Select committee inquiry
Smart meters - follow-up
Closed
What the inquiry looked at
“Background The mass roll-out of smart meters is due to start in late 2015. By the end of 2020, energy suppliers must replace some 53 million existing electricity and gas meters in homes and small businesses across Great Britain. The new smart meters are intended to help consumers manage and reduce their energy consumption and reduce the costs of supplying and delivering their energy. The Department of Energy & Climate Change (the Department) estimates the Smart Meters Programme (the Programme) will cost £10.9 billion and bring economic benefits of £17.1 billion, adding an average of £6 a year to consumer bills in 2015, but subsequently delivering savings which will average £43 a year by 2030. The Department of Energy and Climate Change produced a progress update report for the Committee in March 2014 on the Smart Metering implementation programme and how it has addressed the Committee’s January 2012 recommendations. This follow-up inquiry will allow the Committee to explore progress on the Programme and risks to its successful delivery. There are risks to readiness for the start of roll-out and the ability to install meters in all homes, the costs of the Programme, and whether consumers will make savings in the long-term. Relevant information National Audit Office report: Update on preparations for Smart Metering National Audit report: Preparations for the roll-out of smart meters Chair's statement on preparations for smart meters roll-out”
The committee's words, from the inquiry page on parliament.uk ↗.
What it found
In the committee's words, from the summary of 12th Report - Update on preparations for smart metering ↗
The Department of Energy and Climate Change’s (the Department’s) Smart Metering Implementation Programme requires energy suppliers to replace 53 million meters in homes and small businesses with smart electricity and gas meters by 2020. The costs of installing smart meters, some £10.9 billion, will be borne by consumers through their energy bills. We are concerned that the Department is primarily relying on assumed competition in the industry to control costs and deliver benefits. This may well prove insufficient on its own to protect consumers. There is also a danger that the Government gets locked into an existing technology when technologies are changing fast – leading to consumers paying for investment in a system which is already out of date. The Department must monitor progress, costs and benefits during roll-out to identify whether changes are needed to secure the delivery of smart meters at minimum cost to consumers and ensure vulnerable and low-income households benefit.
What the government said
The government responded on 11 December 2014.
2nd Special Report - Update on Preparations for Smart Metering: Ofgem’s Response to the Committee's 12th Report of Session 2014-15
2nd Special Report - Update on Preparations for Smart Metering: Ofgem’s Response to the Committee's 12th Report of Session 2014-15, 11 December 2014.
Summary written by Accountability Index from the government's response.Ofgem states that it agrees with the Committee's recommendation that the Department and Ofgem should set out how each intends to minimise smart meter installation costs and pass on operational savings to consumers.
- Ofgem "believes that competition is the best way" to ensure suppliers minimise roll-out costs, with customers able to move to a supplier offering a better deal if suppliers do not pass on benefits.
- Ofgem says it will "ensure that competition in the retail market puts pressure on suppliers to roll out efficiently", citing its Retail Market Review measures and its "Be An Energy Shopper" campaign, and says it has referred the market to the Competition and Markets Authority for a full investigation.
- Ofgem says competition is not the best protection where there are natural monopolies. For the Data and Communications Company, which is subject to an ex-post price control, it "may disallow costs that are not economic and efficient".
- For electricity distribution companies, Ofgem says it has set "challenging cost targets" and will issue its final decision on its draft decision "at the end of November".
Update on preparations on smart metering: Government response to the Committee's Twelfth Report of Session 2014-15
Update on preparations on smart metering: Government response to the Committee's Twelfth Report of Session 2014-15, 13 January 2015.
Smart metering: Government response to the Committee's Twelfth Report of Session 2014-15
Smart metering: Government response to the Committee's Twelfth Report of Session 2014-15, 15 December 2014.
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How the inquiry ran
Each dot is a dated item listed on this page, from the inquiry's opening on 20 May 2014 to its close on 23 March 2015.
- Oral evidence 9 Jun 2014
- Report 10 Sep 2014
- Government response 3 responses
What it recommended 1 recommendation · 17 conclusions
1The Department expects smart meters will help consumers reduce their energy consumption, encourage them to...
Concluded (the committee's words)
The Department expects smart meters will help consumers reduce their energy consumption, encourage them to shift demand away from peak times, make it easier to switch between suppliers, and encourage take-up of new tariffs. The Government estimates that £26 will be saved on average by consumers who pay average bills of £1,300 per annum—a saving of just under 2%. This saving has to be set against the cost of £10.6 billion which will be met by consumers at an average cost that will peak at £11 per annum in 2017. The Department is relying on the consumer becoming more “savvy” in making decisions about using energy. It also expects smart meters to reduce costs for suppliers, network operators and generators. The Department has established the shared data and communications infrastructure required to ensure that smart meters work consistently for all consumers, regardless of their energy supplier. It has also established the regulatory framework requiring suppliers to install the meters and to establish and fund a new central body whose role is to increase consumer awareness of the Programme and to promote long-term energy consumption behaviour change. The mass roll-out of smart meters is due to start in late 2015. The regulatory framework requires energy suppliers, under licence conditions that will be overseen by Ofgem, to take all reasonable steps to install smart meters in all households and small businesses by the end of 2020.
2Some aspects of the Programme design may prove to be too costly.
Concluded (the committee's words)
Some aspects of the Programme design may prove to be too costly. The Department requires energy suppliers to install smart meters in virtually all homes and small businesses by the end of 2020. While energy suppliers are planning on this basis, they are concerned that a near 100% per cent roll-out may not be feasible and that extra costs may be involved in persuading their more reluctant customers to accept the new meters. Suppliers also need to develop alternatives to the radio systems for the Home Area Network linking smart meters to in-home displays and other devices, which will not work in some 5% of premises. Recommendation: The Department should keep the design of the Programme under review and, if costs escalate, assess the value for money of the individual components of the design that are causing cost increases, and take action where appropriate.
3Some aspects of the Programme could be out-of-date by the time it is rolled out.
Concluded (the committee's words)
Some aspects of the Programme could be out-of-date by the time it is rolled out. The current proposal is that every household will be fitted with a smart meter and offered an in-home display that allows consumers to see what energy they are using and how much it is costing. However evolving technology suggests that customers could receive the information on their smart phones, making the in-home display redundant. Energy suppliers will therefore be required to offer in-home displays, even though customers may not want or use them.
4The impact of smart meters on vulnerable and low income consumers is unclear.
Concluded (the committee's words)
The impact of smart meters on vulnerable and low income consumers is unclear. The Department lacks a good understanding of the impact of smart meters on different groups, particularly vulnerable or low income consumers. It plans to remedy this by capturing relevant information during the mass roll-out of smart meters. It is important that customers using prepayment smart meters benefit from 6 the smart meter programme, but not all energy suppliers are yet able to offer a viable prepayment smart meter solution and there is no regulatory obligation on companies to provide prepayment meters. The Department is confident, however, that by the end of 2015 all major suppliers will be ready to offer a prepayment option. Recommendation: The Department must monitor the impact of the Programme to ensure vulnerable and low income households are obtaining the benefits available from smart meters.
5Relying on market forces to control costs and deliver benefits may not provide adequate protection...
Recommended (the committee's words)
Relying on market forces to control costs and deliver benefits may not provide adequate protection for consumers. The Department is confident that energy suppliers’ commercial incentives and competition in the industry will control Programme costs and deliver benefits to energy consumers. But the Department and Ofgem accepted that Ofgem’s proposal to refer the energy market to the Competition and Markets Authority reflected their concern about the effectiveness of competition in the industry. 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.” Furthermore, one energy company (EDF) believes £1.24 billion could be saved by having a national procurement programme for smart meters. Recommendation: The Department and Ofgem should set out how each intends to minimise the costs of installing smart meters and ensure that the subsequent operational cost savings to suppliers are passed on to consumers.
6Smart meters need to be fully interoperable so that customers can switch easily between suppliers,...
Concluded (the committee's words)
Smart meters need to be fully interoperable so that customers can switch easily between suppliers, but there are no regulations preventing suppliers from replacing meters when customers switch. The Department and Ofgem expect smart meters to improve competition in the industry by facilitating switching and told us that new suppliers have already entered the market. While the smart meters technology provides for interoperability, the regulatory requirements do not prevent suppliers from replacing smart meters when customers switch supplier. This may be a particular issue in cases where the smart meters installed are rented rather than owned by the supplier. Recommendation: The Department should ensure clear regulatory requirements are in place to prevent suppliers from replacing smart meters unnecessarily when they take on new customers through switching.
7The Department has not made clear to consumers what the Programme will cost them and...
Concluded (the committee's words)
The Department has not made clear to consumers what the Programme will cost them and what benefits they can expect. The Department estimates that the average cost for the gas and electricity meters and other equipment needed and the cost of installation for each premises will be some £215 and that the average impact on bills of the suppliers’ net costs is expected to peak at £11 a year in 2017. By 2020, once 7 roll-out is complete, the Department expects that savings on energy bills, taking into account consumers’ expected energy use reductions, will average £26 a year for each household, a saving of 2 per cent on the average annual bill of £1,328. This is expected to rise to £43 a year, or 3 per cent by 2030. These estimates are based on consumers changing their behaviour and consuming less energy, and energy suppliers passing on their operational cost savings to consumers. Recommendation: The Department should require suppliers to provide a clear breakdown for consumers of the cost of smart meters, their operational cost savings and whether consumers are achieving the expected reductions in energy consumption.
8The Department has relied heavily on consultants to progress the Smart Meters Programme, rather than...
Concluded (the committee's words)
The Department has relied heavily on consultants to progress the Smart Meters Programme, rather than acquiring the skills in-house. In 2013-14 some £14 million of the £19.3 million spent by the Department on managing the Programme was spent on external commercial and technical expertise. The Department also expects to spend around 50% of its 2014-15 budget on external expertise. The Department has a large portfolio of major projects and a need for strong in-house commercial expertise. The Department recognised that some additional pay flexibility may be required to bring in the commercial expertise it needed but had not examined how other departments like the Ministry of Defence were tackling this issue. Recommendation: The Department should examine how other departments are developing their in-house commercial expertise, particularly the model developed by the Ministry of Defence to provide new pay arrangements outside civil service structures.
9Public confidence in the Smart Meters Programme may be undermined by the Department’s refusal to...
Concluded (the committee's words)
Public confidence in the Smart Meters Programme may be undermined by the Department’s refusal to publish the Major Projects Authority’s assessments of the Programme. The Major Projects Authority reviewed the Programme in 2011, 2012, and 2013. The Department maintains that it has followed Cabinet Office advice and is constrained by Cabinet Office rules from placing these reports in the public domain as the reviews were conducted on a confidential basis. Recommendation: The Department and the Cabinet Office should adopt a more open approach to publishing Major Projects Authority project assessments after they have published the resulting RAG rating and only rarely withhold the most sensitive information. 9 1 Securing the benefits of the programme for consumers
10The Department has overall responsibility for the Programme and has overseen its implementation since 2011.
Concluded (the committee's words)
The Department has overall responsibility for the Programme and has overseen its implementation since 2011. As the Programme moves towards mass roll-out the Department expects the transition to enduring industry-led governance to take place progressively over the next two years or so. Suppliers will be responsible for roll-out, and Ofgem will oversee suppliers’ and other industry participants’ compliance with their licence and Smart Energy Code obligations.22
11The Department stated that it was ultimately accountable for the Programme and that it would...
Concluded (the committee's words)
The Department stated that it was ultimately accountable for the Programme and that it would devolve responsibility to Ofgem once the transition to industry-led governance was complete. However, the Department confirmed that there would be no changes to the accountability framework until it was confident that Programme risks had been sufficiently reduced.23 Ofgem told us that it would deal with complaints relating to smart meters, where consumers were not satisfied with their supplier’s response.24
12The Department has mandated suppliers to take “all reasonable steps” to roll out smart meters...
Concluded (the committee's words)
The Department has mandated suppliers to take “all reasonable steps” to roll out smart meters to 100% of the market, and the central communications service provider is contracted to provide a network that will enable smart meters to be reached in 99.25% of premises. Some suppliers have asked the Department to reduce the requirement to, say, 80% roll-out because of the additional expense of achieving the last 20% of installations. The Department told us it was resisting these requests very strongly, particularly as it believed that these last 20% might include a disproportionate number of vulnerable consumers, and it does not want smart meters to be rolled out at the suppliers’ convenience. It was for Ofgem to determine whether suppliers had taken all reasonable steps to achieve 100% roll-out. Ofgem has not provided guidance on what all reasonable steps will mean for suppliers, but told us it was very likely that it would do so in due course.25
13Under the Programme, a home area network is required to allow in-home displays and other...
Concluded (the committee's words)
Under the Programme, a home area network is required to allow in-home displays and other devices to connect to consumers’ smart meters. However, the radio system currently in use for the home area network operates at a frequency of 2.4 GHz which is not suitable for up to 30% of premises, mainly high rise flats and buildings with thick walls. Suppliers are developing an alternative solution using a different radio frequency but this will still not work in 5% of premises.26 Suppliers are working on a range of further solutions for these remaining premises, which may include wired connections, and these must be ready to allow roll-out to be completed by the end of 2020.27 22 C&AG’s report, paras 6 & 7 23 Q 147 24 Qq 148 & 152 25 Qq 114 – 116 26 Q 94 27 Q 94 13
14We asked the Department whether it was necessary to have an in-home display in every...
Concluded (the committee's words)
We asked the Department whether it was necessary to have an in-home display in every home, and whether savings could be achieved by not providing an in-home display to households who wanted to use other devices such as smart phones or tablets to receive data from their smart meters. The Department told us that in-home displays cost £15 each and noted that all available evidence showed that in-home displays lead to additional energy savings of between 2% and 4%, bringing substantial cost savings for the consumer.28 There is also a danger that the Government favours an existing technology when technologies are changing fast—leading to consumers paying for investment in a systems which is already out of date.
15The Department told us that it had spent £19 million on running the Programme in...
Concluded (the committee's words)
The Department told us that it had spent £19 million on running the Programme in 2013-14. Of this, around £14 million had been spent on external experts. In 2014-15, it expects to spend £12 million, of which around half will be spent on external experts. The Department explained that, during 2013-14, it ran four major procurement exercises for the data and communications services, so it had been crucial to have the technical and commercial expertise necessary to be able to engage effectively with commercial companies and safeguard consumers’ financial interests. The Department told us its procurements had delivered a reduction of several hundred million pounds relative to the estimated cost of the central communication system in the impact assessment.29
16We asked why the Department was relying so heavily on consultants to progress the Programme...
Concluded (the committee's words)
We asked why the Department was relying so heavily on consultants to progress the Programme rather than developing its own in-house expertise, given it has a large portfolio of projects that require an ongoing commercial capability. The Department said it was building its in-house capability, but that the Programme required a lot of expertise over a short timeframe, and it would not be practical to carry this expertise within the Department in the longer term.30
17We also asked whether the Department had examined the approach taken by the Ministry of...
Concluded (the committee's words)
We also asked whether the Department had examined the approach taken by the Ministry of Defence of setting up a new organisational structure that allowed permanent civil service staff to be employed and paid outside traditional pay structures. The Department said it had not looked at the Ministry of Defence’s initiative, but it believed that a degree of pay flexibility was necessary to enable the Department to bring in the commercial expertise it needed, because not doing so would mean reliance on consultants that would cost more, and whose knowledge and experience would be lost to the Department once their work is completed.31
18The Major Projects Authority reviewed the Programme in 2011, 2012, and 2013.
Concluded (the committee's words)
The Major Projects Authority reviewed the Programme in 2011, 2012, and 2013. The Department told us that it had not published the MPA’s assessments as they are designed to facilitate a frank discussion of the Programme, to review Programme management and processes, and to provide confidential advice to the Senior Responsible Officer on the delivery of the Programme. The Department maintained that it had followed Cabinet Office advice and was constrained by Cabinet Office rules from placing these reports in the public domain as the reviews were conducted on a confidential basis, and expressed the 28 Q 89 29 Qq 33- 157 30 Qq 158 – 161 31 Q 163 14 view that publishing the reports would remove the confidentiality of the process and inhibit frank contributions to the review.32 32 Q 166 15
Evidence
Oral evidence sessions 1
- 9 Jun 2014No witnesses recordedparliament.uk ↗