To welcome the New Year, BEIS this week published its Smart Meter Implementation Programme 2017 progress update. Reading it cold, a reader would have no concerns. ‘Smart’ meter installations are up to 8.6 million and installations are accelerating as suppliers push to meet their 2020 obligation to install smart meters at all their customers’ sites. What the report does not highlight though is the practical reality of the roll out programme- which has all the hallmarks of an expensive car crash.
I haven’t met anyone who disagrees with the principle that Smart meters have the potential to revolutionise our energy landscape and therefore support a roll out programme that gets us to a Smart world as soon as possible. The predicted revolution is not, as has been trailed, as a response to customers changing their behaviour in response to what they see on their in home devices (IHDs). Where the revolution comes, is in the ability to integrate smart devices, remote controls and electric vehicles and there is growing momentum in technological innovation for all three - accompanied, by the entrepreneurs, in a growing frustration at the pace of delivery of the metering infrastructure.
The associated excitement around the future world is the reason that all suppliers are obligated to deliver their roll out programmes by the end of 2020.
Why is the roll out programme not so smart?
1. SMETs 1 vs SMETs 2: All but a handful of meters installed to date are of the SMETs1 technology. This technology is not interoperable between suppliers and does not integrate with the Smart infrastructure built by the Data Communications Company (DCC) to facilitate secure, and efficient switching. We therefore have a large and expensive SMART infrastructure, with which since November 2017, all suppliers can now interface in line with the Smart Energy Code and Licence Conditions. However, the infrastructure is not being actively used because SMETs2 meters are not yet available at scale. Therefore, in reality the infrastructure and suppliers, whilst match ready, have not been tested at scale due to the lack of appropriate meters.
Meanwhile the pace of installation of SMETs 1 meters accelerates, and the DCC are working hard to devise a ‘workaround’ solution to enable SMETs1 to operate through the DCC systems. This is at best, likely to be a difficult, clunky and expensive solution. So even when later this year, SMETs2 meters become standard, the industry is going to have to cope with the new SMETs 2 solution at the same time as operating separate processes for SMETs1 meters and traditional meters. Ultimately the SMETs1 processes will be replaced with another set of processes to interface with the yet to be delivered SMETs 1 solution. With a following wind this is forecast to be at the end of 2018, but given the delay experienced in the rolling out the SMETs 2 solution, is probably over optimistic.
With the volume of customer and metered data, security and complexity involved, it is hard to believe the associated customer experience is going to be good.
2. Supplier Hub vs Competition: The traditional regulated model puts the supplier at the centre of all things. Licenced suppliers are responsible for ensuring their agents deliver in line with industry codes- in this case the Smart Energy Code and the Smart Implementation Code of Practice (on top of all the existing codes). Effectively, this means they are responsible for all the installers who go to people’s houses and spend around two hours replacing the meters, setting up the IHDs and ‘pairing’ the meters with the DCC systems. In addition they are responsible for sourcing the SMETs 1 & 2 meters from meter asset providers (MAPs). If they acquire a customer whose meter belongs to a MAP with whom they do not have an agreement in place, they are obliged to get an agreement in place within 6 months, or replace the meter again at their own cost.
This would not be unreasonable in the ‘old world’ where the Big 6 dominated all of whom have their own metering divisions. However, as of today there are more than 60 suppliers in the market, the majority of whom are new in the market, running fast to grow and are reliant on an outsourced supply chain model. For these new entrants, they do not have leverage of scale, resource or budget, and in the main are between a rock and a hard place. They are obligated to roll out SMART meters but are struggling to get negotiable contracts in place with the supply chain who are, not unreasonably, focused on the scale players with their limited resources. Contracts, where available, are of the ‘take it or leave it’ type.
As far as possible suppliers need to back off all the code obligations relating to customer experience onto their supply chain, with control at best through KPIs and contract management. They do not have the resources to employ their own skilled installers, and even if they did, they are an incredibly scarce resource with the requirement now to install many thousand of meters per day in order to hit the 2020 deadline. It is hard to see how performance issues and poor customer experience will be avoidable, and it will be the suppliers who get fined for failure to achieve unrealistic obligations.
3. A licence to print money? It is not all doom and gloom. If you are operating on the ‘right’ side of the equation, the SMART roll out is a fantastically profitable opportunity. Whether it be developing the DCC systems (SMETs1 and SMETs2), ‘auditing’ all the suppliers to ensure they are DCC ready (at suppliers cost, on an annual basis), providing the communications network or complex security advice and infrastructure, the obligated market has to pay for your services. Given the complexity and delay to the overall programme, it is probably not surprising that the DCC cost £211m in 2016/17, and were 48% over forecast. The company is expecting to employ 340 people in 2017/18. Whilst these costs are regulated, and some were disallowed by OFGEM, they still appear to be increasing exponentially (which is understandable given the scale of the challenge). However, what is less visible, is the 12% allowable margin that the DCC is permitted to earn through the price control, surely a luxury given the ongoing beating that the suppliers get for their decreasing single figure margins?
No one disagrees with the aspiration for the Smart meter roll out to be completed as quickly as possible. But the time has come for BEIS to draw breath and review what is really happening on the ground. Setting challenging principles and policy are one thing, but not if it is at the expense of customer choice, customer service and customer bills all of which are in danger of heading in the wrong direction as a result of the roll out programme.