Preparations for the Roll-out

7/29/2019 Preparations for the Roll-out

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Department of Energy and Climate Change

Preparations for the roll-outof smart meters

Methodology

JUNE 2011


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2 Preparations or the roll-out o smart meters

Methodology

The main elements o our feldwork, which were undertaken between January and April 2011, were:

Selected method Purpose

1 Review the Departments cost benefit

analysis o the smart metering programme, asset out in successive impact assessments, andconduct scenario modelling using the underlying

inancial model prepared by the Department.We did not review the Departments baselineprojections o energy consumption or pricing.

To understand the Departments options appraisal

and decision-making process; and identi y theimpact o changing key assumptions in theDepartments model on its estimates o costsand bene its.

2 Literature review o academic papers onbehaviour change impact o smart meters andreal time displays.

To contextualise the Depar tments evidence orits assumptions on the behaviour change e ect o smart meters.

3 Document review o Energy DemandResearch Project papers and analysis.

To understand the design o the Governmentsenergy demand reduction trials and the potentialand limitations o the resulting evidence.

4 Document review o programme governanceand risk management documentation, programmeplans, inancial data and progress reportsprepared by the Department, O gem andconsultants to the smart meters programme.

To understand how the programme was managed,and per ormance against plans assessed.

5 Semi-structured interviews with o icials inthe Department and O gem, including:

Department

Senior Responsible O icerHead o Smart Metering Policy

Senior Policy Advisors

Economic Advisor

Technical Speciali st

Consultant Advisors (AECOM)

Ofgem

Commercial Director

Programme Director

Workstream Leads

Consultant Advisors (PA consulting).

To understand how programme planning andmanagement practices operated, and the evidencebase and policy proposals or smar t meteringwere developed.


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Preparations or the roll-out o smart meters 3

Selected method Purpose

6 Stakeholder interviews and analysis o responses to the Departments consultationon its proposals including:

Energy Suppliers

EDF

SSE

British Gas

First Utility

Consumer Bodies

Consumer Focus

Which

Trade Associations

Energy Networks Association

Energy Retail Association

BEAMA

Communications Industry

British Telecom

Meter Manufacturers

Landis Gyr

Other interested bodies

The Institution o Engineering and Technology.

To identi y key risks to del ivery as perceived byindustry and consumer stakeholders and howthese have been re lected in the Departmentsdecision-making.

7 Review of technical risks commissioned romengineering consultants Mott MacDonald.

To assess the Departments approach todeveloping unctional and technical speci icationand identi ying key technical risks.

Design and Production by NAO CommunicationsDP Ref: 009616-002


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De r e E erg d C e C ge


REpoRt by thEComptRollER anD auDitoR GEnERal

hC 1091SESSion 20102012

30 junE 2011


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The National Audit O fce scrutinises public spending on behal

o Parliament. The Comptroller and Auditor General, Amyas Morse,

is an O fcer o the House o Commons. He is the head o the NAO,which employs some 880 sta . He and the NAO are totally independent

o government. He certifes the accounts o all government departments

and a wide range o other public sector bodies; and he has statutory

authority to report to Parliament on the economy, e fciency and

e ectiveness with which departments and other bodies have used their

resources. Our work led to savings and other e fciency gains worth

more than 1 billion in 2010-11.

Our vision is to help the nation spend wisely.

We apply the unique perspective o public auditto help Parliament and government drive lastingimprovement in public services.


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Ordered by the House o Commonsto be printed on 29 June 2011

Re r e C r er d a d r Ge erHC 1091 Session 2010201230 June 2011

London: The Stationery O ce15.50

This report has been

prepared under Section 6o the National Audit Act1983 or presentation tothe House o Commonsin accordance withSection 9 o the Act.

Amyas MorseComptroller and

Auditor General

National Audit O ce

28 June 2011




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This report provides an early assessment o the Departments progress in preparing or themass roll-out o smart meters, which is due tostart in 2014 a ter the completion o the next,

oundation stage, and the risks to securingvalue or money or taxpayers and consumers.

National Audit O fce 2011

The text o this document may be reproduced ree o charge inany ormat or medium providing that it is reproduced accuratelyand not in a misleading context.

The material must be acknowledged as National Audit O fcecopyright and the document title specifed. Where third partymaterial has been identifed, permission rom the respectivecopyright holder must be sought.

Printed in the UK or the Stationery O fce Limitedon behal o the Controller o Her Majestys Stationery O fce2439331 06/11 65536


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Contents

Key acts 4

Summary 5

Part OneIntroduction 12

Part TwoProgress against plans 17

Part ThreeSystem design 22

Part FourForecast bene ts 26

Part FiveCosts to consumers 31

Appendix OneMethodology 36

The National Audit O ce study team

consisted o :

Richard Gauld, George Last andLouisa Shakos, under thedirection o Jill Goldsmith

This report can be ound on theNational Audit O ce website atwww.nao.org.uk/smart-meters-2011

Photographs courtesy o xxxxxxxxxxxxxxxxxxxxxxxx

For urther in ormation about the

National Audit O ce please contact:

National Audit O cePress O ce157-197 Buckingham Palace Road

VictoriaLondonSW1W 9SP

Tel: 020 7798 7400

Email: [email protected]

Website: www.nao.org.uk

Twitter: @NAOorguk


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4 Ke c s Preparations or the roll-out o smart meters

Key acts

18.6 billion in total estimated bene ts during the next 20 years rom installingsmart meters

11.3 billion total estimated cost o installing and operating smart meters duringthe next 20 years

7.3 billion estimated net bene t during the next 20 years

23 estimated annual saving or the average dual uel customer inGreat Britain in 2020

11.2 million the cost o managing phase 1 o the smart metering programme

10 million public spending on consumer trials o energy reduction using smartmeters and existing meters

56 million the Departments latest estimate o the budget it will need orprogramme management and consumer engagement during theperiod 2011-12 to 2014-15.

100 proposed average number o ull-time equivalent sta in theDepartments smart metering programme management team rom2011-12 to 2014-15

53 million existing electricity and gas meters to be replaced

30 million homes and smaller non-domestic premises across Britain to havesmart meters by 2019

11.3bnto install and operate thesmart metering systemacross Great Britain

53mexisting gas andelectricity meters to bereplaced with smartmeters by 2019

23estimated annual saving

or the average dual uelcustomer in Great Britainin 2020


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Preparations or the roll-out o smart meters S r 5

Summary

i r d c

On 30 March 2011, ollowing the completion o the rst phase o its smart metering1programme, the Department o Energy and Climate Change (the Department) publishedits plans or installing smart electricity and gas meters in all homes and smaller non-domestic premises in Great Britain by 2019. Smart meters, together with real time in-homedisplays, can provide consumers with detailed in ormation on their energy use and accessto a wide range o o -peak tari s. Smart meters also allow suppliers to collect meterreadings electronically, provide more accurate bills and cut costs. In the longer term, theDepartment expects smart meters to acilitate the development o smart electricity grids,which could allow the operators o electricity transmission and distribution networks tobetter manage supply and demand. In due course, the aim o smart meters and smartgrids is to support reduced energy use and the maximisation o the use o low carbonenergy to support the achievement o national statutory carbon budgets.

The roll-out o smart meters is a major national programme that will involve2meter installers visiting every home and most smaller non-domestic premises in GreatBritain, and the replacement o around 53 million gas and electricity meters. TheDepartment has established a smart metering programme to oversee the creationo an organisational and regulatory ramework or the roll-out. The Department is notcontracting or the supply and operation o the smart metering system itsel , but willplace obligations on energy suppliers to supply their customers with smart meters.

All member states are required under European Directives to roll-out intelligent3metering systems to at least 80 per cent o domestic electricity consumers ollowing anassessment o costs and bene ts; and to consider the cost and timetable or installingintelligent gas metering. The Department estimates that installing smart electricity andgas meters with in-home displays will cost 11.3 billion and deliver economic bene tstotalling 18.6 billion between 2011 and 2030, so achieving a discounted net presentbene t o 7.3 billion. Public expenditure on smart meters will be limited to the cost o programme management and consumer engagement work. The cost o manu acturing,installing and operating the smart metering system will be determined by energysuppliers and their contractors, and the Department expects the cost and cost savingsto be passed down to customers through their energy bills.


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6 S r Preparations or the roll-out o smart meters

This report provides an early assessment o the Depar tments progress in4preparing or the mass roll-out o smart meters and the risks to securing value or money

or taxpayers and consumers. We examined the Departments management o Phase 1o the programme, completed in March 2011, through which it developed its overallstrategy or mandating the roll-out o smart meters rom 2014, a ter the completion o the next oundation stage and completing it across Britain by 2019. We also examinedthe Departments approach to technical design and managing the costs and bene ts o the programme.

Ke f d gs

The Department is developing a Government-mandated, comprehensive,5electricity and gas smart metering programme, which goes beyond the EUsminimum requirements, on the strength o its cost-bene t work. It estimates theprogramme will deliver e ciency savings to energy suppliers; and enable energyconsumers to change and reduce their energy use, resulting in savings on their bills and environmental bene ts. There is, however, uncertainty over how much,and or how long, consumers will change their energy use and there ore whether the bene ts will be ully realised. The Departments assessment that consumers withsmart meters will annually use 2.8 per cent less electricity and 2 per cent less gas thanconsumers who do not have smart meters is based on estimates contained in a 2008review o trials and international experiences, but is also in ormed by more recent reviews.International experiences indicate that greater reductions are possible, but may not berelevant to Great Britain due to di erences in climates and cultures o energy use, andevidence on sustained behaviour change is limited. Trials o smart metering in Great Britain,which the Department and its predecessors co- unded, in part to improve the reliability o its estimates, identi ed reductions in demand o between 2 and 4 per cent in those trialsthat were statistically reliable. The results do not relate to a nationally representative sampleo households and so provide limited urther support or the Departments orecasts, butthey have nevertheless generated use ul ndings, such as the e ectiveness o di erenttypes o interventions, to in orm the development o the programme.

The costs o the installation o smart meters in every home and the associated6communications technology will be borne by energy suppliers and the Departmentexpects the cost and the cost savings to be passed down to their customers. TheDepartments most recent estimate is that the smart metering system will cost11.3 billion to deliver. The Department s estimate includes adjustments or optimismbias o between 10 and 15 per cent or individual components, refecting its assessmento project speci c costs and risks. As would be expected or a large programme, theDepartment has sought urther cost in ormation during the planning phase and revisedits estimate o the total cost o the smart metering programme. The Department ollowedHM Treasury guidance to set optimism bias levels using project-speci c in ormation andbased its provision on its assessment that it now has a good understanding o the likely

cost o the system. HM Treasury guidance cites that cost escalation in projects involvingthe manu acture o equipment or development o in ormation and communicationstechnology has historically ranged rom 10 per cent to 200 per cent.


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The Department expects smart meters to help the average dual uel7customer to save 23 a year by 2020, i they change their energy use in linewith the Departments estimates. This overall bene t depends on suppliersminimising costs and passing on all their e ciency savings through their prices.

The Department considers competition among suppliers gives them commercialincentives to deliver the lowest cost solution or consumers, and the O ce o the Gasand Electricity Markets (O gem) is currently considering possible actions to strengthencompetition in energy markets ollowing the completion o its review o retail energymarkets. The powers the Department is seeking in the Energy Bill 2011 to obtainin ormation rom suppliers will help it to monitor and evaluate the e ciency ande ectiveness o the smart meter roll-out.

F d gs g d e

Through Phase 1, the Department has developed its overall approach to8installing smart meters, but now aces the considerably more challenging taskso preparing detailed plans and delivering them. The Department has invested aconsiderable amount o time in consulting with industry and consumer groups, anddeveloping the standard unctions that smart meters will provide, the roll-out timetableand its approach to establishing the data and communications in rastructure. It has nowprovided certainty on its timetable and overall approach, which should help suppliersprepare or the roll-out. However, it has urther to go to convert this into detailed deliveryplans or achieving a major programme o complex and high-risk technical, regulatoryand behaviour change projects to allow roll-out to start in 2014 and to deliver thebene ts identi ed in its outline business case.

The Departments planning and budgeting or Phase 1 were initially9insu cient to support clear monitoring and accountability. The Departmentoutsourced the management o Phase 1 to O gem in July 2009. At this stage thecommitment was to publish in July 2010 a Prospectus, setting out the overall

ramework or the smart metering implementation. The Departments initial agreementwith O gem did not clearly de ne deliverables, priorities or how O gems per ormancewould be measured. It also did not set a budget or this Phase, but set annual budgets.

As the scoping o the programme evolved and the Department gained a betterunderstanding o the complexities, it agreed more detailed plans in April 2010 andentered an agreement with O gem in July 2010 that set out a budget and deliverables

or an additional Phase (Phase 1a) with an expected completion date o January 2011. The Department published the Prospectus in July 2010 and completed this Phasein March 2011, by which time it had spent a total o 11.2 million on the programme,coming within its overall annual budget.


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The Department has decided to manage the smart metering programme10itsel and is taking steps to strengthen its resources and approach.

The Department is building its new programme management team that will havean average o around 100 ull-time equivalent sta rom 2011-12 to 2014-15. TheDepartments latest estimate o the programme budget, covering programmemanagement and consumer engagement, is 56 million or the period 2011-12 to2014-15. It has urther work to do to develop a detailed delivery plan or the next phaseo the programme and it has not set a budget or the programme beyond the currentspending review period.

F d gs e re g de ver c e ges

Delivering an appropriate, sa e and secure technology solutionthat is adaptable to change

The Department is responsible or decisions on technical standards or 11the smart metering system and uses a series o industry and expert groups todevelop proposals or design and technology solutions. The Department did nothave a design authority to oversee the industry working groups during Phase 1, but hasestablished one or the oundation stage to take overall responsibility or system designand security and to maintain the ongoing voluntary participation o industry.

There is very little time contingency to address the risk that design12approvals, procurement and testing take longer than planned, adding to costsand delaying achievement o bene ts. The Department intends to nalise its dra ttechnical speci cation in January 2012. In response to stakeholders views, theDepartment has allowed more time to establish the communications system by decidingto start mandated roll-out o smart meters in 2014 rather than 2012 as proposedin its 2010 public consultation. It has still to develop a speci cation or the nationalcommunications network to which each meter must connect.

The system will need su cient fexibility to minimise the risk o uture13obsolescence, and it may need to change to meet smart electricity gridsrequirements. The Department has assumed that smart meters will have a 15-yearli e. However, uture technology developments, including smart grids could potentiallychange the requirements or the meter speci cation and the data and communicationssystems within a shorter time rame. The Department has built some fexibility into itsdesign requirements to address obsolescence risk and recognises the need to align theprogramme with its evolving plans or smart grids.


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Concerns about possible security risks, on which the wider public has not14yet been seriously engaged, could potentially delay or stop the programme.Collecting detailed energy consumption data rom every household and trans erring it tosuppliers or other authorised parties through a central communications network createsrisks o accidental release or the t o data, as well as cyber-attacks. The Department isdeveloping plans or managing smart meter data access and privacy, has asked industryto establish a supporting Privacy Charter and has developed an initial security impactassessment, but more work is required on security be ore roll-out starts. A number o respondents to the Departments consultation also expressed concerns about perceivedhealth impacts o installing wireless smart meter networks. The smart meteringequipment will be subject to the standard requirements or wireless communications

technologies and the Department plans to continue consulting the Department o Healthon these perceived concerns.

Reducing uncertainty in the savings estimates

The Department has still to develop its bene ts realisation plans and15consumer engagement strategy. Since October 2010, the smart meter programmehas been working with the Central O ce o In ormation to develop a ramework orbehaviour change to in orm its consumer engagement and bene ts realisation plans.It has assumed in its cost bene ts modelling that marketing and consumer engagementwill cost 100 million. To in orm its plans, the Department intends to work with suppliersto trial approaches and learn lessons rom the initial roll-out o smart meters be ore massroll-out starts in 2014.

Understanding the costs and bene ts or consumers

The Government decided at an early stage that smart electricity and16gas meters should be rolled-out to all consumers. The costs and bene tsto consumers will vary between households and urther work is needed toassess the impact o the smart metering programme on vulnerable consumers.

The Department expects that the roll-out o smart meters will result in a wider range o

tari s. Some evidence rom trials carried out in the United States indicates that time-o -use tari s are potentially bene cial or consumers on low incomes. However, researchcommissioned by O gem suggests that vulnerable customers generally had littleunderstanding o tari s and are more likely to make inappropriate decisions regardingsuppliers or tari s. Lower levels o uptake among low-income or vulnerable groupswould result in the costs and bene ts being unevenly distributed, but the Departmenthas yet to assess the potential impacts and whether speci c action will be required toaddress distributional issues.


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C c s v e r e The roll-out o Smar t Meters is a large complex programme. The Department17

expects that it will deliver reductions in energy use, e ciency savings and environmentalbene ts totalling 18.6 billion over the period to 2030, and that it will support therealisation o as yet unquanti ed bene ts rom smart grids in the uture. The Departmentestimates the programme will cost 11.3 billion. In March 2011 the Departmentpublished its implementation strategy or the roll-out o smart meters.

On the basis o this early assessment o the Departments progress we conclude18that the Department initially underestimated what would be required to deliver the

rst phase o the programme and that its early planning and budgeting during thisphase were insu cient to support monitoring and accountability. The plans or theprogramme so ar are not as well developed as originally intended in some areas,notably consumer engagement and bene ts realisation. The Department did,however, invest a good deal o e ort during this phase in developing the standard

unctions that smart meters will provide, its approach to establishing the data andcommunications in rastructure and it has now provided certainty on the overall timetable

or the roll-out. The development phase o the programme, which cost 11.2 million,did not demonstrate ull value or money. For a programme o this complexity itis vitally important to invest in strong planning. The Department is strengtheningprogramme management.

To achieve value or money in the uture, the Department needs to develop19urther its plans to address the substantial risks in the programme. In particular, there

is uncertainty over consumer bene ts, which arises because international experiencesand domestic trials together provide limited evidence to support particular assumptionsabout how much and or how long consumer behaviour will change. There is also therisk that costs increase more than the Department has provided or; major technicaland logistical challenges to delivering a t- or-purpose and secure system; and a risk that suppliers do not pass on all the net savings to their customers. The Departmentmust commit to keeping its estimates o costs and bene ts under review and provideclear decision points at which it will judge whether to progress with the programme

as originally designed or to make changes to protect public value.


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Rec e d sSmart metering involves a complex mix o technology, regulatory and behaviour change projects and strong programme management is required to ensurethat all the projects come together to realise the bene ts. The Departmentshould identi y more precisely the critical paths and review points or updating costs,ensuring a secure system and reassessing options be ore taking decisions that maybe irreversible.

The rapid pace o technological change could potentially render somesmart metering technology obsolescent during the li e o the programme.

The Department should build su cient fexibility and clearly-de ned review pointsinto the programme, particularly in relation to the data and communicationsservices contracts. Doing this will allow the use o newer technology where it iscost-e ective to do so.

The Department does not yet have a clear o ering or consumers tocencourage them to engage with smart metering technology and reduce their energy consumption. The Department should develop its dra t bene ts realisationstrategy and consumer engagement plan as a priority. It should also develop aclear plan with suppliers or urther trialling o smart meters during the oundationstage to ensure valuable experience is obtained and the lessons captured, in orderto in orm the strategy.

The net bene ts o the programme will be delivered by suppliers throughdtheir roll-out programmes and the Department is seeking powers to obtainin ormation rom suppliers or monitoring and evaluation o the e ciencyand e ectiveness o their roll-out. The Depar tment should determine the criteriait will use to evaluate whether suppliers are delivering smart meters e ciently ande ectively. It should regularly review suppliers progress in installing smart metersand whether there is a need or additional changes to suppliers licence conditionsto secure cost-e ective completion o the roll-out and value or consumers.

Smart meters are intended in part to support new tari s that encouragee

consumers to use energy when it is cheaper, but vulnerable groups maynot take advantage o this potential bene t. During the oundation stage, theDepartment should research the extent to which di erent socio-economic groupsare likely to secure the bene ts o new smart meter tari s. It should then considerwhether targeted assistance is required to prevent certain groups bearing thecosts, but not obtaining the bene ts o smart meters.


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12 p r o e Preparations or the roll-out o smart meters

Part One

Introduction

t e G ver e w s s r e ers e s ed ever e d s er -d es c re ses br 2019

The Government has decided that every household and smaller non-domestic1.1premises in Great Britain should have smart electricity and gas meters. Smart meteringprovides consumers with more detailed in ormation than conventional meters, andallows suppliers to collect meter readings electronically ( F g re 1 ). The Governmentexpects that providing better in ormation to domestic and non-domestic consumers willencourage them to reduce their energy demand and switch to better tari s, reducingtheir bills and carbon emissions. It also expects smart meters will reduce costs orsuppliers, generators and network operators.

Figure 1 The main components of the proposed smart metering system

Source: Department of Energy and Climate Change

Other devices

In-home display

Wide areanetwork module

Gas meter

Electricity meter

Homearea

network Widearea

network

Suppliers

Network operators

Otherauthorisedparties

Datafunction


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Preparations or the roll-out o smart meters p r o e 13

The Governments longer-term aim is to enable the uture development o a smart1.2electricity grid. Smart grids are currently not well de ned, but the broad aim is to achievebetter connection or new electricity generation and to support demand rom electrictransport and heating. A smart grid also allows better matching o supply with demand,reduced reliance on providing energy generation capacity to meet peak demand,a reduced requirement or network rein orcement and less need or new generatingcapacity. The Government has identi ed the potential bene ts o smart electricity grids inits assessment, but not quanti ed them as it is still reviewing the potential or smart gridsand what they would require. There are currently no plans to develop smart gas grids.

Energy suppliers are already rolling-out signi cant numbers o smart meters. For1.3

example, in March 2010, British Gas announced its intention to install two million smartmeters by 2012. 1 The Government considers that some suppliers may roll-out smallvolumes o smart meters in the absence o intervention, but that regulation is necessaryto ensure that all consumers are supplied with interoperable smart metering equipmentand that appropriate consumer protection is in place. The Government there ore intends to:

Add conditions to energy suppliers licences, obliging them to install smart meters that

meet speci c unctional and technical standards in line with a mandated timetable.

Licence a national data and communications company to collect electronic

meter readings and provide the in ormation to authorised suppliers and network operators. The use o the data and communications company will be optional orsuppliers o non-domestic users.

Develop a Smart Energy Code setting out the roles and responsibilities o all

participants (suppliers, network operators and the data and communicationscompany) in the delivery and operation o smart metering.

Establish an installation code o practice that will regulate the sales activity o

suppliers and their contracted installers at the point o contact with consumers.

The smart metering programme sits within a wider European policy context. All1.4Member States are required under Directives 2009/72/EC and 2009/73/EC to roll-outintelligent metering systems to domestic electricity consumers, ollowing an assessmento the costs and bene ts, and to consider the costs and timetable or installing intelligentmetering or gas. 2 The Governments timetable or suppliers is to start the mass roll-out o 53 million smart electricity and gas meters to 30 million homes and smaller non-domesticpremises in 2014 and to complete it by 2019. It is, to date, the only Member State to haveset a timetable or the roll-out o smart gas meters to all households.

1 Centrica Press Release, 29 March 2010: British Gas plans two million smart meters http://www.centrica.com / index.asp?pageid=39&newsid=1970

2 Directives 2009/72/EC and 2009/73/EC http://eur-lex.europa.eu /JOHtml.do?uri=OJ:L:2009:211:SOM:EN:HT ML


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org s d f c res s es r e r gr e The Department o Energy and Climate Change has overall responsibility or the1.5

smart metering programme ( F g re 2 ). On 30 March 2011, it published its high-levelstrategy and plans. This was the culmination o work completed in Phase 1 o theprogramme, drawing on work undertaken by the Department, its predecessors anddelivery partners previously on assessing the options, trialling smart meters anddeveloping initial plans ( F g re 3 on page 16). The Department is now working to delivera completed system design, regulatory ramework and approach to bene ts realisation.

S d sc e d e ds

The Committee o Public Accounts, in its 2009 report on1.6 Programmes to reduce household energy consumption, emphasised the importance o not underestimatingthe challenges o a national programme to introduce smart meters and, in particular,the need to set out clearly the expected bene ts, and establish a comprehensiveprogramme or delivering the bene ts. 3 In this report we provide an early assessmento the Departments preparations or suppliers mass roll-out o smart meters rom 2014,and the risks to securing value or money or taxpayers and consumers. We examine:

the Departments management o the programme to date (Part Two);

progress in designing the system (Part Three);

the estimation and management o bene ts (Part Four); and

the cost to consumers (Part Five).

To assess value or money, we compared programme management against best1.7practice and examined outputs and spending to date against plans and progress onthe programme. To assess the management o risks, we examined the Departmentsapproach to delivering the bene ts, controlling costs and system design. We collectedevidence by reviewing programme documents and wider literature, interviewing sta inthe Department and O gem, and consulting key industry and consumer stakeholders.Further in ormation on our methods is in Appendix One.

3 Committee o Public Accounts, Programmes to reduce household energy consumption , Fi th Report oSession 200809, HC 228 p.6, http://www.parliament.the-stationery-o fce.co.uk/pa/cm200809/cmselect/ cmpubacc/228/9780215526618.pd


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Preparations or the roll-out o smart meters p r o e 15

Figure 2Organisational and nancial responsibilities within the programme

C s ers

Accept instal lation o smar t meters

Reduce energy consumption

Meet costs and bene it rom savings rom smart meter roll-out inenergy bills

Consumer bene its rom reducing energy consumption = 6.2 billion

Bene its rom associated reduced carbon emissions = 1.6 billion

Source: National Audit O fce

G s d e ec r c ge er rs de w rk er rs

Use data rom smart meters to managenetwork more cost-e ectively

Reduce costs o generation because o consumer demand load-shi ting enabled bysmart meters

Pass through savings to energy suppliers

Generation and network savings = 1.8 billion

E erg s ersRequired to install smart meters throughlicense obligations

Advise the DECC programme on technicalspeci ications

Use data rom smart meters to provideaccurate bills and streamline processes

Fund data and communications companythrough cost recovery mechanism

Pass through savings to consumers

Supplier bene its = 9 billion

D d c c sc

Manages data andcommunications servicescontracts

Collects data rom smartmeters

Makes data available tosuppliers, network companiesand others

Set-up and operating costs

o data and communicationscompany = 362 million

o ge

Non-ministerial department

Advises the Department o Energy and Climate Change programme

Oversees energy industry and suppliers compliance with regulations


Sets the policy or smart metering

Manages the smart metering programme

Sets the technical speci ication or the meter

Sets the speci ication or the data and communications services

Designs smart metering regulation

Licenses data and communications company


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Figure 3 Timeline o the development o the Governments plans to roll-out smart meters


March 2006: HM Treasuryannounces intention to undtrials to improve evidenceon smart meters

2006

May 2007: Department o Trade andIndustry publishes Energy White Paperannouncing expectation that smartmeters will be installed in all homes inBritain by 2017

2007

October 2008: Ministerialstatement announcingintention to mandate theroll-out o gas and electricitysmart meters to domesticconsumers

2008

December 2009: Department o Energy andClimate Change announceslaunch o smart meteringprogramme

May 2009: Department o Energy andClimate Change publishes consultationdocument setting out proposals ordelivery o the roll-out and high-level

unctionality o smart meters

2009

July 2010: Department o Energyand Climate Change publishesProspectus o proposals or smartmetering or consultation

2010

March 2011: Departmento Energy and ClimateChange responds toconsultation and con irmsthat the mandated roll-outwill commence in 2014 andbe completed in 2019

2011


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Preparations or the roll-out o smart meters p r tw 17

Part Two

Progress against plans

E ective programme planning and management are needed at all phases in the2.1

li ecycle o a programme to support the delivery o outputs in the most economic ande cient way. In this part o the report we examine:

the Departments plans or Phase 1 and how the scope, timescale and cost

evolved a ter it was launched;

achievements at the end o Phase 1; and

the Departments decision to manage the programme itsel ollowing the

completion o Phase 1.

t e De r e ed o ge ge e r gr e s e d d es s c e r de ver gree e

From March to November 2009, the Department carried out preparatory work 2.2on scoping, de ning and planning its smart metering programme, and identi ying theskills and resource mix required to deliver it. It reached agreement in July 2009 thatO gem would manage Phase 1 o the programme on its behal . O gem is responsible

or the economic regulation o the electricity and gas industries in Great Britain. TheDepartment considered O gem could appropriately manage the smart meteringprogramme as an extension o the programme delivery unction it has or a numbero the Departments other environmental programmes.

The Department and O gem launched Phase 1 o the programme in2.3December 2009, with the aim o publishing a smart metering Prospectus in summer2010. The Department did not, however, initially establish an agreement with O gemthat clearly identi ed the activities that would be required to deliver the Prospectus andthe resulting decisions on the programme, the scope and timing o consultation on theProspectus, key priorities or how O gems per ormance would be measured. This lack o precision refected a lack o programme and project management approach and skills.


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18 p r tw Preparations or the roll-out o smart meters

The Department revised its approach as its understanding o the complexities o 2.4the smart metering programme developed and to meet the requirements o the newadministration ollowing the general election. In April 2010, it agreed more detailedplans and in July 2010 it entered agreement with O gem or a new Phase 1a, whichwas introduced to allow time or detailed consultation on the Prospectus, to a reviseddeadline or post-consultation decisions by Ministers o January 2011. The Prospectuswas published in July 2010, as planned, and the Department completed Phase 1a inMarch 2011, two months later than planned. The March 2011 plans included provision

or mandated roll-out to start in 2014 rather than in 2012, as proposed in its consultation,and nish in 2019, a year earlier than previously planned ( F g re 4 ).

t e De r e s g d dge g r p se 1 were s fc e s r r g d cc ,

re ed w s r gr e dge

Robust cost estimates underpin good decision-making, planning and2.5management. The Department set nancial year budgets or the smart meteringprogramme o 3 million or 2009-10 and 15 million or 2010-11, covering expenditureon Phase 1 and subsequent spending on Phase 2. We would have expected theDepartment to set a budget or Phase 1 against which to manage its own and O gemsexpenditure, but it did not do so initially. O gem prepared monthly orecasts o itsspending on the programme, but be ore the start o Phase 1a these were not linked tocompleting speci c tasks. In July 2010, the Department set a budget o 7.5 million orO gems Phase 1a spending and a ur ther 1.35 million or contingency.

The nal cost o completing Phase 1, including Phase 1a, was just under2.611.2 million. This covered the cost o the Departments policy team (1.19 million) andO gems costs (10 million). Based on its monthly spending orecasts, O gem spent3.87 million on Phase 1 and 6.12 million on Phase 1a (18 per cent less than orecast)(F g re 5 on page 20). Total spending remained within the overall annual programmebudget set by the Department o 3 million or 2009-10 and 15 million or 2010-11.


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2010 2011 2012 2013 2014 2019 2020

Figure 4Changes in the overall programme timetable since 2009


as Dece er 2009

as j 2010

as m rc 2011

Mid 2012Roll-out regulations in place

Autumn 2013Proposed go-live date ordata and communicationscompany

April-June 2014Planned date or starto mandated roll-outand go-live date or dataand communicationscompany

Summer 2012Proposed date or start o mandatedroll-out; and roll-out regulations in place

Accelerated rol l-outproposed but nocompletion datespeci ied

2019Proposed completiondate or mandatedroll-out

Mid 2012Roll-out regulations in place

2020Expected completion date

or mandated roll-out

Phase 1

High leveldecisions

ollowingconsultationon proposals

Phase 1

Propectuso policyproposals or

consultation

Phase 1

Propectuso policyproposals orconsultation

Phase 2

Detailedtechnicaldesign anddevelopmento regulatoryandcommerical

rameworks

Phase 1a

Publicconsultationand initial

work ontechnicaldesign

Phase 1a

Publicconsultation,stakeholderengagement,and initialwork ontechnicaldesign

Phase 3

Arrangementsor data and

communications

company

Phase 3

Implementregulatoryandcommercial

rameworks

Phase 2

Detailedtechnicaldesign and

developmento regulatoryandcommerical

rameworksto allowmandatedroll-out romsummer 2012

Phases 2 and 3 combined (theoundation stage)

Finalise technical speci ications, developregulatory and commercial rameworks,license data and communications companyand manage procurement and testing o data and communications services


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20 p r tw Preparations or the roll-out o smart meters

t e De r e s deve ed s ver r c , c ss e d e dd de s s.

Given the lack o detailed plans at the outset o Phase 1 and subsequent evolution2.7o the Departments approach, it is di cult to determine precisely whether the plans

or each element o Phase 1 o the programme have progressed as much as intended.Completion o Phase 1 in March 2011 has, however, achieved an important milestonein planning or the roll-out. The Departments decisions have provided suppliers withcertainty on the roll-out timetable, and by setting the start o roll-out as 2014, ollowingconsultation on its proposal to start roll-out in 2012, has provided more time or industryand consumers to be prepared or mass roll-out. That timetable is based on the

Department nalising the technical speci cation o the smart meters in January 2012,ollowing noti cation to the European Commission in October 2011. The Department

is working to have the regulatory ramework or roll-out in place by mid 2012. In theoundation stage the Department needs to undertake considerable urther work

to add detail to its plans and complete its work to speci y, procure and licence thecommunications in rastructure. It also needs to urther develop its bene ts realisationplan, which has progressed more slowly than intended. We examine these urther inParts Three and Four.

Figure 5

O gems orecast and actual spending (000s)p se 1 p se 1

o - r o ge s ess dge s j 2010

o - r

() (%) () (%) () (%)

Sta 677 17 1,392 19 1,155 19

Consultancy andother external input

2,460 64 3,785 50 3,386 55

Overheads 731 19 2,312 31 1,582 26

3,868 7,489 6,123

Source: National Audit O fce analysis o O gem data


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t e De r e s k g s e s s re g e s r gr ege e rr ge e s

The Department announced in December 2010, that in view o the scale o the2.8programme and the importance o government accountability or its delivery, it would,starting rom the oundation stage, manage the programme itsel . The Departmentsdecision was in ormed by a review o programme governance arrangements andstrategic options or subsequent phases. The Department concluded that the costo managing the programme itsel would be broadly similar to the cost o continuingto outsource programme management to O gem. However, managing it in-housewould increase the likelihood o success by strengthening programme leadership and

capability. In our review, we ound that there had been signi cant weaknesses in theprogramme management o Phase 1. The changes to the management responsibilities

or Phase 2 has also achieved a clearer separation o duties between programmedelivery and regulation o the energy industrys management o the roll-out.

The programme management and governance arrangements or the oundation2.9stage are considerably more developed than was the case or Phase 1. As at May 2011,the Department was in the process o establishing a new programme managementteam, which it expects will have an average o around 100 ull-time equivalent sta

rom 2011-12 to 2014-15, and developing its delivery plans ur ther. Key tasks during theoundation stage include the licensing o the data and communications company and

tendering or data and communications services, which will need to be managed asmajor projects in their own right.

The Departments latest estimate is that it will require a budget o 56 million2.10or the period 2011-12 to 2014-15 to cover programme management and consumer

engagement. It has not developed an estimate o the whole li e cost o programmemanagement beyond the current spending review period.

The Department has a new internal review process which requires all projects2.11with a public investment or economic cost exceeding 10 million to be submitted toan approvals committee at key stages in their development. The committee approvedthe outline business case or the smart metering programme in March 2011, subjectto important caveats that the programme needed to develop more detailed deliveryplans and a stronger understanding o what is necessary to deliver smart grids. Thecommittee expects to carry out urther reviews in due course and the Programme willcontinue to be reviewed by the Treasury and Cabinet O ces Major Projects Authority.


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22 p r t ree Preparations or the roll-out o smart meters

Part Three

System design

The smart metering programme involves a number o major interdependent and3.1

individually complex in ormation and communications technology projects. In this parto the report we examine:

the Departments overall approach to system design;

the risks to delivering a unctioning system within the planned timetable;

the potential impact on the system o the uture development o smart grids; and

security and privacy risks, and how the Department intends to manage them.

t e De r e s re g ex er w rk g gr s r

e s s e des g , versee s ew des g r To develop the unctional requirements and technical standards or individual3.2

system components, the Department and its delivery partner O gem, have relied ona series o advisory working groups, comprising industry and consumer experts. Thereare currently 19 working groups, each with a speci c remit, such as to develop andpropose standards or the home area network. Industry and others have participated inthese groups on a voluntary basis, covering their own costs. This approach has helpedminimise the cost to the Department o system design, but has also introduced risks asthese groups are not ormally accountable to the Department, and some have been slowto provide advice. They are also ocused on discrete parts o the system, so are not in a

position to identi y risks across the system as a whole. This approach there ore relies onthe Departments ability to determine whether to accept or reject the technical advice,and to ll any gaps in the advice provided.

To address design risks across systems, it is good practice to establish a central3.3design authority with overall responsibility or the system architecture and approval orrejection o technical proposals. The Department did not establish a design authorityduring Phase 1, but has done so or the oundation stage. The Department will continueto rely on the working groups to propose the speci cation or the detailed systemdesign but the new authority will be responsible or checking the integrity o proposedtechnical standards or meters, communications and data management services at

key milestones.


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Preparations or the roll-out o smart meters p r t ree 23

t ere s ver e e c ge c e de ver sc ed es The Department has adopted a sequential approach to system design, starting3.4

with the requirements or meters, in-home displays and home area networks ( F g re 6 ).In its 2010 public consultation, the Department proposed mandating the roll-out o smartmeters in 2012, but in March 2011, ollowing stakeholder consultation, it decided to setthe start date as 2014 in order to give suppliers more time to prepare.

Figure 6Key milestones in the system development

notEThe orecast date or completing the EU notifcation process is dependent on the completion o consultation with industry on the dra t specifcation1and the European commission or other Member States raising no objections to the specifcation submitted by the Department.

Source: Department o Energy and Climate Change

July 2011: Dra ttechnical speci icationcomplete

October 2011: Department o Energy and Climate Changesubmit dra t technical speci ication

or EU noti ication process

October-December 2012: Data and communicationscompany licence awarded

January 2012:EU noti icationprocess orthe technicalspeci ication

complete

January-March 2013:Data and communications

service providers appointed

April- June 2014:

Mandated roll-out begins

April- June 2012: Data andcommunications companylicence applicationcommences

2011 2012 2013 2014

July-September 2011: Issue o contract notice

or procurement o dataand communicationsservice providers

April- June 2012: Early regulatoryobligations on suppliers come into orce:

Mandated roll-out completion date

Installation code o practice


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24 p r t ree Preparations or the roll-out o smart meters

The Departments milestones allow little contingency or delays in completing,3.5integrating and testing the system, with data and communications services presentinga particular risk. Delays could add to costs and put back achievement o bene ts,reducing the net bene ts o the programme. To meet its timetable, the Department must:

complete the EU noti cation process or the technical speci cation. The

Departments timetable assumes that there will be no objections to its speci cationand that it will complete the process within three months o submitting it.

The Department has estimated that energy suppliers will be able to supply smartmeters in bulk by 2013. Objections rom the European Commission or otherMember States could delay bulk procurements o smart meters;

establish a data and communications company with the technology to receive

communications rom smart meters and provide resulting data to suppliers. The timetable is based on the Department running parallel competitions to awarda licence to a data and communications company (which will require a supportingregulatory ramework including a new Smart Energy Code) and, separately, appointa pre erred bidder or bidders or data management and communications servicesthat must then enter into a contract with the licence holder to allow the system tostart operating in April to June 2014. The licence award and procurement o dataand communications services are on the critical path; and

test the operation and security o individual components and the end-to-end

system. End-to-end testing o the ull system as a whole is scheduled to begin byDecember 2013 and must reach a success ul conclusion i the mandated roll-outis to star t in April to June 2014.

t e De r e s s e des g w s r s r gr ds,g re c ges e ecess r

The smart meter system is intended to support the uture development o smart3.6grids, which could allow network operators to better manage the energy system andreduce carbon emissions, or example, by better matching generation o electricity rom

renewable sources to demand. The development and need or smart grids is dependenton other actors, such as the electri cation o transport and heating, and the take-up o microgeneration, so it is uncertain whether or how the smart meter design and the dataand communications company licence and service speci cation that are currently beingdeveloped and nalised might need to adapt to support a smart grid. The Departmentrecognises the challenge o uture-proo ng. It has sought to include some fexibility,

or example, by enabling the Wide Area Network module to be replaced withoutreplacing the meter itsel and including increased data storage capacity in the technicalspeci cation or meters in anticipation o this being required or smart grids.


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Preparations or the roll-out o smart meters p r t ree 25

There is, however, a risk that the smart meters and the data and communications3.7structure will have to be modi ed or replaced be ore the end o their working li e oncethe requirement or smart grids has been de ned. This creates a challenge to minimisecosts while incorporating su cient fexibility, review points and appropriate allocationo risk into speci cations and the data and communications company licence andservice contracts.

C cer s d sec r r sks c d der e er gr e e re r r e ged

Smart meters will store detailed data on individual households energy use3.8

that will be trans erred to suppliers and other authorised parties through a centralcommunications network. The Government has con rmed the principle that consumersshould choose how their consumption data is used and by whom, with the exceptiono data required to ul l regulated duties, such as providing accurate bills. It has stillto determine what data may be required or regulated duties and whether consumerswill have to opt-in or opt-out o data-sharing arrangements with industry. Althoughthe management o data will be subject to the Data Protection Act, the Department isdeveloping speci c arrangements or smart meter data access and privacy, and hasasked suppliers to draw up a Privacy Charter setting out how smart metering data willbe protected.

The Department is seeking to mitigate the risks that the system is vulnerable3.9to security breaches, criminal cyber-attacks and the accidental release, the t andmisuse o personal data. I the initial roll-out o smart meters results in a bad customerexperience and poor public relations, this could threaten the success o the programme.For example, in the Netherlands, the Dutch Government, unlike Great Britain, decided toplace a legal obligation on consumers to accept the installation o new smart meters andconcerns about data privacy and security contributed to a public backlash that haltedthe national programme. The Department has established an expert Privacy AdvisoryGroup to in orm its policy. The Department established a Security and Technical ExpertsGroup to examine security issues and in March 2011 completed a detailed securityrisk assessment. The scope o the risk assessment does not currently cover the datacommunications company data centre and operational premises that have still to bedesigned. The Department has also still to develop a detailed mitigation plan.

A number o respondents to the Departments consultation expressed concerns3.10about electromagnetic sensitivity relating to smart meter communications technologies,particularly wireless technologies. The communications technology solutions have notyet been selected or the smart metering system, but where wireless technologies areused they will have to comply with relevant regulations, best practice and internationalstandards as set out by the International Commission on Non-Ionizing RadiationProtection. Compliance with these standards will be a unctional requirement o thesmart metering equipment and licence obligations. The Department plans to continueconsulting the Department o Health on these perceived concerns.


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26 p r F r Preparations or the roll-out o smart meters

Part Four

Forecast bene ts

The Department estimates that installing smart meters will deliver a net bene t o 4.1

7.3 billion between 2011 and 2030 (discounted at 3.5 per cent). In this part o the reportwe examine:

the sensitivity o the Departments estimates o bene ts to changes in key

assumptions;

limitations in the evidence on consumer bene ts and how the Department is

seeking to address them; and

the Departments strategy or achieving the bene ts.

t e ec c e ef s s r e er g re e rge,g ere re cer es

The Department estimates that installing smart electricity and gas meters will4.2deliver a gross bene t o 18.6 billion between 2011 and 2030 ( F g re 7 ). The largestsources o bene ts are reduced demand as a result o providing consumers andbusinesses with better in ormation on energy use and prices (6.2 billion), avoided visitsto read meters (3.4 billion) and reductions in the cost to suppliers o managing theprocess o customers switching supplier (1.7 billion). The Department decided at anearly stage that there would be synergies rom installing both smart electricity and gasmeters, and our analysis using the Departments model suggests that excluding gascould potentially reduce the net bene ts o the roll-out between 2011 and 2030 by upto 6 billion.

The Departments estimate o gross bene ts is subject to a wide range o 4.3uncertainty, ranging rom its lowest estimate o 13.5 billion (2.2 billion net) to its highestestimate o 24.3 billion (12.9 billion net). Most o the variation refects adjustments tothe assumed level o energy reduction rom a lower estimate o a 1 per cent reductionto an upper estimate o a 4 per cent reduction. The sensitivity o the estimates tovariations in energy reduction highlights the importance o improving the evidence baseon the impact o smart meters and in-home displays, updating bene t estimates andmonitoring bene ts realisation. The estimates are based on rolling-out smart meters to97 per cent o households, which is how the Department has de ned the completion o its roll-out or modelling purposes. The Department has not examined the impact on itsestimates o varying the level o roll-out o smart meters.


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Preparations or the roll-out o smart meters p r F r 27

Figure 7 The Departments detailed bene ts analysis 2011-2030 (m)

D es cre ses

n -d es cre ses

t

Energy saving 4,598 1,622 6,220

Microgeneration 36 7 43

User bene its 4,635 1,629 6,264

Avoided site vis its 3,178 248 3,426

Reduced customer enquiries 1,053 51 1,104

Reduced customer service overheads 183 9 192Reduced cost o debt handling 1,075 51 1,126

Avoided cost o ser ving prepayment meters 991 0 991

Remote (dis)connection 244 7 251

Reduced the t 237 0 237

Customer switching 1,606 80 1,686

Supplier bene its 8,567 446 9,013

Reduced losses 438 90 528

Avoided investment in the transmission and distr ibutionnetwork as a result o lower peak demand through takeup o time-o -use tari s

29 1 30

Savings rom quicker restoration o supply ollowingan outtage

46 19 65

Operational savings rom ault ixing 86 35 121

Better in ormed en orcement investment decisions 115 0 115

Avoided investigation o voltage complaints 43 12 55

Reduced outage noti ication calls 21 9 30

Network bene its 780 165 945

Savings rom the lower cost o generating more energy ato peak times through take up o time o use tari s

121 27 148

Avoided investment in generation capacity as a result o lower peak demand through take up o time-o -use tari s

653 20 673

Generation bene its 774 47 821

Global CO 2 reduction 654 434 1,088

EU Emissions Trading System savings rom energyreduction

371 84 455

EU Emissions Trading System savings rom reduced carbonemissions rom generating more electricity at o -peak timesthrough take up o time-o -use tari s

47 17 64

UK-wide bene its 1,072 535 1,607

Total 15,827 2,822 18,649

notENumbers do not sum due to rounding e ect.1

Source: Department o Energy and Climate Change Impact assessments March 2011


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t e ev de ce se r c s er e ef s s c c s ve The largest single bene t identi ed in the Depar tments impact assessment is a4.4

reduction in energy consumption totalling 6.2 billion over the next 20 years, with anassociated 1.5 billion in bene ts rom reduced carbon emissions. 4 This is additionalto reductions in consumption that it expects to achieve through energy e ciencymeasures such as the Green Deal. The Department has assumed a sustained2.8 per cent reduction in annual electricity consumption and 2 per cent reduction in gasconsumption per household once tted with a smart meter. This is based on a literaturereview completed in May 2008 by the consultants Mott MacDonald, which identi edsavings rom trials and experiences overseas ranging rom 1 per cent to 15 per cent,

and has been in ormed by more recent reviews that also show greater reductions arepossible. 5 The estimate o economic bene ts rom reducing energy consumption andmoving demand to o -peak times is sensitive to the length o time that these changesin energy use are sustained. So, or example, using the Departments model the averageconsumer must sustain their reduction in energy consumption or more than a year i thebene ts o smart metering are to outweigh the costs.

The Department recognises that evidence on sustained behaviour change by4.5domestic consumers is limited and that the behaviour observed in other countries,where climate and cultures o energy usage are di erent, may not be relevant toconsumers in Britain. The Department and its predecessors have spent 10 million

on a project involving a trial o several types o smart meter, in-home displays andother energy saving measures in a total o 50,000 households, in part to obtain betterin ormation on the impact o smart meters on domestic energy demand. The projectstarted in 2006 and concluded in May 2011, a year behind schedule. The validityo some results has been constrained by design faws, such as sel -selection byparticipants and inconsistencies in the use o control groups, data collection and thedocumentation o results. The Department commissioned AECOM and other subjectexperts to examine sources o bias and provide assistance in interpreting the results.

AECOM concluded that the trials that generated statistically reliable results suggestedthat supplying smart meters with in-home displays generally reduced electricityconsumption by between 2 per cent and 4 per cent. In the case o gas, consumptionreduced by between 2 per cent and 4 per cent. These results do not relate to anationally representative sample o households and so provide limited urther support orthe Departments orecasts, but they have nevertheless generated use ul ndings or thesmart metering programme such as the e ectiveness o di erent types o interventions.

The Department intends to work with suppliers to undertake urther trials be ore the starto the mandated roll-out in 2014.

4 1.5 billion in benefts associated with reduced energy consumption consist o reduced traded (EU ETS) emissionsvalued at 455 million and non-traded global C O 2 reductions i.e. rom reduced gas consumption valued at1,088 million.

5 Mott MacDonald/BERR, Appraisal o costs & benefts o smart meter roll-out options , May 2008 - http://www.decc.gov.uk/assets/decc/what%20we%20do/supporting%20consumers/smart%20energy%20meters/fle45997.pd


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Preparations or the roll-out o smart meters p r F r 29

The Department has also estimated that installing smart meters will encourage4.6consumers to move their energy consumption to o -peak times resulting in cheapergeneration and more e ective management o the electricity network. In total, theDepartment estimates that 916 million 6 can be saved, on the assumption that20 per cent o energy consumers will take up time-o -use tari s, which prompt themto move up to 10 per cent o their peak electricity usage to o -peak times. Internationalevidence suggests that, depending on the type o tari , consumers can shi t between6 per cent and 25 per cent o peak demand to o peak. 7 The realisation o bene ts

rom time-o -use tari s depends however, on the proportion o consumers who chooseto provide their suppliers with their detailed usage data and take-up new tari s; aswell as how much they switch to using energy at o -peak times. O gems March 2011

Retail Market Review identi ed that increased tari complexity inhibits customers romchoosing the most appropriate tari or their energy usage. Given the uncertainty aboutthe nature o the tari o er which suppliers will make and the proportion o consumerswho will respond, there is a risk that these bene ts will not be realised on the scaleestimated by the Department.

be ef s re s s ve s e deve ed

The Department intends to set an end date or individual suppliers to complete4.7the roll-out, but will leave suppliers to determine their individual roll-out strategies andthere ore set the pace with which savings and consumer bene ts are realised, withinthe overall timetable o completing the roll-out by 2019. The Department is expectingindustry to realise the supply, network and generation bene ts and competition amongsuppliers to provide a commercial incentive to achieve savings. The programme willrequire some suppliers and network companies to deliver major in ormation technologychange programmes and re orm their internal processes, which bear their own risks.

The Department expects the realisation o consumer and suppliers bene ts to star t atan early stage o the roll-out, but estimates that the realisation o most network bene ts,totalling 945 million, will not start until 80 per cent o the roll-out is completed, which it

orecasts will be achieved in 2018.

6 916 million in benefts result rom the shi ting o demand to o -peak. These consist o 30 million in avoidedinvestment in the network, reduced costs o electricity generation in the short term o 148 million with a urther673 million rom avoided investment in generation capacity, and reduced traded emissions valued at 64 million.

7 Smart Tari s and Household Demand Respo nse or Great Britain , Gill Owen and Judith Ward, Sustainability FirstMarch 2010 p.19.


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The Department has identi ed that unding or a major government-led consumer4.8engagement programme will be needed to help consumers make best use o thetechnology and achieve the carbon reduction bene ts. Since October 2010, the smartmeter programme has been working with the Central O ce o In ormation to developa ramework or behaviour change or its consumer engagement work. The Departmenthas not yet established a consumer engagement strategy or clari ed the responsibilitieso Government and energy suppliers. It has, however, estimated in its cost bene tanalysis that marketing and consumer engagement by Government and industry willcost 100 million up to 2019, based on a budget set in 2007 or marketing digitalswitchover, a programme with di erent requirements.

The Department has still to develop a bene ts management strategy. It has not4.9there ore developed any speci c plans to manage or track whether bene ts are passedthrough to the consumer in ull. It is relying on competition among suppliers to deliverthe supply-side bene ts. The en orcement o common commercial and technicalinteroperability requirements or smart meters is intended to strengthen the competitivepressures in the supply market. The Department has concluded that competition amongmeter manu acturers and energy suppliers, with compliance backed by regulation, willprovide the most appropriate protection or consumers.


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Preparations or the roll-out o smart meters p r F ve 31

Part Five

Costs to consumers

From the outset o any programme or project, it is vital to clearly identi y the costs5.1

involved and how they will be met. In this part o the report we examine:how the Department has addressed risk in its cost estimates; and

how the Department is minimising the risk that consumers, particularly vulnerable

groups, pay too high a price or the roll-out o smart metering.

t e De r e s c s es es c de d s e s c vers ssess e e r sk c s esc

The Departments cost estimates or smart metering total 11.3 billion over the next5.220 years ( F g re 8 overlea ). This covers the capital cost o the meters and the data andcommunication technologies, the cost o installing, operating and maintaining them andthe cost o replacing or upgrading smart meters and network modules installed be ore2014 that do not comply with the Departments technical speci cations. The estimate,which includes nancing costs and allowance or optimism bias, is based on in ormationprovided by energy suppliers, meter manu acturers and network companies, supportedby evidence on the cost o rolling-out smart meters in other countries. F g re 9 overlea shows the estimated unit cost o key system components. Additionally, some 50 millionnon-smart electricity and gas meters, with a value o 829 million, will have to beremoved be ore the end o their normal working li e.


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32 p r F ve Preparations or the roll-out o smart meters

Figure 8Cost o smart meters (2011-2030)

C s e e e D es c n -d es c t( )

Capital cost o meters 4,005 265 4,270

Meter installation 1,596 96 1,692

Communication operation and maintenance 1,314 93 1,407

In ormation technology 1,026 0 1,026

Communication set-up 792 58 850

Energy 731 28 759

Meter operation and maintenance 692 39 731

Ine iciences in reading non-smart meters 238 -8 230

Industry set-up costs 198 0 198

Marketing 85 0 85

Cost o upgrading non-compliant meters 65 0 65

Disposals o old meters 15 3 18

Total 10,757 574 11,331

notENet present value at constant prices (2009) based on discount rate o 3.5 per cent.1

Source: Department o Energy and Climate Change, Impact Assessment M arch 2011

Figure 9Estimated unit cost o key components o the smart metering system

C e E ec r c ()

G s()

Meter 44 56

In-home display 15 15

Wide area network module 15 15

Home area network 1 1

Installation 1 29 49

Total 104 136

notEEstimated cost o dual uel installation is 68. These costs are capital costs and do not include operation and1maintenance.

Source: Department o Energy and Climate Change, Impact Assessment M arch 2011


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As would be expected or a large programme during the planning phase, the5.3Departments estimate o the total cost o the smart metering programme has beenrevised as plans have developed and urther cost in ormation has become available(F g re 10 ). These estimates are not directly comparable because they use di erentbaseline years and di erent assumptions about the timing o roll-out, a ecting theirnet present value. Part o the increase in costs since 2009 is due to these changes aswell as new in ormation provided by suppliers, mainly on in ormation technology costs.However, between April 2008 and May 2009, reductions in the assumed level o risk and optimism bias accounted or the majority o the reduction in the estimated costs.

The Departments latest estimates are also in ormed by international experiences, orexample, rom the roll-out o nine million smart meters in the United States, and the cost

o smart metering components that are already in use in Great Britain. 8 The estimatesprepared in March 2011 are those used in the Departments outline business case,which was approved by its internal approvals committee.

8 IEE white paper prepared by the Brattle Group, The Impact o Dynamic Pricing on Low Income Customers ,September 2010. http://www.hks.harvard.edu/hepg/Papers/2010/IEE_LowIncomeDynamicPricing_0910.pd

Figure 10Changes in the estimated total cost and net present value o rolling-outsmart meters since 2008

D es c n -d es c t

D e cssess e

C s s( )

be e s( )

C s s( )

be e s( )

ne rese v e( )

April 2008 13.4 12.0 1.0 2.6 0.2

May 2009 8.1 11.7 0.8 2.5 5.3

December 2009 8.6 14.6 0.6 2.8 8.2

July 2010 10.1 15.0 0.6 2.8 7.1

March 2011 10.8 15.8 0.5 1 2.8 7.3

notES Adjusted to re ect rounding e ect.1

These estimates are not directly comparable as they were calculated using di erent baseline years and di erent2assumptions about the timing o roll-out, which a ect their net p resent value. Changes in estimated benefts arepartly due to revisions to energy price orecasts.

Source: Department o Business Enterprise and Regulatory Re orm/Department o Energy and Climate ChangeImpact Assessments


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34 p r F ve Preparations or the roll-out o smart meters

The Department ollowed HM Treasury guidance and made allowance or5.4optimism bias in its March 2011 estimates based on project-speci c in ormation onrisks. The Department has allowed or optimism bias in the cost o individual elementssuch as the communications in rastructure and in ormation technology to a maximumo 15 per cent, in ormed by an analysis commissioned rom the consultants BaringaPartners in 2009. The HM Treasury guidance cites that historically there has been costescalation above original estimates or projects involving the manu acture o equipmentor the development o in ormation and communications technology rom 10 to200 per cent. 9 The Department intends to use the oundation stage o the programmeto urther test its assumptions about costs, but considers that it already has a goodunderstanding o the likely cost o the system and that its adjustment or optimism bias

provides su cient allowance or the risk o cost escalation.

The Department did not analyse the sensitivity o net bene ts to changing its5.5assumptions about the cost o smart meter system components, as it had consideredthis had been addressed in its assessment o optimism bias. Our analysis usingthe Departments model shows that i the anticipated bene ts were realised in ull,costs could escalate by a urther 60 per cent over the Departments cost estimates,including optimism bias, be ore they would exceed the bene ts. Until the nalisationo the speci cation o the smart meters and bids or the contracts to supply data andcommunications services and other key elements o the system are in place, some costswill remain uncertain.

t e De r e ex ec s c e g s ers wse e c s r c s ers

The Department has assumed in its estimate o the impact o smart meters on5.6energy bills that suppliers will spread the cost o roll-out across their entire customerbase. The Department expects that competition among suppliers will incentivise themto minimise costs and in its modelling o the costs to consumers has assumed thatsuppliers will charge their customers no more than the cost price o installing andoperating the smart metering system, and pass through all the e ciency savings theyachieve through the prices they charge.

O gems March 2011 review o retail energy markets in Britain ound evidence that5.7energy companies were pursuing similar pricing strategies. The review covered energymarkets as a whole, and did not address smart metering speci cally, but the ndingsare relevant to the smart meter roll-out. For example, by increasing their prices when themandated roll-out o smart meters starts without transparency or any increase in theircosts, suppliers could seek to make pro ts on installing smart meters.

9 HM Treasury Green Book, Supplementary Guidance on Optimism Bias p.5, http://www.hm-treasury.gov.uk/data_greenbook_supguidance.htm


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Suppliers will be required not to levy a one-o or up ront charge on their domestic5.8customers or the smart metering equipment, including in-home displays, which they arerequired to provide. Beyond this, no additional constraints will be imposed on suppliersas to how they recover their costs. The Energy Bill 2011 contains provisions speci cto smart meters that would give the Department powers to request in ormation romsuppliers, which will enable the Department to monitor and evaluate the e ciency ande ectiveness o suppliers roll-out plans.

t e c s s d e ef s c s ers w v r e wee se ds

The Department estimates that the smart metering programme will result in an5.9

increase in annual domestic energy and gas bills or the average dual uel customer o 6 by 2015 but by 2020 it will deliver a net annual saving o 23. This is an indicative

gure which could be signi cantly lower, or higher, and it depends on how much thesystem actually costs to deliver and operate, whether savings are passed throughto consumers in ull and whether individual households are able to reduce theiruse o electricity and gas, and switch to cheaper tari s, as a direct result o havingsmart meters.

There is a risk that the costs and bene ts o smart meters will di er between5.10households and exacerbate uel poverty. Some evidence rom trials carried out in theUnited States indicates that time-o -use tari s are potentially bene cial or consumers

on low incomes. However, research carried out by FDS or O gem suggests thatvulnerable customers generally had little understanding o tari s and are more likely tomake inappropriate decisions regarding suppliers or tari s 10, and our 2008 report onprotecting consumers highlighted concerns that vulnerable consumers may be payingmore or their energy. 11 These ndings are not speci c to smart meters, but highlighthow the impact o suppliers roll-out plans or decisions to target new tari s at particulargroups could result in the uneven distribution o costs and bene ts between consumers.

The interests o all consumers, including the vulnerable, will be protected by an5.11Installation Code o Practice, including rules on sales and marketing activities around theinstallation visit. The code is currently being developed by suppliers in consultation with

interested parties, including consumer groups.

10 O gem, 2011 Vulnerab le customer research , Report by FDS International, March 2011, http://www.o gem.gov.uk/ Markets/RetMkts/rmr/Documents1/O gem_vulnerable_customers_research_Final.pd

11 National Audit O fce, Protecting consumers? Removing retail price controls, HC 342 Session 2007-08,28 March 2008, http://www.nao.org.uk/publications/0708/protecting_consumers_removing.aspx


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36 a e d x o e Preparations or the roll-out o smart meters

Appendix One

Methodology

The main elements o our eldwork, which were undertaken between January and

April 2011, were:

Se ec ed e d p r se

1 Review the Departments cost bene it analysiso the smart metering programme, as set out insuccessive impact assessments, and conductscenario modelling using the underlying inancialmodel prepared by the Department.

To understand the Departments optionsappraisal and decision-making process; andidenti y the impact o changing key assumptions inthe Departments model on its estimates o costsand bene its.

2 Review o programme plans and progressreports prepared by the Department, O gem andconsultants to the smart metering programme.

To understand how the programme was managed,and per ormance against plans.

3 Interviews with o icials in the Departmentand O gem.

To understand how programme planning andmanagement practices operated.

4 Analysis o responses to the Departmentsconsultation on its proposals and stakeholderinterviews.

To identi y key risks to del ivery as perceived bythird-party stakeholders and how these had beenre lected in the Departments decision-making.

5 Review commissioned rom Mott MacDonaldo technical risks.

To assess the Departments approach to developingthe technology and key risks.


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REpoRt by thEComptRollER anD auDitoR GEnERal

hC 1091SESSion 20102012

30 junE 2011


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Preparations or the roll-out o smart meters Summary 5

Summary

introduct on

On 30 March 2011, ollowing the completion o the rst phase o its smart metering1programme, the Department o Energy and Climate Change (the Department) publishedits plans or installing smart electricity and gas meters in all homes and smaller non-domestic premises in Great Britain by 2019. Smart meters, together with real time in-homedisplays, can provide consumers with detailed in ormation on their energy use and accessto a wide range o o -peak tari s. Smart meters also allow suppliers to collect meterreadings electronically, provide more accurate bills and cut costs. In the longer term, theDepartment expects smart meters to acilitate the development o smart electricity grids,which could allow the operators o electricity transmission and distribution networks tobetter manage supply and demand. In due course, the aim o smart meters and smartgrids is to support reduced energy use and the maximisation o the use o low carbonenergy to support the achievement o national statutory carbon budgets.

The roll-out o smart meters is a major national programme that will involve2meter installers visiting every home and most smaller non-domestic premises in GreatBritain, and the replacement o around 53 million gas and electricity meters. TheDepartment has established a smart metering programme to oversee the creationo an organisational and regulatory ramework or the roll-out. The Department is notcontracting or the supply and operation o the smart metering system itsel , but willplace obligations on energy suppliers to supply their customers with smart meters.

All member states are required under European Directives to roll-out intelligent3metering systems to at least 80 per cent o domestic electricity consumers ollowing anassessment o costs and bene ts; and to consider the cost and timetable or installingintelligent gas metering. The Department estimates that installing smart electricity andgas meters with in-home displays will cost 11.3 billion and deliver economic bene tstotalling 18.6 billion between 2011 and 2030, so achieving a discounted net presentbene t o 7.3 billion. Public expenditure on smart meters will be limited to the cost o programme management and consumer engagement work. The cost o manu acturing,installing and operating the smart metering system will be determined by energysuppliers and their contractors, and the Department expects the cost and cost savingsto be passed down to customers through their energy bills.


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6 Summary Preparations or the roll-out o smart meters

This report provides an early assessment o the Depar tments progress in4preparing or the mass roll-out o smart meters and the risks to securing value or money

or taxpayers and consumers. We examined the Departments management o Phase 1o the programme, completed in March 2011, through which it developed its overallstrategy or mandating the roll-out o sma