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Amendment, by leave, withdrawn.

Lord Whitty had given notice of his intention to move Amendment No. 22:

22: After Clause 80, insert the following new Clause—

“Energy Assistance Packages

(1) The Secretary of State may make regulation prescribing that domestic gas or electricity suppliers (“the suppliers”) or both or each gas and electricity supplier of a specified description, shall make available energy assistance packages to such gas and electricity customers as are prescribed by the Secretary of State.

(2) The regulations shall—

(a) set out group or groups of gas and electricity customers who are eligible for energy assistance packages; and

(b) Supply gas or electricity or both at a reduced rate lower than any other rate available to other customers of that supplier until such time as their home has been brought up to the energy efficiency standard of Sap 81 or such other standard that the Secretary of State may reasonably consider will significantly protect vulnerable consumers from fuel poverty.”

The noble Lord said: My Lords, I have been informed by the House authorities that this amendment may well not be in order in terms of the Long Title of the Bill. I shall therefore not move it, and I will make my remarks very short.

I accept that ruling, but I do not understand it. Furthermore, I do not think that the outside world will understand why, with energy prices and fuel poverty being what they are, an amendment which attempts to combine the improvement of energy efficiency in our housing stock with the rate at which the fuel poor are charged for that energy is not included in an energy Bill. I give notice that if the Government themselves

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do not find a way of squeezing this kind of amendment into the Bill in time for Third Reading, I will propose a Private Member’s Bill in the next Session of Parliament and seek support for it in another place, something that I suspect will have widespread support from all parties in this House. I regret that we cannot debate this today, but I accept the ruling.

[Amendment No. 22 not moved.]

Clause 81 [Power to amend licence conditions etc: smart meters]:

Lord Dubs moved Amendment No. 23:

23: Clause 81, page 74, line 26, after “including” insert “financial and other”

The noble Lord said: My Lords, in speaking to this amendment, I shall speak also to Amendments Nos. 24 and 28. I declare an interest: I am chair of the appeal panel of the Association of Energy Suppliers, although that has no direct bearing on my amendments here.

I am an enthusiast for smart meters. I learnt about them some time ago. They would make a significant difference to the consumption and cost of energy for ordinary domestic consumers. They would enable people to use their own energy more efficiently, both gas and electricity, and to use it at the time of day when it was less costly. It is believed that there would therefore be a significant saving to domestic consumers if smart meters were installed.

The Government accept that proposition and are keen for smart meters to be proceeded with. There are one or two difficulties, though, and I want to indicate why my amendment will make the transition to smart metering somewhat easier. I have had to learn some technical terms here. In the world of energy metering, the word “stranding” is the term given to the cost of replacing a meter before the end of its useful economic life. That is to say, if a meter is taken out and replaced by another meter, that meter will have a value unless it is totally used up, which would not be the case in a transition to smart meters.

Currently, when a meter is removed prematurely, it will be returned to its owner, whichever company owns it, and is likely to be reinstalled elsewhere. But if we are moving towards smart meters, these old meters will no longer have a use, which would result in a significant cost in terms of disposing of an asset that would no longer have a value. If we are moving towards smart metering, the timescale would be liable to require an early replacement of a large number of the meters that we now have in our homes, and those meters would have no further value and no further use.

There is likely to be a need within the industry to compensate participants for the potential stranding costs that they will face if there is a decision to implement an accelerated rollout of smart metering to domestic premises on a national basis. I hope that such a decision will be made soon; therefore, my amendments are relevant.

The understanding is that the existing provisions of the legislation covering electricity are adequate, but there are doubts whether those covering gas are sufficient, and one of the amendments deals with that point.

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Amendment No. 23 clarifies that the Secretary of State’s powers to modify licences include the power to make provision for appropriate financial arrangements in relation to the problem of the stranded meters to which I have referred.

Amendment No. 28 corrects an anomaly in the gas legislation regarding the power of gas transporters to raise a levy through their network user charges. Most of the issues are concerned with transporters which provide the gas straight to our homes. As drafted, Section 7B(5)(b)(ii) of the Gas Act 1986 would provide for compensation for stranding via any such levy to be payable only to gas suppliers or shippers and not to gas transporters, which are the industry parties most likely to be affected by stranding. Accordingly, Amendment No. 28 would remove the relevant restriction from the paragraph in question and put this gas provision on all fours with its counterpart in electricity legislation. It is an anomaly that gas and electricity have not been dealt with equally up to now, and this amendment seeks to deal with that anomaly.

Finally, it is unclear whether the Bill as drafted is strong enough to support a rollout of domestic smart metering on a regional franchise basis, should that be the delivery option finally chosen by the Government following assessment and consultations. I appreciate that these decisions have not yet been made and consultations are taking place, but it is a fair bet that one serious option is that domestic smart metering would be rolled out on a regional franchise basis. There is, then, the difficulty of competition law. Amendment No. 24 is intended to ensure that if it were decided to use a regional franchise model, there would be no risk of a challenge for infringement of competition law.

The three amendments make the position somewhat clearer and would facilitate the transition to smart meters. I hope that the Government will find them helpful regarding the aim that we all share in moving clearly, and not too slowly, towards installing smart meters in our domestic households. I beg to move.

Lord Teverson: My Lords, I suspect that we will be talking a little more about smart metering as the afternoon progresses. Stranding is a very important issue that needs to be resolved in moving the smart meter agenda forward. Therefore, I welcome the amendments.

If we look at this from a business point of view, the problem of the stranding of assets is one of the balance sheet, and having to take a book loss, rather than of cash, as the cash has already been expended. The book loss on the company is real in terms of its accounting, but might not be such a problem if there were a real cash movement at the time. However, the cash investment has to be made for the smart meters.

4.30 pm

I shall be interested in the Minister’s reply, because that factor needs to be borne in mind. Another factor is that smart meters, once installed, should reduce the running costs of power companies through much easier billing and automatic feedback of readings, avoiding

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inspection costs. All companies have to deal with the problem of technical obsolescence before the end of the book life of an asset. One could say that that is their problem for having depreciated these assets over 20 years. Where else in the world does one do that these days outside buildings? I will be interested to hear the Minister’s view on the responsibility that the various organisations concerned should take for past decisions.

Lord De Mauley: My Lords, Amendment No. 24 is entirely permissive, allowing the Government to consider the use of regional franchises when rolling out smart meters. It seems to have merit. It would be interesting to hear the Minister’s views on the likelihood of this method being used to roll them out. I assume that they are considering them as part of their cost-benefit analysis.

Lord Davies of Oldham: My Lords, I am grateful to my noble friend Lord Dubs for these amendments and for the way in which he has deployed his case. As we discussed in Committee, a rollout of smart meters to domestic customers would be a major technical and logistical challenge. It would require a visit to every house in Great Britain and the replacement of some 47 million electricity and gas meters. We are therefore talking about a major and inevitably costly undertaking, and someone has to bear the costs.

Various proposals have been put forward for the practical delivery of a project of this scale so that any rollout of smart meters is both efficient and cost effective. Uniquely, Britain has a competitive market for metering. When one considers a large-scale rollout of smart meters, one sees that this presents some advantages but, as my noble friend recognised, some challenges, too. For example, unlike some countries where the metering operator has a monopoly, we have a wide range of players in our metering market. This poses challenges to delivering a well organised and managed rollout. Competition can deliver greater innovation and help minimise costs to the consumer, from which we reap the benefits.

The context, which my noble friend established and which I have sought to reinforce, is therefore one of a major undertaking. I turn first to Amendments Nos. 23 and 28, which I shall ask him not to press, while being grateful to him for raising such important and complex matters. The stranding of existing meter assets will occur in any smart-meter rollout which is taken forward faster than on a new-and-replacement basis. Stranding would arise because existing non-smart meters would be removed before the end of their usual life cycle. This early removal of meters would result in costs to suppliers or meter providers, depending on the type of contractual or other arrangements in place. I reiterate the fact that we are talking about 47 million households.

On the other hand, an accelerated rollout would mean that some of the benefits of smart metering for both consumers and business could be realised more quickly; I know that my noble friend has that point at heart. The Government have undertaken work to examine these issues and understand which timeframe for a rollout would deliver the benefits of smart metering as cost effectively as possible.

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Our analysis to date suggests that the issue of stranded assets is a complex one. I shall outline some of the complexities so that the House is fully aware of the difficulties with which we need to wrestle. For example, it is not possible at this stage to place a specific value on stranded meters. This value will depend on a wide range of factors, particularly the speed of any potential rollout, because that would determine how fast meters become unusable, and the value attendant upon meters that may have been installed quite recently. But of course there is also the issue of the market model deployed. Some early central estimates suggest that the cost of stranded assets by this process could be between £1.5 billion and £2 billion for a 10-year rollout, but these figures would change significantly, depending on the factors that I described.

Amendment No. 23 makes it explicit that, in exercising his power in relation to smart meters, the Secretary of State can make financial provisions in relation to the replacement of existing meters. Amendment No. 28 is an amendment to existing levy-raising powers in the Gas Act to make clear that amounts raised by a levy can be paid out to all gas licensees. I believe that it is my noble friend’s intention, as he covered it in his opening remarks—it is certainly the view of some industry stakeholders—that these amendments would enable the Government to establish a mechanism to ensure that the impact of stranded assets was not borne significantly more by some market players than by others. In other words, the concept of fairness needs to obtain. Some stakeholders are also arguing for this mechanism to compensate for all the stranded metering assets created as a result of any accelerated rollout of smart meters—and therefore, in effect, for 100 per cent of these costs to be passed through to consumers. The end payer would be the consumer.

I recognise the issue of stranded assets as one with potentially significant costs for smart metering. We all see the potential benefits of smart metering, but we are talking about a huge exercise and very significant costs. The Government need to wrestle with the fairness of the distribution of the costs, which are bound to be part of the Government’s considerations in deciding how to move forward, particularly as the costs may ultimately be borne by the consumer. While it is right and proper that the Government consider these costs as part of our analysis, I do not share the view of those who argue that there should be automatic 100 per cent compensation in the event that the Government impose an accelerated timetable for smart metering. I am grateful to the noble Lord, Lord Teverson, who has demonstrated his understanding of this issue. We have to be cautious about the precedent that this could set. Any automatic 100 per cent compensation cost-recovery mechanism would mean that those costs would be passed straight through to consumers. Putting a levy on consumers at any time is a fraught exercise, but particularly at this time of high energy prices, and we would need a high level of proof and quantification to justify such an impost on such a large number of our people.

I am sure the House would agree that it is for companies to factor in and subsequently bear the risk of their commercial decisions. Generally speaking, changes of law do not and should not result in a right

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to automatic compensation. Our interest in stranding at this stage is therefore in understanding the market impacts and subsequent impacts on consumers and considering whether these impacts are sufficient to justify government intervention in the market. We have to balance what is in the best interests of consumers, including in the long term, and what is in the best interests of those delivering smart meters.

Ofgem has, at our request, already undertaken an initial analysis of the levels of stranding and how this stranding cost is spread across the industry. We have looked carefully at that work and considered industry analysis. While that has revealed the complexity of the issue, it has not suggested a clear-cut need for a compensation mechanism of the type proposed by the amendments, which would be mandatory on the Government irrespective of the timescale adopted for the rollout of smart meters.

Therefore, it is only right that before taking the significant step of legal powers of compensation in this context, we need to fully understand how much of an issue that is and the implications for the energy market, for consumers and for the progress of smart metering. The Government have decided that it would not be right to take powers at this stage to address stranded assets, but we recognise the significance of the issue and we have asked Ofgem to continue its work to conduct a detailed analysis, looking particularly at market impacts. As with any policy area, if the evidence changes or becomes clearer and more compelling as a result of this further work, the Government can reconsider whether any new legal powers are needed.

I am grateful to my noble friend for raising a fundamental issue of the greatest interest to the House, but I hope that he will recognise that a great deal of further work needs to be done, and it would be premature for the Government to be legislating at this stage for automatic compensation. I hope that he will recognise that I have difficulty with Amendments Nos. 23 and 28 and that he will not press them.

However, I have rather better news for my noble friend about Amendment No. 24. There are a number of different market models for rollout of smart meters. At one end of the spectrum is an entirely centrally planned rollout by a series of regional monopolies, through models with an element of co-operation between suppliers and ending at the opposite extreme with a rollout delivered entirely through the existing competitive metering market. Examining the case for changes to the existing competitive metering market is a complex issue and an important element of our ongoing work to assess the costs and benefits of a rollout.

The Government are working with a range of stakeholders to define and evaluate various market models, and we expect to be in a position to reach final conclusions in due course as part of our broader work looking at the possible implementation of a domestic rollout. At this stage, therefore, our objective has been to ensure that we have appropriate legal powers to underpin a wide range of market model options. Ensuring that all market model options remain open is the objective behind my noble friend’s amendment, as he said. The amendment is broadly similar to the existing wording at Clause 81(3)(k). This paragraph enables the Secretary of State, as part of exercising this power

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to mandate the rolling out of smart meters, to modify suppliers' licences to require suppliers to enter into certain types of agreements.

The amendment would expand the wording of this paragraph to make it clear that the Secretary of State could also require licence holders,

agreements solely or collectively. It also adds that these agreements could be,

It is the Government’s intention—we share the sentiments of my noble friend in tabling Amendment No. 24—for all market model options to be possible. Our own analysis suggests that there may be a case for amending the Bill further to ensure this, but we are unsure that Amendment No. 24 quite does so. We accept my noble friend’s objective, and intend to deliver against it. We will bring forward an amendment at Third Reading to resolve the matter, and I hope that he will recognise our intentions. He has been extremely constructive this afternoon on Amendment No. 24, and if he withdraws it we intend to consider the matter. I hope that he will be kind enough not to press the other two amendments.

Lord O'Neill of Clackmannan: My Lords, the Minister said that additional studies will be carried out into models, and that the Government hope to report in due course. Can we take it that this is in addition to what was promised at Second Reading, when we discussed this? Will it mean that an announcement on this will be later than anticipated?

4.45 pm

Lord Davies of Oldham: My Lords, I am not arguing for delay. We intend to bring back an amendment at Third Reading that, I hope, will satisfy my noble friend Lord Dubs. I ask him to withdraw his amendment with the intent of meeting the objective behind it. My noble friend Lord O’Neill is as well versed as anyone in the House on the great complexities of this issue.

We certainly have a great deal of work to do, going well beyond the time at which we expect this legislation to be on the statute book. I reassure every noble Lord in the House that, from the Government’s point of view, it is essential that we have the correct framework in legislation through which we can meet our objectives, which we hope noble Lords will endorse. My noble friend Lord Dubs has identified one area on which we must think beyond what we have in the Bill.

I said that we had considered this matter but not as fully as my noble friend has sought. We agree with him, and will come back with an amendment to amplify that.

Lord Teverson: My Lords, something that has concerned me a little, and which the Minister did not address, is the possible process of replacing meters that have been written down, taking them out of the system first. That could be a model.

If that is in the Government’s mind, I would point out that it is clear from the debate that all these meters effectively have only scrap value. We must not end up

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with either the Government or the public paying for a strange replacement system that meets accounting needs but does not reflect reality.

Lord Davies of Oldham: My Lords, I certainly agree. One dimension of the complexity is that we do not want the unfortunate consumer to be billed for a meter that has no value because of the transition. However, the speed of the roll-out could, in the most extreme cases, take out meters which had only just been installed. They might have advanced features but not quite the technical ability of the smart meters that we are putting in. There must be an assessment of that. All the Government seek is a basis in the legislation upon which that can be fairly evaluated.

Lord Dubs: My Lords, I am grateful to noble Lords for supporting these amendments and to my noble friend for what he said. A one-in-three success rate is not bad these days.

I appreciate that putting a new type of meter into every household in the country is a costly and difficult exercise. On the other hand, I do not think that all the costs should be borne by domestic consumers. Companies would make a saving as they would no longer have to send people round to read meters, which is a cumbersome and difficult activity resulting in estimated costs and so on, all of which pose difficulties for the companies. Providing an easier way to read meters would be enormously beneficial to companies. All the evidence from countries where smart meters have been introduced suggests that consumers would probably benefit from a 15 per cent reduction in costs. The percentage reduction might even be higher because, when we can see how much energy we use at different times of the day, we tend to change our habits. Certainly, when we had a water meter installed at our London address, we immediately changed our water consumption habits. We turn taps off when previously we did not. I believe that the same would apply to other consumers if they could see how much energy they were using. If we could see how much energy we used when we switch on a kettle to boil water to fill a teapot, we would no longer overfill our kettles. There are all sorts of ways in which we can all save energy, and I believe that smart meters would be enormously beneficial in that regard. As I say, I do not believe that all the costs should be borne by consumers. Companies would benefit from this measure and consumers would gain offsetting savings. Having said that, I am grateful to my noble friend for the very detailed way in which he dealt with the amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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