When plans for the rollout of smart meters across the UK were announced back in 2009, the then energy and climate change secretary Ed Miliband announced,

“We need to...get smarterwith our energy ... so it's important we design a system that brings best value to everyone involved.”

We are now eight years on. The rollout is still slated to complete by 2020 but has been hit by a number of challenges over the past few months due to:

• Erosion of the benefits case and resulting net present value
• Increased costs due to the delay in developing and rolling out the central communications hub
• Backloading of rollout timescales impacting installers due to a shortage of suitably skilled installers
• Complexity in interoperability and transition from first generation to second generation smart meters
• Criticism of the 2017 Smart Meter Bill extending regulatory powers by five years, suggesting a future extension in the rollout deadline

Given the smart meter rollout programme is so politically sensitive and impactful for energy companies, their rollout partners and of course the consumer, let’s take stock of the current progress made and what this means for the overall business case.

So, how is the rollout going?

From the start of the programme up until 31 March 2017 (the latest published data) large and small suppliers have installed around 6.3 million smart meters in domestic properties, of which 5.76 were operational in Q1 2017. The difference between the two numbers is explained by technical issues and some customers choosing to switch to suppliers currently unable to operate smart meters in smart mode.

Against a total of 48 million domestic meters (around 21.6 million gas meters and 26 million electricity meters) this represents only 13% of the total rollout. Critics of the rollout argue that whilst installations are growing, the energy sector is off pace to achieve the current 2020 target.

Politically the UK Government is unlikely to want to be seen as lenient on the energy sector but the past few months have seen a range of energy companies such as SSE and EDF Energy urging the government to review its 2020 deadline. It is striking of course to note that British Gas claims to have installed well over 50% of total smart meters, leaving an estimated 12% for SSE and 3% of EDF Energy amongst the other market players. It’s perhaps no wonder that the energy companies that are relatively further behind on the rollout are the ones calling for a deadline extension.

Is the rollout likely to be extended?

The Queen’s speech in June 2017 promised a Smart Meter Bill containing two policy areas:

• The introduction of a Special Administration Regime to ensure the continuing operation of the national smart meter service if the provider becomes insolvent and more importantly;
• The extension, by five years, of powers to make changes to smart meter regulations, and make sure the rollout is delivered effectively

Whilst the Queen’s speech reiterated that the requirement to offer a smart meter to all households and businesses by 2020 remains in place, the above statement is being interpreted as potential future ‘wiggle room’ for energy companies. Scottish Power also signed a five-year partnership with Actavo in October 2016to help deliver the majority of its smart metering installation programme. The fact this contract lasts for five years could take its desired rollout to 2022 rather than 2020.

What progress has been made on the central communications hub?

The other main driver of delays to the programme is the slow progress being made on the central communications hub provided by Data Communications Company (DCC). DCC is a subsidiary of Capita and was granted a licence by the Department for Business, Energy and Industry Strategy to build and integrate a national telecommunications network for smart meters. DCC faced over a year of delays in delivering the technology for smart meters.

When the DCC system finally went live in November 2016 it was found to be unable to support pre-payment meters, which supply around six million UK households. The go live was originally due in 2015 but was put back three times in 18 months. With this go live date, suppliers were able to begin rolling out SMETS2 meters which have better interoperability and make switching easier.

The main challenge this presents is due to the significant challenge in migrating SMETS1 (first generation smart) meters onto the DCC network, a problem exacerbated by the delays due to a larger number of SMETS1 meters being installed during that period. It has also been noted that some SMETS1 smart meters (particularly for pre-payment customers) suffered interoperability issues which required them to be physically replaced after a change of supplier. It has also been reported that many meters installed prior to DCC go live are incapable of being adapted to the central system, meaning they will have to be replaced.

Clearly there were lessons to be learned from the DCC go live. Energy UK (the trade association for the UK energy industry) pushed for appropriate controls and assurances to be put in place to ensure that functionality releases were fit-for-purpose before their release into live. The testing activity itself also proved complex with numerous instances where test participants were unable to connect to test environments following new uplifts to code. Any IT programme has the potential to be complex, particularly during its testing phase, but the slippage to go live has clearly had an impact on the wider rollout timescales.

What is the view of the regulator?

Whilst energy companies and their meter installation partners are planning for accelerating their rollout activities, Which? reported in June 2017 that energy companies were still installing SMETS1 smart meters and none installing SMETS2 meters. Most are planning to do so from Q3 – Q4 2017 but there are indications that the energy regulator is also concerned over the resulting slow progress of smart meter installs and the seeming lack of ‘ambition’ of energy companies to prepare to install SMETS2 meters. Ofgem wrote in June 2017 in an open letter, that:

‍“We are concerned that some suppliers have apparently unambitious approaches to these preparations and for the subsequent installation of SMETS2 meters. This could hamper progress later in the rollout and suppliers must carefully consider their strategies for the critical transition from SMETS1/ advanced meters to SMETS2 or otherwise risk non- compliance with their regulatory obligations.”

What is the impact on third party partners?

Ofgem noted that a number of energy companies reported issues with the performance of their installation partners in 2016. There were also reports from some suppliers that they – or their partners – had faced significant challenges in recruiting enough meter installers during 2016.

It is clearly a challenging time for the likes of Siemens Utility Services, Morrison Utility Services, Trilliant, Amey and Trojan Utilities with their respective contracts. Over the next two years, close to 6,000 individuals with the skills to install smart meters will be recruited and trained, joining the almost 8,000 already in post. The scale of this recruitment is designed to meet the forecast fivefold increase in smart meter installations from the current 200,000 per month to more than one million per month. Fast, effective and accredited training programmes are therefore vital, whilst ensuring that key aspects such as safety aren’t compromised.

Not only do these installers need to be trained but the organisations they belong to need to:

• Ensure the installation demand is effectively planned and capacity managed
• Deliver the expected excellent customer experience, particularly to those who may be elderly, vulnerable, fuel poor or have households with difficult access
• Utilise scheduling technology that optimises the utilisation, routing and delivery efficiency of field-based installers
• Adopt meaningful mobile technology that improves asset identification, compliance and productivity of the installer workforce
• Operate a sustainable business model based on efficient, optimised processes and ways of working

What will it mean for the settlement market?

The anticipated changes to the half hourly settlements system combined with the uptake of smart metering in the UK are expected to open up a new market of flexible tariffs that incentivise customers to change their behaviour at periods of peak demand.

Ofgemhas recently launched its review of the Mandatory Half-hourly Settlement Significant Code following a previous consultation in November 2016. Whilst not essential to the smart meter rollout directly, most organisations agree that it is the right thing for Ofgem to do.

The transition won’t be a quick one. Current timescales suggest that a decision on the mandatory half hourly settlement mechanism and its implementation won’t be finalised until the end of 2019 or early 2020, so broadly in line with the smart meter rollout. Without a currently defined target operating model there are a lot of unanswered questions for market players, including:

• Significant investment costs in the short-term due to required changes to IT systems for the likes of ELEXON, energy suppliers and third parties
• Additional costs to dual run two settlement systems during the transitional period
• Helping customers understand the range of information and tariff flexibility that a HHS will give them, when they are only starting to be exposed to smart meter displays
• HHS market changes aren’t happening in isolation; they are planned at the same time as the ongoing smart meter rollout (and migration of SMETS1 meters) alongside initiatives like Ofgem’s Faster and More Reliable Switching Programme
• Changes to policy required to facilitate the transition to mandatory HHS
• Future roles and responsibilities for settlement supplier agents and the design of the settlement process

What is the impact on customers?

The smart meter rollout should be seen in the context of current low levels of current engagement and awareness in consumers. Critics have warned that it is unclear whether smart meters will save consumers any money and they could even end up paying for the roll-out through higher energy bills.

Smart Energy GB, commissioned a survey into energy behaviour amongst smart meter users in April 2017. Whilst it suggests that those who have had a smart meter have a greater likelihood of looking into ways of using less energy, other results present a more mixed picture:

86% of those with a smart meter have changed the way they do things around the house to use less energy, but 95% of those without a smart meter have also done so, as have 84% of those who have no understanding of what a smart meter even is. It also found that more people have made changes to their home who don’t have a smart meter than those who do.

The current adoption of smart home devices (aside from smart entertainment devices like TVs and games consoles) is also critically low. By 2020, 13.5 billionconsumer items are expected to be connected to the web, but only around 2 – 3% of UK consumers currently own a smart home device (such as a smart thermostat, smart lighting or smart home appliance). What is more, surveys have suggested that 70% don’t plan to buy any connected devices between 2016 to 2017. Smart meters don’t need to be part of a connected home to deliver benefits, but it does show that broader consumer engagement has some way to go.

It’s also worth reviewing the consumer benefits case for smart metering. The most recent Impact Assessment predicts that by 2020 an average household could make an annual saving on their dual fuel energy bill of £26, rising to £43 in 2030. It is hard to anticipate that a benefit of £26 per year or 7 pence per day is enough of an incentive to drive sustained behaviour change.

This is exacerbated by any increases to the smart meter programme costs needing to be passed through to the consumer bill, or at least an erosion of the benefits case for energy companies meaning fewer savings are passed through. The near-term profile suggests an increase of c.£7 per annum is projected as suppliers pass their costs onto consumers during the smart meter rollout.

Over half of the overall benefits case results from savings associated with suppliers’ costs, and around 30% from consumers (mostly reduced energy consumption), with the rest resulting from network, generation and carbon-related benefits. Given the original assumption was made of reductions of 1% to 4% of consumer energy usage, sustained behaviour change would be needed to deliver this.

There may be wider benefits for the consumer from adopting time of use tariffs; taking up demand side technologies such as battery storage and smart appliances; easier switching and tariff optimisation and the smart meter enables a number of these. But there are a range of barriers to making this type of energy network a reality and such approaches are unlikely to deliver any near-term consumer benefits.

What is the impact on the business case for smart metering?

The original smart metering business case was produced in 2011 based on an 18-year period and a delivery model of supplier led roll-out of smart meters by 2020 with a centralised Data and Communications Company.

From original estimates, it is clear that the NPV has eroded, resulting from the scale of reduction in the smart meter benefits case. There are a number of factors driving this, including:

• Increased cost of DCC solution (-£355m impact on NPV)
• Greater number of meters being rolled out later than originally modelled, reducing benefits case within the NPV
• Backloaded rollout profile results in increase in the volume of SMETS1 meters and decrease in the volume of SMETS2 meters, driving greater a cost increase to allow for interoperability risks
• Increased cost of manually reading remaining traditional meters for a longer period of time
• Other changes related to installation and asset costs due to a more accurate forecast including the costs of training installers, providing tools, managing installers in the field, appointment setting, and other back office support costs

It is also important to note that whilst the cost picture has decreased from 2011, this reflects installation- related costs that are incurred further into the future and discounted more heavily during the 18 year NPV.

How can Leadent help me understand this further?

Working with energy utilities over a number of years, we have seen first-hand the rapid changes affecting this sector. We believe that asset intensive and field based operations are too pivotal for energy companies to simply sit back and follow the pack; there’s a need to innovate, to realise value for the customer and to make a greater contribution to the company’s goals. To help with that, we’ll bring a different way of thinking, but combine that with an absolute understanding of the drivers of your business and the challenges you face.

For smart metering, we have helped organisations such as EDF Energy, British Gas and National Grid to understand:

• The business case for rollout and adoption
• Ways to manage the field installer workforce and ensure the right benchmarks of efficiency and utilisation
• How to become mobile whilst optimising work scheduling for field based operations based on accurate demand-led forecasting
• Evaluate and re-engineer business processes to support smart metering deployment
• Understand the customer experience and track the consumer benefits case for smart
• Evaluate latest trends in smart grids, demand side management, internet of things and connected home technologies

Get in touch to find out how we can help you.