Smart Metering, Muddled Economics
Read the latest article from our MD, Joel Stark where he considers the BEIS' updated cost-benefit analysis for the smart meter roll-out and policy framework post 2020.
So we’ve had some time to digest the latest tranche of BEIS’ thinking on the smart meter rollout and post 2020 policy here at Stark HQ. Spoiler: we’re not impressed.
Worth pointing we’re massive champions of smart metering – Stark managed advanced and smart metering underpins almost 20% of the UK’s electricity consumption, every day. However, we’ve never been fans of the UK’s smart metering programme – particularly the role of the Capita-run monopoly DCC. We think this overly centralised model risks holding government hostage to cost overruns and scope increases. Sadly this cost-benefit analysis (CBA) seems to confirm our worst fears.
The CBA is a tour de force in creative business cases. It’s pretty egregious that it’s been compiled without any Treasury oversight. Some lowlights:
- Classic trick for any failing business case – just extend the period of benefits. Extending to 2034 has added ~£4bn to the benefits case, and almost single-handedly justified the whole endeavour.
- £6.2Bn of benefits are ascribed to reduced consumption, a claim which relies on shockingly old data from as far back as 2007. With 15 million smart meters in the field, you have to infer that current data does not support these claims, or surely BEIS would have used it.
- Massive chunks of the benefits case are completely new. Despite the programme approaching its 10th birthday BEIS have uncovered another £1.4 Bn of benefits from households no longer having to read meters themselves, or visiting shops to top up. Odd indeed that this was never included and only appears now DCC costs are so much higher than originally envisaged.
- Every efficiency that suppliers make is assumed to be passed on 100% to consumers – given many suppliers currently operate at 0% gross margin, this seems punchy.
- The metering and labour costs themselves are wildly aggressive, and don’t reflect the received costs of consumers which can include finance costs and commissions.
- Some massive risks to the programme are absent – for example the CBA makes no provision for the switch off of 2/2.5G mobile networks slated for the mid 2020s. This could mean a site visit to replace comms hubs for 60% of smart meters (Central and Southern regions) – could be another £2.2Bn of cost
Taken together, we’re not certain the business case stacks up at all, and for businesses in particular.
- BEIS seem at pains to demonstrate that in the smart metering programme will deliver a metering platform for businesses at a lower cost than existing offerings. Assumptions are deployed around take-up of advanced metering and costs which do not reflect reality at all. If calculated correctly we believe the smart meter programme is NPV negative for the non-domestic sector, who would be better served by advanced metering and a competitive market.
- Most media picked up on the headline that BEIS has accepted a delay to the roll-out until 2024. Most missed the news that the way DCC is funded is set to change. Rather than suppliers paying only for enrolled meters, now all suppliers must pay DCC according to their market share post 2020, even if they or their customers would prefer to use alternatives.
- So, rather than forcing the DCC to cut its cloth and cost base to reflect the number of enrolled meters, everyone must now be taxed to support the escalating costs of this monopoly.
- Even worse, the DCC is a monopoly with an ever-expanding scope – the CBA and framework both make reference to DCC doing more and more activities outside the immediate scope of the programme, all funded by this stealth tax.
We’re going to be raising these concerns and more to BEIS, and continuing to lobby for suppliers and businesses’ right to choose. Businesses should not be forced to tie themselves to the fortunes of the current programme whose benefits remain murky and whose costs have been continually under-estimated.