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Smart meter rollout extended as benefits continue to fall
The Government has finally agreed to extend the deadline for smart meter installation, pushing it back to 2024 under a new supplier obligation that will come into effect from 1 January 2021 when the current obligation ends. At the same time, the latest cost projections for the scheme have been released, showing an increase from £11 to over £13 billion.
Interestingly, a new cost benefit analysis has been released. It is somewhat difficult to follow, with costs and benefits being appraised over different periods. In recognition of the likely extension of the programme, the costs and benefits are assessed out to 2034 rather than 2030 – the £13.4 billion of costs is to 2030, with the costs to 2034 being assessed at £15.9 billion.
The benefits on the other hand are £19.5 billion, resulting in a net benefit of £3.6 billion over 21 years from 2013. £7.6 billion of benefits are expected to be realised by consumers and £8.1 billion by suppliers, with the remainder being demand shifting benefits (£1.4 billion), network benefits (£0.4 billion) and carbon and air quality benefits (£2.0 billion).
This means the net benefits are now assessed at £3.6 billion, a significant reduction on the £5.7 billion in the 2016 cost-benefit analysis and the £6.7 billion in the 2013 business case. In six years, the benefits have almost halved.
By June this year only 14.9 million smart meters had been installed against a target of 53 million. To have met the goal by the original target data at the end of 2020 would have required a significant ramping up of installations, which would have added further costs to the programme, eroding the benefits expected from the scheme.
It was also highly likely to fail – the latest research from Smart Energy GB, cited in the consultation paper, suggests that only 39% of consumers who don’t yet have a smart meter, would actively seek or accept one. That suggests that the number of installations could be doubled to around 30 million, with a further 23 million consumers potentially refusing to accept a smart meter.
The Government continues to talk up the benefits of the scheme, but the reality is that not only are the costs increasing, but the benefits may not be realised since they rely on consumers changing their behaviour. The Government cites research indicating that after a year, 80% of smart meter owners still have their IHD plugged in and in use, with 45% looking at their energy consumption at least weekly one year after installation, and 29% looking at it most days.
If the next 15 million smart meter users are as engaged – which is unlikely since early adopters are likely to be more interested and proactive – then only 45% of 30 million consumers would be checking consumption weekly, ie a quarter of the number of target installations. The demand reduction benefits are likely to decline with increasing installations as smart meters are given to consumers who are unwilling or unable to adjust their consumption.
However, the cost benefit analysis assumes around one third of all energy customers will meet the higher reductions in consumption which customers of suppliers with more mature and sophisticated engagement approaches currently achieve, with the remaining two thirds reducing their energy consumption in line with the programme’s original expectations. £6.2 billion of the benefits to consumers is expected to come from reductions in consumption, and £1.4 billion from time savings (not having to submit meter readings and so on). It’s difficult to believe these benefits will be fully realised.
Some of the supplier benefits such as not having to go and read meters (£2.3 billion) and other reduced costs of serving customers, are far more credible, but other are also tenuous such as £1.2 billion is expected to come from lower costs of customer switching due to automation and a further £1.2 billion from lower call handling costs from customers querying bills – billing will not become less complex and suppliers have a poor track record of delivering accurate and robust billing systems.
According to Cornwall Insight, the new target of a minimum of 85% coverage level by 31 December 2024, means an installation would need to take place every seven seconds.
“The flexibility of the all reasonable steps framework will be superseded with a much more structured framework with binding installation milestones that will need to be met each year. This means that suppliers will need to maintain their focus on their smart meter rollout, with no room for back-ending their rollout delivery to the 2024 deadline.
Although the new 2024 target might seem more manageable on paper, it is still likely to be a significant challenge. Installation rates have fallen for the fourth consecutive quarter due to issues surrounding the transition to the newer SMETS 2 meters, and this trend will need to be reversed with the installation rate picking up considerably if the 2024 ambition is to be achieved,” – Rowan Hazell, analyst at Cornwall Insight
This may well result in further alienation of customers that are reluctant to accept smart meters. There have been recent reports in the press of suppliers excluding consumers that do not have smart meters from their most attractive tariffs. This is controversial, and many people see it as further evidence of the pressure tactics being used by suppliers to “force” smart meters on their customers. This is a function of the fact that suppliers are fined if they are considered to be failing to meet target installations, but as customers are not obliged to agree to a smart meter, the target is not within the suppliers’ control.
“In addition to setting out smart metering energy supply licence obligations, the Government has used wider energy policies to encourage the smart meter rollout. For example, the metering requirements under the new Smart Export Guarantee are enabled by the functionality provided by smart meters. Energy suppliers are also offering tariff plans associated with the installation of smart meters, enabling consumers to access the benefits of a smart system earlier,”
However, it appears from the consultation paper that conditional tariffs meet with Government approval. This will be disappointing to the not insignificant numbers of consumers that are unable to have a smart meter for technical reasons. Despite the SMETS1 deadline having long since passed, suppliers are still installing the first generation of smart meters, many of which cease to work if the customer changes supplier.
The revised target is a move in the right direction, sort of, but it is still challenging and still costly, while the expected benefits fall. Despite the Government’s optimistic tone, there continue to be reports of technical problems, and one of my readers was recently told by his supplier that he should wait for SMETS3 for his meter to be read remotely.
Smart meters should deliver benefits to the energy system, enabling a new set of differentiated tariffs, and allowing aggregators and energy services providers to optimise loads of all sizes. But the GB implementation plan has been fraught with problems, largely due to poor design: the choice of suppliers rather than distribution network operators to lead the roll-out was flawed, and some of the technology choices have been sub-optimal.
“But what it says about this new government’s approach to energy policy could be more significant. Here was a government target the industry has known about for quite some time, and BEIS has now relented to pressure and kicked it into the medium- to long-grass. If this government is prepared to do this for smart meters, regarded as critical for the energy transition, then what’s stopping it from doing the same for other clean energy measures, or even the net zero target?” – Liam Stoker, editor in chief, Current±
In some ways the decision by the Government to extend the rollout is the worst of both worlds, ploughing on with a deeply flawed scheme that may fail to deliver any net financial benefit, while signalling to the market that it is not necessarily that serious about even it’s highest priority energy objectives, underminines confidence in other major ambitions such as the net zero target (which is also problematic in practical terms).
The Government would be better taking a pause, and evaluating whether a more change in approach to the smart meters programme would be more effective. Removing the target and penalty regime for suppliers would put a stop to the pressure tactics that are alienating consumers, and will help restore consumer confidence – if a less heavy handed approach is taken then consumers might be more inclined to trust in the potential benefits. A pause would also provide time for technology to catch up with the Government’s ambitions.
Unfortunately the Government is likely to press on regardless, continuing to laud the benefits even as they trickle away.