Oxera Consulting’s assessment of the Smart meter roll-out
New analysis of the smart meter programme underlines serious flaws in the government’s analysis, threatening the viability of the rollout. Meanwhile, costs of running the central data and communications hub, the DCC, have more than doubled to £4.14bn.
As the government consults on the future of the £13.5bn programme Oxera’s appraisal challenges a number of assumptions made by the Department for Business, Energy and Industrial Strategy (BEIS) within its latest cost benefit analysis (CBA). Oxera’s findings suggest an already borderline business case is based on underestimated costs and overestimated benefits while the department has made scant provision for additional costs arising from further delays.
BEIS calculates that the £13.5bn programme will deliver benefits of £19.4bn. Its most recent net benefit assumption of £5.9bn suggests a benefit-cost ratio (BCR) of 1.44. In the context of other projects, 1.44 is considered low value for money.
Commissioned by energy data and analytics company Stark, Oxera’s analysis highlights a range of issues likely to further erode BEIS’s business case, including:
- Real-world costs for smart meters could be much higher than the £36 assumed
- Real-world costs for advanced meters – the alternative to smart meters for businesses – are 70% lower than assumed
- The full costs levied on consumers are unlikely to be captured by the headline 6% cost of capital applied
- Lack of quantitative evidence to support assumptions around sustained energy savings puts almost a third (£6.2bn) of benefits at risk
- Additional costs (hardware, industry change) required to unlock the £1.4bn demand-shifting benefits are omitted
- Optimism bias of 5% is inappropriate – HM Treasury guidance suggests a minimum of 10% for equipment related projects
- Significant risk factors have not been modelled e.g. the opportunity cost of maintaining 2G networks – Telefonica (which provides communications services to the smart meter central Data Communications Company) may have to pay £48.7m annually for its 2G spectrum.
Meanwhile, latest data published by Ofgem shows that forecast costs to 2026 for the Data Comms Co, run by Capita, have increased to £4.14bn, which is 103 per cent higher than the original bid.
Energy data and analytics company Stark commissioned Oxera to review BEIS’s assumptions as it is concerned that the DCC may be adding cost to the rollout while stifling competition by branching into areas originally outside of its scope.
“The smart meter programme is in trouble and costs are out of control, particularly the spiralling costs of the DCC and its service partners,” said Managing Director Joel Stark.
“Part of the problem is the time it took for the DCC to define specifications, but we are also concerned that a centralised monopoly is sitting at the heart of the rollout – and moving into other areas. That creates a significant risk that regulated revenue distorts adjacent markets.”
Stark believes limiting the DCC’s remit to delivering robust communications for Smart meters would help to bring costs back under control while enabling other businesses to innovate, thereby increasing programme benefits.
Allowing smaller businesses to choose advanced meters over smart meters would also reduce programme costs while unlocking greater benefit, argues Stark.
He claims advanced meters offer equivalent functionality at equivalent cost without making businesses reliant on suppliers as gatekeepers of their consumption data, an assertion supported by Oxera’s analysis.
At present, suppliers can only count smart meters towards the new government rollout target of 85 per cent completion by 2024, though larger businesses have been allowed to choose to install advanced meters. Advanced meters do not have to be enrolled into the DCC, which means third parties can provide independent data services. They also overcome the technical restrictions of smart meters in the non-domestic sector.
“So the current smart metering infrastructure arrangements erect barriers for businesses in terms of independent access to their data – and businesses are not being made aware that there are alternatives,” he added.
“We believe that is a very retrograde step. We want the programme to be a success. In order for that to happen, suppliers should be allowed to offer advanced meters, as well as smart meters, to business clients – and those meters should count towards their obligation.”