Seventy-Second Report - Update on the rollout of smart meters

We are concerned that smart meters are not achieving the consumer benefits they are supposed to and are benefitting certain, often wealthier, consumers more than others. The Department’s most recent estimates of consumer energy savings are based on data from installations that took place between 2015 and 2018 (with consumption data up to 2019). These show energy reductions of 3.3% to 3.6% for electricity and 2.9% to 3.1% for gas. However, the Department needs more up- to-date data to be confident that smart meters are saving consumers money on their energy bills, as it anticipated. If consumers are older, male, on high incomes, or homeowners then they are more likely to have smart meters. Wealthier people are also more likely than less wealthy people to be able to purchase new replacement appliances (such as washing machines) if their smart meter suggests relatively high running costs of older appliances they may own. Previously, there special smart meter tariffs were available that offered lower prices, for example for off-peak consumption —owever, these have been withdrawn due to current conditions in the domestic energy market, thereby removing an incentive for smart meter installation. Recommendation 2: The Department should: • update its evidence base on the benefits consumers are actually receiving; and • carry out further assessment of how to maximise the benefits of the smart meter network for all consumers, particularly those groups currently less likely to have them to encourage them to apply for one. 6 Update on the rollout of smart meters

The Department has limited understanding of why smart meter coverage is lower in some areas—particularly London, rural and remote areas—compared to others. The extent of smart meter installation varies across Great Britain, from 5% in the Isles of Scilly to 69% in Chesterfield as at March 2023. Installation rates in London are 43%, some way below the 57% being achieved across Great Britain. The Department thinks this is due to the challenges of installations in blocks of flats (where it is more difficult to place meters and in-home displays in sufficient proximity to each other), and also because installers cost more and are less available. Remote areas such as the Highlands and Islands of Scotland also have lower coverage, as do some rural areas such as the Cotswolds. The Department says that the Data and Communications Company, which operates the central communications and data platform for smart meters, is looking into options for the 0.75% of homes that sit outside its ‘wide area network’ coverage (known as “not-spots”) for smart metering. The Department referred to the ‘few hundred thousand’ homes in these areas as located in ‘not-spots’. However, we also note that some suburban areas such as the constituency of Richmond Park can have low coverage but have neither the characteristics of inner London nor rural or remote areas. Recommendation 3: The Department should set out in its Treasury Minute response how it will: a) increase its understanding of the reasons for variation in geographic coverage, and what it is doing to increase smart meter uptake in those areas that are lagging behind; b) set out how those households who are unable to install smart meters will be supported.

Ofgem risks neglecting the importance of consumer engagement and behaviour change by focusing on penalising suppliers for missing targets. Energy suppliers have binding targets to install smart meters, which should be enforced by Ofgem, the energy regulator. However, energy consumers are not required to accept an offer of having smart meters installed and only one large supplier hit both its 2022 gas and electricity smart meter installation targets. Ofgem is in discussions with suppliers that did not meet their targets, and has previously used its enforcement powers to require an energy supplier to contribute more than £1m to a “redress fund”. It told us it is now considering more severe financial penalties than this. The Department and Ofgem are also in the process of reforming the energy retail market, to increase its resilience whilst enabling innovation that helps support achieving net zero. This may require Ofgem to adapt its regulatory approach, moving beyond merely considering performance against targets, to take account of suppliers’ investment in the innovation and consumer engagement that encourages consumer behaviour change in line with net zero. Recommendation 4: Ofgem should consider how its approach to regulating suppliers, on both the rollout and in relation to net zero more widely, takes account of the need for suppliers to engage their customers to promote behaviour change. Update on the rollout of smart meters 7

Too many smart meters are not fully functioning and millions more will be impacted when the 2G and 3G mobile communication networks close. In March 2023, around 3 million (9%) of smart meters were not working properly in total. Of these, 1.6 million are “transitory” issues according to the Department, but the remainder were faulty, and either not sending energy use information to suppliers or not displaying usage to consumers, or both. Suppliers are supposed to take “all reasonable steps” to replace smart meters that are not working properly, but the government’s rollout targets mean suppliers have much clearer incentives to prioritise the installation of new meters rather than replacing broken ones. Consumers are only guaranteed for a year the benefits arising from being able to monitor their energy consumption in real-time - because if their display breaks after that, the supplier currently has no obligation to replace it. An estimated seven million communications hubs (part of the electricity smart meters) will also need to be replaced, because they will lose functionality when the 2G and 3G mobile communications networks are closed. The costs of these upgrades could be very significant, and, like other costs of the rollout, are ultimately passed on to billpayers. Recommendation 5: The Department and Ofgem should set out: a) what they will do to ensure suppliers assign more importance than at present to replacing those smart meters (and their in-home displays) not functioning properly; b) a timetable for replacing the communication hub element of smart meters that will lose functionality when the 2G and 3G mobile networks are switched off; c) measures to ensure that suppliers use future-proofed technology – for example, by excluding 2G or 3G connectivity – in all new smart meter installations.

The smart meters programme has been going for more than a decade and it is not clear how the Department takes important decisions relating to its future, including how it will decide when to bring the Programme to a close. The government first announced its intention to mandate suppliers to install smart meters in 2008, and energy suppliers have been rolling out smart meters since

On the basis of a Report by the Comptroller and Auditor General, we took evidence from the Department for Energy Security & Net Zero (the Department) and Ofgem on progress with the Smart Metering Implementation Programme (the Programme).1 We also took evidence from Energy UK, a senior analyst at the Climate Change Committee and Citizens Advice.

The Department told us that Ministers have a role in promoting the benefits of smart meters and the Programme to consumers.21 The responsibility for consumer engagement primarily rests with Smart Energy GB, a company funded by mandatory contributions from energy suppliers.22 However, the Department told us it plays a role in the policy around convincing groups of people to have a smart meter installed, to help ensure installations progress across all energy consumer groups.23 EDF the energy company told us that there are clear opportunities for government departments to work more closely together to support the programme and for the policy environment around smart meters to be more favourable. These include, for example, requiring smart meters to be installed in new build homes, or in social housing, and incentivising smart meters as a credit for a property’s Energy Performance Certificate.24 Consumer benefits and their distribution among different groups

The Department has commissioned research to identify the energy consumption savings made by consumers with functioning smart meters. The estimates show energy reductions of 3.3% to 3.6% for electricity and 2.9% to 3.1% for gas. These findings are based on a sample of 500,000 consumers who had a first-generation smart meter installed between 2015 and 2018 (with consumption data up to 2019).25

These energy reductions show a slight improvement on earlier estimates included in the Department’s 2019 cost benefit analysis.26 The Department told us it considers the expected percentage reduction in energy use is being maintained and that in a ‘much higher energy price world’, the actual monetary benefits will have significantly increased.27 However, the Department needs more up-to-date data to be confident that smart meters are saving consumers money on their energy bills, in line with its expectations.28 It does not plan a full evaluation, including assessment of the impacts on consumers, until the completion of the rollout.29

The Department told us that real-time data offered by a smart meter means that all types of consumer can benefit from having a smart meter installed, and that its early learning project identified that people with smart meters who were fuel-poor were benefiting similarly to people who were not.30 Smart Energy GB has a duty to ensure consumers in vulnerable circumstances are not ‘left behind’ and conducts surveys to identify smart meter uptake by demographic characteristics.31 Its recent data show consumers that are older, on higher incomes, male, and homeowners are more likely to have smart meters. Consumers that are young, female, on low salaries, and private renters are less likely to have smart meters.32 Wealthier consumers are also more likely than others to be able to replace inefficient appliances (such as washing machines), for example if their smart meter 21 Q 65 22 C&AG’s Report, Figure 3 23 Q 65 24 URM0005 25 Q 98; C&AG’s Report, para 2.8 26 C&AG’s Report, para 2.10 27 Q 88 28 C&AG’s Report, para 17 29 C&AG’s Report, para 2.11 30 Qq 119–120 31 C&AG’s Report, para 1.13, Figure 8 32 C&AG’s Report, Figure 8 12 Update on the rollout of smart meters suggests an older washing machine has relatively high running costs.33 In correspondence to the Committee after the session, Smart Energy GB told us that it has a specific team focused on vulnerable consumers who also lead on working with a range of local and national partners who are trusted voices for vulnerable customer segments, including Carers UK.34 Smart meter coverage by geography

Smart meter coverage across Great Britain in 2023 varies by local authority from 5% in the Isles of Scilly to 69% in Chesterfield. Installation rates in London are only 43%, which the Department considered is due to the challenges of installing smart meters in a densely populated city, particularly in inner-London. The Department told us that technical issues have posed a problem when installing smart meters in blocks of flats (where it is more difficult to place meters and in-home displays in sufficient proximity to each other).35 The Department said progress has been made in resolving this issue and it was piloting a solution.36 However, the Department told us it was piloting this technology in only tens of properties (rather than tens of blocks of flats). It nevertheless expects that number to increase over time, subject to the outcome of the pilot, and particularly from the end of July.37 The Department also said that supplier recruitment of engineers in London is more difficult as installers cost more and are less available.38 Remote areas such as the Highlands and Islands of Scotland also have lower coverage, as do some rural areas such as the Cotswolds.39

The Committee noted that some suburban areas, including the constituency of Richmond Park situated to the south-west of London, can have low coverage but have neither the characteristics of inner London nor rural or remote areas. The Department acknowledged that at 40% installation coverage, Richmond Park was below average (although it did not offer an explanation as to why this was the case).40 The Department said that in London more generally there is a much higher proportion of people in privately rented housing than in the rest of Great Britain. Tenants can be hesitant about having a smart meter installed because they are not sure they are allowed to. The Department’s understanding is that landlords are in support of having smart meters installed because accurate timely bills are less likely to lead to future problems.41

The Department told us that the Data and Communications Company, the central communications and data platform that provides the network ecosystem for smart meters, is looking into options for ‘not-spots’ which the Department considers applies to only 0.75% of homes.42 These ‘few hundred thousand homes’ sit outside the ‘wide area network’ of coverage across Great Britain for smart meters.43 The Department said that one solution the Data and Communications Company is considering involves piggybacking on a 33 Qq 113, 120 34 Correspondence submitted by CEO, Smart Energy GB dated 30 June 2023 35 Q 85; C&AG’s Report, para 1.8, Figure 7 36 Qq 58–59, 85 37 Q 59; C&AG’s Report, para 1.20 38 Qq 87–88; C&AG’s Report, para 1.8 39 Qq 57, 85; C&AG’s Report, para 1.8, Figure 7 40 Q 86 41 Q 87 42 Qq 57, 110 43 Q 57 Update on the rollout of smart meters 13 consumer’s home broadband service. However, the Department advised that this solution will take some time to develop, and is one of a number of solutions being considered.44 Regulatory approach

Energy suppliers have binding targets to install smart meters, enforced by Ofgem, the energy regulator. However, energy consumers are not required to accept an offer of having smart meters installed. The Department told us that it chose a voluntary, demand- led approach to the smart meters rollout because it wanted to engage consumers in the way they use energy. It said that in countries that had chosen either a mandatory or semi- mandatory approach it had led to resistance and a lack of engagement with consumers.45 However, in 2022, only one large supplier hit both its gas and electricity smart meters installation targets. This large supplier had a less than one per cent share of total actual installations by all large suppliers.46 Energy UK told us that one supplier considered that in order to meet its targets it would need to convert all consumers who had previously said no to a smart meter.47

Ofgem believes that the missed 2022 targets were nevertheless achievable, even for large suppliers with ‘lots of incumbent customers’.48 It considers the role it can play in suppliers meeting their installation targets is to provide a clear signal and an incentive to suppliers to invest appropriately and take meeting their targets seriously.49 It is now in discussions with the majority of those suppliers that did not meet their targets, and has previously used its enforcement powers for smart meters to require one energy supplier, OVO Energy, to contribute more than £1 million to a ‘redress fund’.50 It is considering more severe financial penalties, but does not want enforcement action to force or lead to supplier failures.51

The Department and Ofgem are also in the process of introducing reforms to the energy retail market, in part to increase resilience and enable innovation. This reform comes at a time when new and innovative technologies are being developed, including those that contribute to or encourage consumer behaviour change in line with net zero.52 The Department highlighted that some innovative energy suppliers were able to offer tariffs, to consumers with smart meters, that could save up to two-thirds of the costs of charging their electric vehicles if they do so at certain times of day when the energy price is cheaper.53 Ofgem also told us about how, in winter 2022–23, the National Grid ran a demand response exercise with some smart meter consumers, by paying them to turn down their demand temporarily. In future this could be used to help manage demand at peak times.54 The Climate Change Committee analyst told us that smart meters broadly sit on the critical path to net zero and while delays in the rollout do not directly slow things down, the slower than expected progress ‘definitely does not make things easier’. It sees 44 Q 110 45 Q 76 46 C&AG’s Report, para 1.15, Figure 9 47 Q 17 48 Q 99 49 Q 69 50 Q 73; C&AG’s Report, para 1.17 51 Qq 3, 99 52 Q 112; C&AG’s Report, para 2.14; Ofgem, Ofgem launches new proposals to strengthen energy market and protect consumers, 25 November 2022 53 Qq 112–113 54 Q 97 14 Update on the rollout of smart meters smart meters as important in bringing consumers along—paving the way to educating consumers about their energy use, how energy is wasted and changes that are coming, including low carbon heating.55 55 Q 19 Update on the rollout of smart meters 15 2 Replacing non-functioning smart meters, and the future of the Programme Replacing non-functioning smart meters

As at March 2023, 3 million smart meters were not working properly; which means that these meters were either not sending energy use information to suppliers or not displaying this information to consumers, or both. This equated to 9% of the 32.4 million smart meters installed.56 Keeping smart meters working as intended is generally more complex than traditional meters because, for example, they require software updates and have three different and separate components at minimum (compared with just one traditional meter).57

The Department identified three main reasons why a smart meter might not be functioning. In June 2023, it told us that approximately 1 million of the 3 million non- functioning meters were new installations where the smart meter is not commissioned when installed, which can be intentional, such as in new build premises; or where the commissioning process is attempted but fails, requiring a repeat visit. A further approximately 600,000 smart meters were owned by consumers switching suppliers, and the switching process had not proceeded as it should have, for example if the new supplier did not recognise the customer had a smart meter. The Department considers the smart meters in these first two categories as ‘transitory’ given the issues can be resolved.58

According to the Department and Energy UK, the third category included around 1.4 million meters that were working at the point of installation but had since lost communication.59 This includes first generation meters, known as SMETS1, that needed to be ‘enrolled’ (in effect, connected) to the central data and communication platform infrastructure to continue functioning when consumers switch suppliers. In June 2023, the Department told us it might not be possible to enrol 500,000 of these SMETS1 meters, in which case they might ultimately need to be replaced.60 Suppliers’ regulatory framework only requires them to take ‘all reasonable steps’ to replace non-functioning smart meters and doing so does not count towards their binding targets, which only cover new smart meters.61 Suppliers consider this leads them to prioritise installation of new smart meters over replacing non-functioning ones they have previously installed. The Department disagrees, suggesting the existence of a regulatory requirement for replacing a non-functioning meter means there is no practical incentive for suppliers to prioritise meeting their binding targets to install new smart meters over replacing non-functioning meters.62 However, Ofgem acknowledges that ‘all reasonable steps’ (to replace non- functioning meters) is a harder regime to enforce than a binding target to install meters.63 56 C&AG’s Report, Key facts, para 13 57 C&AG’s Report, para 23 58 Q 48 59 Q 48; Correspondence submitted by Head of Future Retail Markets, Energy UK, dated 6 July 2023 60 Q 48 61 Qq 15, 34 and 35 62 C&AG’s Report, para 1.16 63 Q 72 16 Update on the rollout of smart meters Energy UK told us that despite the differentiation between requirements suppliers have processes in place to address metering issues and getting meters working is critical to a positive consumer experience. There are also commercial incentives to want to keep meters working. When smart meters are not working the upfront cost of the meter, i

Consumers are only guaranteed to receive the benefits available from being able to monitor their energy usage via an in-home display for a year. After one year, if the device breaks the energy supplier currently has no obligation to replace it.65 Ofgem said it encourages suppliers very strongly to replace any in-home displays that are not currently working for whatever reason, although the Department accepts that after one year this would be at the discretion of the supplier and the consumer may be charged for a replacement.66

The Department also estimates that 7 million communications hubs (a modular component of the smart meter set) will need to be replaced in the South and Central regions ahead of 2033, when 2G and 3G communications networks are closed. These will be replaced with an equivalent module which communicates using the 4G network.67 The Department told us that it considers this replacement exercise will cost ‘about’ £2 for each household.68 However, Citizens Advice indicate these costs may be very significant and ultimately borne by consumers or taxpayers.69 The future of the Programme

The government first announced its intention to mandate suppliers to install smart meters in 2008, and energy suppliers have been rolling out smart meters since 2012.70 The Programme has therefore been active for more than a decade, and although the Department has produced seven cost-benefit analyses, it has not done so since 2019.71 The Programme is in the Government Major Projects Portfolio of the largest and highest- profile programmes across government.72

At our evidence session, the Department could not provide an up-to-date figure for the Programme’s costs and benefits. It considers that both costs and benefits will have increased since 2019, given: a) lower installer efficiency and delays during COVID-19 increasing costs generally, together with higher than anticipated labour costs; and b) HM Treasury revisions to carbon prices and the increase in retail energy costs following increasing demand for energy after the pandemic and Russia’s invasion of Ukraine.73 We highlighted that the scale and size of the Programme, and length of time it will run for, meant the Department should be providing more regular information for Parliament to assess its progress. The Department acknowledged our arguments for reporting more data (including cost data) regularly to Parliament, while noting that it would want ministerial consent before agreeing to do so.74 64 Correspondence submitted by Head of Future Retail Markets, Energy UK, dated 6 July 2023 65 Q 122 66 Qq 122–123 67 Q 56; C&AG’s Report, para 2.20 68 Q 119 69 C&AG’s Report, para 2.20 70 C&AG’s Report, para 3, Figure 1 71 Qq 89–90 72 C&AG’s Report, para 5 73 Qq 19, 88–90; C&AG’s Report, paras 15, 2.4 74 Qq 91–92 Update on the rollout of smart meters 17

The Department characterises smart meters as a change programme, and recognises that it needs, at some point, to stop being so and become business as usual in the energy retail market.75 However, it considers that there remains significant unsatisfied demand which its current proposed target framework to 2025 recognises, claiming 35% to 40% of customers surveyed say they are keen to have a smart meter in the next six months.76 Energy UK told us the survey data findings reflect a consumer’s opinion before factoring in any barriers or inconvenience associated with an install such as waiting in or needing to rebook an appointment. This means the survey findings do not reflect these real life deterrents to having a smart meter installed and could overstate real life demand.77 The Department told us that energy suppliers also want to roll out smart meters, but they want to do so at a slower pace which better accommodates their commercial interests and objectives.78 The Department feels that by upping the pace of the rollout it can deliver benefits to consumers sooner, particularly as all energy billpayers are already covering its costs.79

As well as the approach to the rollout there are other significant issues for the Department to consider after 2025, including the re-licensing of the DCC (the central communications and data platform), and reform of the industry code governance. Ofgem has a key role to play in both of these.80 The Department told us it still aspires to get as close to 100% smart meter coverage as possible, but only has a plan to 2025. It is developing a framework for after 2025 but does not know when it will be in a position to close the programme.81 75 Qq 106, 109 76 Qq 64 77 URM0014 78 Q 75 79 Qq 47, 75, 94–95 80 Q 109 81 Qq 106, 108–109 18 Update on the rollout of smart meters