Thoughts from our Finance and Commercial Director, Alex Warren

The last few weeks have been extremely dramatic from a political perspective with the stakes extremely high over the UKs future relationship with the rest of the world. Now I am not a politician or a civil servant but, if I were, I may be minded to distribute bad news on poorly performing government run projects at a time when the media are somewhat distracted.


The National Audit Office (NAO) report on Smart Meters was always due to be published in the Autumn the timing was interesting and the contents particularly damning. The cost of the project is currently predicted to be £11bn and may end up at a multiple of that. It could end up being similar to our divorce bill with the EU. Make no mistake this roll-out is being paid for every day by domestic and non-domestic customers. The point is that no one really knows.

In that context I thought I would make some observations about the NAO report which don’t focus on the popular stories about the lack of SMETS 1 interoperability and the consistent delays to the programme. There are other more important points that need to be made.


Lack of HM Treasury Oversight

The Smart Meter Roll-Out lacks financial oversight from a senior HM Treasury Official. Let me repeat that again so it is fully understood.  The Smart Meter Roll-Out lacks financial oversight from a senior HM Treasury Official.  So, one of the largest consumer funded projects in recent history lacks the governance framework that should support a tax payer funded project. This is because BEIS have deemed it to be an “Industry Change” project. As a result, the project apparently doesn’t need senior Financial official oversight.

As the project cost is spread across all consumers’ bills then effectively we are being divided and conquered. Of course all consumers can opt-out of the programme whereby this charging will fall off their bills at the end of 2020. For non-domestic consumers, as we will see below, this seems like a sensible option.


No appraisal of Energy Savings

The last time BEIS performed a Cost Benefit Analysis was in 2016. The NAO make the observation that any energy savings derived from smart meters are particularly hard to assess. In fact, the NAO state that the energy savings being achieved are not being monitored in a systematic or controlled fashion.

This makes no sense to me. Surely it must be possible to measure and assess any changes in consumption pre and post smart meter install? In addition, it must be possible to monitor any load shift from peak to non-peak times?

It strikes me that energy savings by consumers are only likely if there is sufficient financial incentive for them to change behaviour and have access to high quality data.The fact that non-domestic consumers don’t need to be offered an in-home display coupled with a lack of clarity over fault resolutions means that accessible and high quality data is unlikely to be in abundant supply.

To reiterate, non-domestic customers can opt-out and elect for Advanced Metering. By appointing their own Data Collector they can ensure high quality energy data, provided independently of their Supplier.  It could well be time to take control.


Are costs out of control?

The NAO point out that all the costs of the Smart Meter Roll-Out are not being monitored. The Smart Meter Roll-Out is already over budget. BEIS are focussing on the supply and install cost of metering and the Data Communication Company (DCC) cost base.

Supply and install costs are typically funded by Meter Asset Providers (MAPs) who then rent the meter sets onto the customer via the Supplier bill. If it were me I would be using the MAP cost in the standing charge rather than the binary supply and install costs as BEIS need to understand MAP and Supplier margins being made at the consumers’ expense.

In addition, actual installation costs are significantly more than originally anticipated. There are many reasons for this but perhaps the most significant is that the roll out is being led by Suppliers rather than the Distribution and Network Operators.

In relation to the DCC, we do have a degree of Ofgem oversight which is helpful. But Ofgem themselves are resource constrained. The DCC is in essence comprised of 4 large entities being Capita, CGI (the Data Services Provider or DSP), Telefonica and Arqiva (the Communications Services Provider or CSPs) who each have defined roles. My understanding is that DCC spend to 2020 will be circa £1bn.

It seems that the DCC will recover its costs via all consumers’ bills until the end of the mass roll out in 2020, whereafter its costs will be picked up only by those consumers that have a smart meter installed.  Only consumers that have a smart meter installed will pick up the DCC Operating costs post 2020. A rather unattractive proposition for those with a smart meter installed and I wonder whether the lowering margins for DCC participants will inevitably lead to lower data quality standards.


The scope of the project is not well understood

One thing that was saddening but perhaps expected given the complexity of the task at hand was that the full scope of the DCC was not fully understood by BEIS at the time when the license was awarded. This lack of clarity over scope naturally lends itself to a process of ambiguity where the outsourced provider will put in scope variations to manage up revenue over time.

There are some glaring omissions however that non-domestic customers need to be concerned about in particular the fact that the DCC is not set up to handle daily data. The expected throughput I believe is one read a month per meter but for a customer to manage energy they’ll need a higher frequency of data and to ideally receive it daily. Therefore, it is inevitable that to engage customers and especially to run effective Half Hourly tariffs that the DCC costs will rise further. This poses yet another threat to the data journey for non-domestic customers.


Who will fix the faulty meters?

Whilst the NAO was silent on this I am unsure whether this has been thought through fully. Given the multiple hand offs, I can see multiple finger pointing at the time of a meter or communications failure. We are likely to see Suppliers, MOPs and the DCC in some kind of Mexican stand-off with no money left in the pot to pay for the site visit.

SMETS 2 meters do not appear to have an optical probe port so there is no way to download half hourly interval data which leaves us looking at mass meter exchanges and cost increases.

An open question for me is that does that mean that customer data will be lost forever? There were so many lessons to learn from the fully interoperable Advanced Metering market however basic errors may well have been made.


A failing roll-out mechanism

My favourite part of the NAO review was Figure 21 on Page 69. The table shows the number of European countries where the network companies (16) are responsible for the roll out and the number where the Supplier (1) is responsible. In a similar way to Brexit we are truly in the minority.

Talk to any field service company around the world and they will tell you that the largest driver of efficiency is density. It makes sense for a van to be parked in one street completing multiple jobs rather than moving from town to town. This model inherently increases installation costs as a single street will have multiple suppliers with different installation timescales. In addition this gives the Energy Suppliers with larger customer bases a very significant competitive advantage.

I would also note that Dual Fuel installation costs are being quoted at around £200 in today’s market and the initial business case was around £107. The impact is higher rentals in customer bills and makes smart metering look increasingly expensive.


Cost Benefit Analysis to be presented before Parliament in 2019

As part of the review BEIS has committed to presenting a fully updated Cost Benefit Analysis before Parliament in 2019. We hope this is in early 2019 but again the political calendar is going to be jam packed and so we can only hope that Parliament is afforded the time to scrutinise the analysis in some detail. Anything else would frankly be an insult to the UK energy consumers.


A single point of failure?

As I write this note the DCC is unable to contact meters in the Central and South Regions due to an issue with one of its Communications Service Provider (CSP).  All businesses have technology issues but this is typical of a centralised industry with no plan B or redundancy when things go wrong.

Whereas Data Collectors with non-domestic customers are able to utilise other networks and alternative communications strategies to give their consumers a better data experience. Competition always drives the customer experience.

One thing we do know is that without the data the energy savings simply do not happen.


Conclusion

We really welcomed the NAO review into the Smart Meter Roll-Out but are particularly concerned for non-domestic customers that have taken SMETS metering into their portfolio. Given the ever increasing risks to the programme, it is now more important than ever that non-domestic customers take control of their metering arrangements.

If they don’t then a “Smart Exit” rather like a “Good Brexit” might be very difficult to achieve.