For several years now energywatch has campaigned for the introduction of smart meters in the residential sector as the overall consumer benefits to us seem high from a GB PLC perspective and are accompanied by energy and carbon dioxide saving benefits. Naturally, as a consumer organisation, we would wish to see some safeguards built into the licence conditions regarding the use of smart meters and we will elaborate on these in separate communications.
With regard to the particular topic addressed by BERR (UK Department for Business, Enterprise & Regulatory Reform) of the roll out model, we are in favour of an approach which is the most cost effective, most beneficial and least disruptive to consumers. To a certain extent, judgements on these cannot be made until after the consultants’ report back but, as well as making comments on the three BERR options, we wish to raise three specific issues. In particular, it seems to us that the topic of consumer engagement and commitment to the introduction of smart meters is crucial to the success and ease of this roll out. As this issue has not had the attention to date that we believe it warrants, we begin with this
“By having a local roll out approach, the local media can be used to make sure that everyone is aware of what is happening and the potential benefits for them.”
THE IMPORTANCE OF A LOCALISED ROLL OUT
Over a timescale, probably up to eight years, some 26 million households will be fitted with smart meters. In terms of access to households and positive engagement of customers with the process, this will be an even bigger exercise than the conversion of 13 million homes from town’s gas to North Sea gas in the period 1968 to 1976.
To date, the discussion on the best way to roll out a smart meter programme has focused on potential installation-cost savings that might arise based on a regional monopoly or a supplier-led approach. Such an approach underplays the important challenge of engaging with householders in a positive framework. As well as possible installation-cost savings in delivering such a programme via a “local area blitz”, we believe that to generate the publicity, interest and hence engagement of householders, it will be necessary to have a localised approach.
By having a local roll out approach, the local media can be used to make sure that everyone is aware of what is happening and the potential benefits for them. By creating a positive and receptive attitude in householders to the installation of the new smart meters – similar to that which accompanied the conversion to natural gas in the ’70s – the whole process of customer buy-in will be greatly improved, as it will be happening to “everyone in my neighbourhood”.
Without such an approach, we believe it will take longer to explain what is happening to individual, random households than will be necessary under a localised roll out accompanied by local media publicity and word of mouth. Additionally, there is the possibility of involving local authorities and local voluntary organisations in this publicity campaign, with the latter being particularly important in helping some of the most vulnerable customers.
A further advantage of such a community-based approach is that it could be an important opportunity for other activities with a specific objective of reducing the carbon footprint of Great Britain’s households to be tied into the roll out. For example, CERT or a successor energy supplier obligation or local authority activities, etc could provide energy audits, offers of energy-saving measures and advice to households as part of the roll out campaign. Such actions are undoubtedly going to be required if we are to meet Great Britain’s challenging CO2 targets. We would expect government to play an important part in publicising such a roll out by supporting the local media blitz.
This “local area blitz” approach to consumer engagement and significant changes to household energy-efficiency behaviours and energy-saving measures is not necessarily something that can be easily captured by traditional cost benefit analysis focused on a specific issue. Nevertheless, the strategic importance of such an approach is necessary in tackling climate change caused by carbon dioxide emissions linked to household energy consumption. The local area approach fits well within a regional approach and we discuss further what is meant by “regions” below.
Of course, stranded asset issues will arise from such an approach but, as we have previously pointed out, these costs are equivalent to £9 per meter averaged over the meter stock for electricity. Although they are much higher when averaged across the existing stock of gas meters at £55, we note that Ofgem has issued a statement of objection under the Competition Act 1998 on the use of long-term contracts by National Grid. As we noted in the supplement to our 2007 Report, stranded assets even with the current high gas meter costs only reduced the net present value by £800 million and it still remained a very healthy £8.8 billion for our central case. As discussed below, the cost of stranding could be rolled into the capital costs of the smart meters and associated communication systems as part of the “asset” owned by the electricity or gas distribution systems.
THE EXPERIENCE OF ROLLING OUT SMART METERS IN EUROPE
In Europe, Italy, Sweden, the Netherlands, France, Spain and Portugal have, or are proceeding with, smart meter roll outs to residential customers. More recently, Ireland decided earlier this year to begin introducing smart meters in the residential sector. It is noticeable that in all of these countries the smart meter assets will be held by the distribution companies.
Indeed, in the Netherlands, which had followed the UK example of introducing competition into all metering aspects, the government decided that to facilitate the roll out to the residential sector the meter assets would be bought back into the distribution business. However, it is only for the Dutch residential sector – for all other users, metering remains a competitive business. Strong arguments can be advanced for the meter assets being owned by the distribution business, including:
- It has a long track record of dealing with long-lived assets
- It has a lower cost of capital than the supply business
- The assets could be “financially packaged” and sold off to financial institutions
- Changing supplier and entry into the marketplace should be much easier if the meter is not owned by the incumbent supplier.
Thus, from a consumer perspective, the longer write-off periods and lower cost of capital should mean smaller increases in the distribution charge – increases which in any case will be quickly compensated for by the benefits to householders flowing from smart meters. Against this are the arguments that reverting meters to the distribution business may stifle innovation and may incur additional costs that would otherwise be lower in a competitive market. The first argument is doubtful in our view as one of the original benefits perceived to flow from introducing competition into the metering business was that more innovation in meters would occur – this has clearly not happened in the residential sector. On the second argument, as the metering costs remain a very small fraction of the overall consumer’s bill, the potential benefits of introducing competition in this area are debatable in the light of the considerable obstacles caused by the notable lack of progress on smart meters for householders.
We would urge BERR to ensure that the consultants appointed for this study visit the Netherlands to learn first-hand exactly how they are managing their rollout via the distribution business and the reasons why they decided this was the best way to proceed. Given that in Europe there appears to be no problems for operating an exclusive, centralised (either regional or national) smart meter service, energywatch believes that the UK will not fall foul of EU competition law.
This is a complex area and energywatch look forward to the detailed analyses and implications on consumer costs that will flow from the consultants’ work. We have only a few broad generalisations to guide the consultants’ considerations. We do not consider undue emphasis should be placed on ensuring maximum innovation in this area, particularly if this leads to delays or increased costs. With the introduction of any major new technology, there is always a concern that future opportunities for further technology developments may be missed. However a decision on technology has to be made at some point and energywatch’s principal concern is that the chosen technology delivers at the earliest opportunity all the consumer benefits that we have identified as arising from existing smart meter technology.
We assume that the gas meters will have to “piggy back” on the smart electricity meter in the household. This again points to the need to have a localised roll out in the case where householders have both electricity and gas supply but are not on dual fuel arrangements. We acknowledge that, at present, the number of staff skilled in and qualified to deliver dual fuel meters on their own is limited but we do not see this as necessarily a “show stopper”. Either training or double manning will overcome such problems. Again, to facilitate customer switching and the entry of new suppliers, we believe that the communication system needs to be standardised and centralised. Consideration should be given to including the communication system and the physical smart meter as assets that are more cheaply financed through the electricity or gas distribution systems. However, the software used to interface with the customer should be supplier specific in order to encourage suppliers to experiment with and compete on how they can fulfil customer requirements, including reducing energy consumption, in imaginative ways.
energywatch COMMENTS ON THE THREE MARKET MODEL OPTIONS FROM BERR
Again we confine ourselves to broad objectives and, in addition to the points we have made above, we would make the following comments on each of the options:
Option 1: Competitive model Because this seems to be largely the existing situation and as such has not brought forward smart meters, it is not clear to us why this approach will change anything in the near term. We therefore do not favour Option 1.
Option 2: Centralisation of communication infrastructure The advantage over the previous option is that the problems with customers with separate gas and electricity suppliers would be lessened. The problem with this option is that there is little change from what exists today. Furthermore, it is assumed under this model that the roll out would not be geographically focused and, as we have mentioned above, we believe that consumer engagement is best served by such a geographical roll out. We therefore do not favour Option 2 in its current form.
Option 3: Centralisation of all smart metering services This option would appear to us to be more akin to the approach being adopted for the roll out of smart meters to the residential sector in the Netherlands. The key to this option would be the governance and regulatory structures that would need to be in place. The advantage of the centralised monopoly is potential economies of scale and a uniform standard approach. However, this would not provide Ofgem with any company comparators which help identify good and bad performance of the regulated activities, as happens with the electricity and gas distribution companies. Furthermore, in view of the very different stranded asset prices for the electricity distribution company meters as against national grid Transco meters, we would advocate that the use of company comparators is the preferred option. We would envisage a competitive tendering model for the “regional” franchises to roll out the meter service but have no strong view on the definition of the “region”, other than that there should be sufficient comparators available to Ofgem. Finally, and in our view most crucially, this model appears to be the only one in BERR’s three options that would facilitate a street-by-street roll out and a single visit per household.
Further option: Asset ownership by distribution companies We believe that a hybrid of options two and three is also all worthy of further exploration by the consultants. In this model, the assets (the physical smart meter, communication system and any stranding costs) would be held by the electricity or gas distribution company. The responsibility for installing and maintaining the smart meter and communication system could be carried out either by the energy suppliers or the electricity/gas distributors. From a consumer’s perspective, we are attracted by a solution which gives the householder one number to phone in the event of malfunction by either the smart meter or the communication system. The operational and practical complications of such an approach should be explored by the BERR consultants as part of their brief.
*On 1 October 2008 energywatch merged with Postwatch and the Welsh, Scottish and National Consumer Councils to form Consumer Focus, the new champion for consumers’ interests in England, Scotland, Wales.