Bill will ensure that there is further parliamentary scrutiny of the draft licence conditions, so the Government will be answerable in that respect.
I want to put on the record the fact that the clauses enable the modification of licence conditions. Amendment No. 69 refers to regulations which, in its current form, neither the existing power nor that amendment would
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Noble Lords are anxious that the Government should be committed to a timeframe. That is what we are doing. There will be a decision with regard to medium-sized businesses. We are looking at the issue of small businesses. The domestic position requires further work, and the Committee will recognise what an immense task that is and why the Government have to get it right.
Lord Redesdale: The Minister said “later this year”. Does he have a timeframe for that? We will be in the autumn before we come back to some of the issues, and it may be that these decisions will have been taken by that time.
Lord Davies of Oldham: From all the discussions I have had with officials, I think that that is somewhat unlikely. Some of the studies will not be completed until the autumn, so when I say the end of this year, the noble Lord had better think a little bit beyond the end of the passage of the Bill.
Lord Redesdale: I thank the Minister for his response—but maybe I should qualify that, because I thought that smart metering was a foregone conclusion and we were moving forward. I believe that it will be, because the opposition parties have signed up to it and it will be in the manifestos for the next election—although it would take a crystal ball to see the result of that.
The Minister pointed out the difficulties associated with the consultation process, which we do not underestimate. The noble Lord, Lord O’Neill, gave the impression that we somehow thought that this is a very easy matter of just taking the meter out of the box and installing it. I have been to a vast number of meetings, as the noble Lord probably has, looking at all the different options for what might be available within the cost ratio being looked at for smart meters. We believe that a timescale is important because it will have a massive effect on the cost implications and the cost benefits, which should not be underestimated, not just in cost to the consumer but in carbon saving, which was a major part of the Climate Change Bill and is another strand of government policy. I plan to come back to this issue at a later stage of the Bill. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Redesdale moved Amendment No. 68A:
“( ) provision requiring a levy to be raised on gas transportation or electricity distribution charges and paid out to licensees in order to cover, in whole or in part, the cost of stranded meter assets;( ) provision requiring the holder of a licence, solely or jointly with other licence holders, to tender for the purchase of services related to meters on an exclusive basis in relation to a specified area”1 July 2008 : Column GC24
The noble Lord said: This amendment deals with two important areas in establishing the terms of a future smart meter rollout: stranding and the delivery model. Neither can be established until the impact assessment work, which the Minister discussed, has been completed by DBERR towards the end of the year; in an earlier question, we established that that is an elastic period. It is important that the Bill is amended in this way to ensure that no options are precluded before the decision-making process is completed.
The first subsection deals with stranding and the need to be able to compensate for the potential stranding costs that the industry—in particular, network operators—would face if the decision is taken to mandate an accelerated rollout of domestic smart meters. Although it was originally thought that existing provisions of gas and electricity legislation would deal adequately with this, a project of this scale is unprecedented. Closer examination has revealed an anomaly in Section 7B(5)(a)(iii) of the gas legislation, meaning that only gas suppliers or shippers, rather than transporters who are most likely to be affected, can be compensated.
The second subsection is designed to strengthen the clauses to ensure that no delivery options are ruled out by the terms of the Bill before the completion of the impact assessment. Clause 81 is probably not legally good enough to support the regional franchise model—at least, not without exposing the industry to a significant risk of challenge for infringement of competition law principles. The industry feels that there is sufficient doubt to justify a positive clarifying amendment to ensure that no rollout option should be precluded by the legal drafting. The industry is aware that more work must be done to complete the case for regional franchise model, but competition law precludes continuing this work.
If Clause 81 is not amended, the decision on the rollout suggests that there is a real possibility that the regional franchise model will be ruled out before proper consideration can be given to whether it is the right model. The industry feels that it is vital that the enabling clause does not presuppose the outcomes or restrict the scope of delivery of the smart meter rollout. I hope that the Minister sees the amendment as a clarifying one, so that the consultation can be undertaken without any one issue or other being ruled out. I beg to move.
Lord Jenkin of Roding: I certainly see the case for the first paragraph of the amendment. There is clearly an anomaly. As the noble Lord, Lord Redesdale, has said, if gas suppliers and shippers can be compensated for stranded assets—that is, those that must be replaced before their life has expired—that would be something. However, the people who will do this are described as the “transporters”: those who transport the gas from the suppliers to the consumers. If the clause is to have the effect that the Government intend, that is an important amendment.
While I understand the case made for the second paragraph, I have already indicated that I dislike the regional franchise model on the whole. There may be some initial cost savings, but anything that smacks of a regional monopoly—which it would—would be a recipe for increasing slackness and a lack of proper
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Lord Bach: I am grateful to the noble Lord for his amendment, which touches on what I agree are two important areas for any future rollout of smart meters: stranding and the choice of market model for a rollout. The first part of the amendment deals with stranding, which will occur in any smart meters rollout that is taken forward faster than on a new-and-replacement basis. As has been said, it would mean that existing meters would need to be removed before the end of their usual life cycle. There would be costs to both suppliers and meter providers.
The wording of the first part of the amendment makes explicit provision for the Secretary of State to amend licence conditions to raise a levy from gas transporters or electricity distributors which can then be paid to other licensees to compensate them for the cost of stranded assets in the event of an accelerated smart-meter rollout. It goes almost without saying that this is a complex issue, which we are closely examining with industry. As we discussed during the previous debate and as the Committee knows, we have not taken final decisions on whether to roll out smart meters to the domestic sector, and if so at what speed that rollout should happen. It is therefore not clear at this stage what the potential value of those stranded assets may be, as they will vary according to the specific details of any rollout and, in particular, the speed of the rollout.
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Different market actors will be affected differentially. The potential cost impact of stranding is not spread equally across the industry. We need to continue to consider how to address this problem. It is also important to note that how we deal with stranded assets will affect the costs of a smart-metering rollout and it is likely in all scenarios that these additional costs will eventually be borne by the consumer. Until we have decided our overall approach on stranding, it is too early to say whether such a mechanism as the one proposed in the amendment will be necessary or even appropriate.
Given the complexity of this issue we have asked Ofgem to conduct a detailed analysis of stranding, which obviously will feed into our broader analysis of a rollout of smart meters. We cannot take a detailed view on the most appropriate way forward until that assessment is complete—it is due in September 2008. We are also examining whether powers under existing legislation—for instance, there may be some overlap with existing powers available to Ofgem under the gas and electricity Acts to raise levies—could provide for the type of mechanism proposed in this amendment if we should decide such a mechanism is necessary.
I concede, of course, that the second part of the amendment touches on another key issue; that is, the market framework for any such rollout. We have already
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Proposals have been made by some stakeholders for changes to the existing competitive metering market, which also is an important element of our ongoing work to assess the costs and benefits of a rollout. This work involves looking at the most appropriate market structures and the required mechanisms to ensure that any rollout of smart meters is efficient and cost effective. Industry and the Government are in agreement that decisions on the most appropriate way forward in terms of market structure should not be taken until our analysis of all the issues related to a smart-meter rollout is complete.
It is for this reason that the smart metering clauses we have introduced enable us to pursue a range of possible market models. I draw the attention of the Committee to Clause 81(3)(k), which can be described as the modifications subsection. Under that provision, the Secretary of State can make licence modifications to suppliers’ licences requiring them to enter into agreements with meter companies and thereby, we argue, enabling certain kinds of centralised provision of smart meters and related services. Controls would be exerted over the meter companies via these modifications to suppliers’ licences.
The purpose behind the wording of the second part of this amendment is broadly similar to that already set out under paragraph (k). This amendment would enable suppliers to work together to purchase meter assets and services from a single source within a specified region. It is not immediately clear therefore that the amendment adds to the existing wording of Clause 81(3)(k).
Given the scale and complexity of such a rollout, we are considering and evaluating market options, ranging from competitive delivery by meter operators to options for a more centralised rollout, where the industry might jointly contract for certain services. While we are grateful to the noble Lord for raising two undoubtedly important issues, we must resist the amendment, but I assure noble Lords that work on both market model and stranding is central to our ongoing analysis and will play an important role in forming our future decisions on smart metering.
Lord O'Neill of Clackmannan: Perhaps not today, but before we return to the topic, will my noble friend try to find out what the European experience is with this? Northern Ireland has been mentioned, but I am not necessarily saying that that is the best area to choose, because it has historically had high domestic energy prices. My understanding is that the Italian electricity system has gone through this process comparatively recently. There seems to be a sense being conveyed that the UK is trying to start from first principles and go through this in a painfully slow fashion, whereas we may be able to stand on the shoulders of others, see what they have done and
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Lord Bach: I am grateful to my noble friend. As always, his suggestion is very helpful. I will write to him and to other Members of the Committee with some analysis of what has happened elsewhere in Europe, so that our opinions can be changed, if necessary, by what we read. I hope that might be ready by Report, let alone Third Reading.
Lord Jenkin of Roding: Before the noble Lord withdraws the amendment, I have a question for the Minister. The people I have spoken to about this seem fairly clear that there is a legal problem. The noble Lord said in his reply that the Government are satisfied that there is not a problem and that it is covered by Clause 81(3)(k). Will he give an undertaking that he and his officials will once again go over the ground and make sure that there is not a gap here? I am thinking particularly of stranding and of the question of gas transporters. People seem to think that there is a gap.
Lord Bach: I hope that my response did not indicate that we were absolutely satisfied about the legal position. We are still examining it, so the noble Lord need not fear. We are not there yet. We will share with the Committee and the House what conclusion we come to. There are still further examinations to be done across the whole field.
Lord Redesdale: The purpose of the amendment was to bring up the issues, and the Minister has said that he will look at them again. Due to the rather extended gap between Committee and Report, it might become clear at that point whether this is an issue. If it is, I might return to it. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Redesdale moved Amendment No. 70:
“( ) Where the Secretary of State makes modifications under this section, such modifications must require that such meters have the facility to provide data on gas or electricity consumption in such form that it may be used for the purpose of assisting the householder to select the gas or electricity tariff which is most to the householder’s advantage.”
The noble Lord said: This area has already been touched on in the rather full debate that we had on the first amendment on smart meters. The amendment is to facilitate information on gas or electricity consumption that would help householders. One of the problems that has been highlighted is a difference of opinion between those promoting smart meters for the benefits
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The amendment deals with one of the central problems with smart meters, which is also one of the central benefits to the consumer: that is, that you could use the information to switch quickly between suppliers to make the best use of better tariffs. If it is being done on the internet, you could do it on a daily basis or on a much more frequent basis. Depending on the model that is to be rolled out, that will leave the supplier of the gas meter with a problem. If the supplier is paying for the meter and, as soon as the meter is installed, the customer switches to another supplier, that might incur some difficulties with the business model.
However, we should not underestimate the value to the customer in financial terms of the ability to manage the smart meter. That is not an issue that should be taken lightly. Fuel poverty has been mentioned and there is greater mobility within the market for people to switch between different tariffs. One of the major benefits to the customer of using a smart meter is that the customer could use automatic systems to wash their clothes in the middle of the night or do anything that uses vast amounts of electricity on a much cheaper tariff. That could be done easily and cheaply by many householders, and it would have an interesting effect on levelling the grid if a greater proportion of those power-hungry activities, such as washing, were done at a time when more electricity is on the grid than is being used. It would have value in carbon-saving terms. The purpose of the amendment is to find out where the Government see the ultimate benefits of smart metering accruing. I beg to move.
Lord Jenkin of Roding: There is something to be said for the case made by the noble Lord, Lord Redesdale. Perhaps I can compare it with what happens now. I get electricity bills which cover a period in which there has been a change in the price of the electricity and I have yet to discover how on earth the company apportions my supply which covers a three-month period when there is a change of price half way. I have tried sitting down with a towel round my head to work it out. Not being a mathematician, I gave up. My wife positively refused to allow me to take it up with the company. I believe a smart meter would be able to answer that sort of thing at once. You would see exactly when the rate changed and what your reading was at that time.
I quiver at “must”. I find that slightly difficult. As the Minister said, there is still a great deal of work to be done to be able to have an effective rollout of smart meters. Although I understand the case made by the noble Lord, Lord Redesdale, “must” brings a slight doubt into my mind.
Lord O'Neill of Clackmannan: I almost have some sympathy with this amendment. We have to guard against overselling smart meters, particularly in relation to fuel poverty. Many people who find it hard to pay their bills find it hard to do many things, and putting them in charge of a mini-power station in their house might be a little more than some of them are capable of. The majority of people in fuel poverty are there
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Lord Jenkin of Roding: If the noble Lord acquires some grandchildren, he will find that they are the people who can really put him right on all this.
Lord Oxburgh: The relevance of smart meters to fuel poverty is the alerting of the supply company to the fact that there is something anomalous there. The supply company now has the responsibility to look after this problem. One of their main concerns—and this is something that the noble Lord, Lord Jenkin, has drawn attention to on a number of occasions—is with identifying those in difficulty. I do not think that there is significant intent that the fuel-poverty family themselves have to do anything.
Lord Davies of Oldham: I am grateful to noble Lords. I usually express gratitude at this point for the contribution of my noble friend Lord O’Neill, who is often extremely helpful. Let me just say that I was rather shocked by his suggestion that we would need our grandchildren to show us how to use our video recorders. I find that quite challenging; I am still teaching my grandchildren how to do it, so there is a reverse of that situation. But, as the noble Lord, Lord Jenkin, indicated, calculating the bills is a different matter altogether. We should address ourselves to that point. There is no question of the consumer’s rights being fulfilled if they cannot follow the position of caveat emptor because what is in front of them is incomprehensible.
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