Smart Energy Meters : Commercial, Policy and Regulatory Drivers


Modern smart meters are not being installed in the United Kingdom because the policy and regulatory framework contributes to inertia against upgrade and technology change. Ofgem and the government need to define clear pathways to give the industry confidence to install smart meters.

These are key findings of a study of the commercial, policy and regulatory drivers for smart metering that we conducted for the think tank Sustainability First. The work was sponsored by five of the major UK  energy suppliers – EdF Energy, E.On, RWE-npower, Scottish and Southern Energy and Centrica – and industry players the Energy Saving Trust, energywatch, IBM Business Consulting and Ampy Meters. The project set out to assess the costs and benefits of smart metering in the UK; to consider the structure and operation of the UK metering market; to assess the UK case for smart meters in the light of international experience, especially on energy saving; and to identify the policy and regulatory changes needed to secure  wider uptake of smart meters. We carried out comprehensive desk research and structured interviews between October 2005 and March 2006. The report identifies smart meters as an important gateway:

• For energy suppliers – to improve market operation through better ways of tackling energy management, and creating new retail opportunities.
• For small and medium enterprises (SMEs) and households – to achieve energy savings through improved feedback on energy consumption and expenditure; to develop demand-response at an individual level; and to develop new scope for micro-generation.

The study finds that the significant opportunities, both for suppliers and for consumers, risk not being realised because the present commercial, policy and regulatory framework combine to create an inertia which acts against significant meter-stock upgrade or technological change. Little is likely to happen to stimulate smart meter installation at the residential or SME level in the UK without additional measures. Clear policy and regulatory pathways are needed. The Energy Review and a new European Directive on Energy End-Use Efficiency offer the opportunity to develop firm recommendations and a clear policy road-map for delivery of smart energy meters in the UK. Concerted leadership from the Department of Trade and Industry (DTI) will be needed, with appropriate support from the Department for the Environment, Food and Rural Affairs (DEFRA) and the UK energy regulator Ofgem.

In many other countries, detailed assessments have found a positive cost-benefit case for widespread smart meter installation. This review suggests that the cost-benefit case for the UK could be positive under some circumstances, but further work is needed to confirm this. It would therefore be sensible to start with a number of minimal interventions to enable some progress, alongside a major trial, to help determine the most appropriate further regulatory interventions. These could either be developments of the current competitive framework for meter provision, or a more systematic geographic rollout.


Smart meters are able to perform a huge variety of functions, from simple remote meter reading to potentially offering real-time tariffs to the individual consumer, subject to whether the communications capability is one- or two-way. Desirable smart meter capabilities include:

• Measurement of energy consumed – both quantity and when (i.e. on a time-interval basis).
• Two-way communication.
• Storage of interval data and remote transfer to a data collector/utility.
• Capability to display consumption data, tariff and other information.

Cost differences between actual meters are not highly material, but communications choices are significant, both in terms of costs and application. Some communications technologies are better suited to a targeted installation approach, and some to geographic installation.


International experience suggests that although the overall benefits to society exceed the costs, government or regulatory intervention has been required to facilitate smart metering because suppliers/distributors cannot capture all these benefits. Key benefits of smart meters that have led other countries to install them include:

• Reductions in fraud and theft
• Reductions in meter reading costs
• Reductions in prepayment metering costs
• Reductions in peak demand – lower costs and/or better security of supply
• Greater efficiency of the electricity wholesale market
• Customers enabled to switch supplier more easily, plus new service offers.

Reductions in overall energy demand and in carbon emissions were not identified as major benefits in most of the international examples, because these were not the drivers for smart metering in those countries and were thus not evaluated. Importantly, a positive cost-benefit assessment in these international examples therefore does not take account of benefits that might accrue in terms of reduced carbon emissions.


The major long-term evidence to date on energy saving is from a 1989 Norwegian study based on ‘informative billing’ in homes with electric heating – not smart metering – where savings of 4-8% were achieved. A major UK study suggests 3-5% is possible for homes without electric heating. Shortterm results with smart prepayment meters in Northern Ireland have shown a 3% energy saving. It therefore seems reasonable to estimate potential energy savings on a cautious basis at around 1-3%. A 3% saving would represent £10.50 p.a. off an average electricity bill; a 1% saving would equal 8% of the UK’s domestic CO2 target.


The choice of communications technology has a significant impact on overall smart meter installed costs. Summary cost information falls in the following ranges:

• Advanced meter +communications (meter only) – £37-80
• Advanced meter + communications + installation and system costs – £70-180

Supplier benefit case : Suppliers could save perhaps around one-quarter of their average £20 cost-to-serve per customer. This includes meter reading, service centre costs, billing and payment. However, these averages conceal a wide range of costs – and the benefits do not apply evenly across all customers. There is no ‘simple’ business case for suppliers to introduce smart meters on a widespread basis, although there is a business case for prepayment token meters and customers who are costly to serve (e.g. debt prone,  any meter-read attempts, remote location). In addition, smart meters may also offer scope for revenue-enhancement for suppliers through development of new services to customers.

Customer benefit case : Customer benefits fall into three main areas – more accurate billing and payment; better information leading to energy (and money) saving; dynamic market effects through easier switching and new offers from suppliers. There may be further benefits for prepayment and vulnerable customers. However, as cross-subsidies unwind, there may also be winners and losers. Moreover, customers will not necessarily get clear easy-to-use displays, either onthe meter, or elsewhere in the home.

Other benefits : There should be network and security of supply benefits through new opportunities offered by time-of-day pricing at an individual level, which may lead to peak demand reductions. But market participants see a lower value in peak demand reductions in the UK than in many other countries. Smart metering could also enable better valuation of distributed generation.

Summary of smart meter costs and benefits : Assuming cost recovery over a 15-year period (life of asset) the extra costs per customer per year could be around £8 for the meter, plus £5-10 for operation and maintenance (all nominal values). If 3% energy savings are achieved then the overall cost-benefit calculation is likely to be positive – particularly when combined with the supplier and network savings. At a 1% energy-saving, the cost-benefit calculation may be positive, depending upon the level of other customer supplier and network benefits. If the value of carbon savings was factored in, this would also increase the benefits.


Provision of all new energy meters will soon become a competitive, non-price controlled activity. All the present incentives for suppliers are to keep metering costs as low as possible and replacement (about 5% a year) is done on a like-for-like non-smart basis. The existence of a number of regulatory barriers means that without further intervention, smart metering is unlikely to take off in the UK other than on a small-scale, targeted basis. Currently, key barriers include the requirement for a visual inspection once every two years and potential stranding of any new smart meter assets. The options for regulatory action split broadly into a range of interventions to make the competitive metering market work more effectively to support provision of smart-meters; or more major changes in the regulatory arrangements for meter provision, designed to achieve a more systematic rollout over a shorter period.


In this scenario the supplier would remain responsible for meter asset provision, meter maintenance, and meter reading. Financial exposure for the meter asset would continue to rest with the supplier. Metering costs will be reflected in prices charged to customers either by customer class or, perhaps, a ‘bespoke’ package. Minimal interventions would include:

• Remove requirement for a visual inspection every two years(easier for electricity than gas).
• Deal with stranding of new assets – through DTI/Ofgemled supplier agreements for new suppliers to take over smart meters when customers switch.
• DTI/Ofgem would also need to lead an initiative on interoperability.

These minimal interventions would keep down overall costs of smart metering, leave suppliers in the lead and allow a flexible, targeted, incremental approach, which may be desirable given the communications technology learning curve. However, they would produce very low volumes of smart meters installed, no economies of scale, and no pathway to ‘criticalmass’, which could lead to possible loss of wider benefits overall. Options for further interventions might include:

• New smart-meter duty on suppliers – for new and replacement meters from 2008 (as part of the response to the Energy End-Use Efficiency Directive).
• Set a standard of ‘smartness’ – e.g. AMM+Interval meters. DTI/ OFGEM would need to lead this initiative and set a timetable.
• Accelerate rate of meter-replacement – e.g. to 10% or more a year.

These further interventions could help to stimulate upgrading of the meter stock by creating a guaranteed minimum market, whilst maintaining flexibility. All suppliers would face the same requirements, so it potentially removes ‘first-mover risk’. However, they would lead to extra costs for an uncertain size of
benefit, volumes would remain relatively low, and overall costto- serve during the replacement phase could increase.


Long-term responsibility for the meter assets for most smart meter rollouts internationally rests with the network, and expenditure is recovered via network charges. A mass-rollout could realise logistical and organisational efficiencies, deliver scale-economies and provide a rapid upgrade of meter infrastructure. Full supplier benefits could be realised and the cost to consumers could be spread over 10-plus years. This does not necessarily mean rebundling – there could be competition for geographic meter licences and meter operation could become subject to competitive provision by 2007, as currently planned. However, a geographic rollout represents a high cost step for uncertain benefit. The potential technology and implementation risks are transferred to consumers – unless there is an incentive for distribution network operators (DNOs) or meter licence holders (MLHs) to take some risk. There is also the risk of early lock-in to technology choices while communications options are still evolving. Key features include:

• Suppliers would continue to make meter arrangements – but financial exposure would rest with the DNO or MLH.
• DNO/MLH would be required to offer terms to provide meter assets in a geographic area.
• DNO/MLH would be required to replace, say, 20 % pa of existing meter stock with new meters which conform to new ‘smart’ standards.
• New meter assets could be price-controlled – or not.
• Costs recovered via DNO/MLH charges to suppliers over full asset life – i.e. 10-plus years – enabling pass-through to consumers.


A major smart meter trial is needed but should not hold up progress. Some of the changes outlined above should be introduced in parallel. The key priority should be to secure better information on the effects of smart meters on energy consumption (electricity and gas if possible) and load shifting. Different forms of customer display and feedback need to be evaluated. Empirical evidence on energy saving from a trial would allow fuller evaluation of the costbenefit case for gas smart meters. A few weeks ago the UK Chancellor announced a £5 million fund to cofinance a pilot study with energy suppliers of feedback devices such as smart energy meters that could potentially reduce energy demand and facilitate other market efficiencies.

Now the UK’s first major interactive smart metering trial in the residential sector has been launched by Elliot Morley, Minister for Climate Change and Environment. The EDF Energy Smart Metering Trial, which is being managed in conjunction with fuel poverty charity National Energy Action (NEA) will see up to 3,000 electricity and gas smart meters being installed in homes over two years. The meters being installed under the NEA DEMIA (Domestic Environmental Management in Action) project provide a means of generating accurate bills without estimating and give customers and EDF Energy information about how energy can be saved in the home, and the impact on household bills.