Smart meter rollout targets ‘will not be met’, says NAO

The National Audit Office has warned that the government’s original ambition of offering a smart meter to every home by 2020 will not be met, whilst the cost of the rollout will likely “escalate beyond initial expectations”.

The government also “underestimated” how long it would take to implement the infrastructure of SMETS2 smart meter devices, according to the spending watchdog.

Over 7 million more SMETS1 devices have been installed than was planned, presenting the rollout with significant challenges.

Furthermore, the report found “important gaps” in the tracking of costs and benefits because the Department for Business, Energy and Industrial Strategy (BEIS) has not updated its analysis since 2016 and is not systematically monitoring whether the intended energy savings are being achieved.

The NAO says, because the start of the SMETS2 rollout was delayed, sticking to the 2020 deadline is putting “increasing timetable pressure” on the programme, thus increasing the risk of cost escalation and the technology being rolled out before its defects have been properly addressed.

The first SMETS2 devices, which are more technologically advanced than their first-generation counterparts, were installed in July 2017 – more than three years later than initially planned.

Suppliers have now installed 12.5 million SMETS1 meters – 7.1 million more than the 5.4 million originally intended. This is an “unintended consequence” of trying to install smart meters quickly.

The report says the government decided upon this strategy without first making an economic assessment of its implications.

The mass rollout of SMETS1 meters has added to the complexity and cost of the programme, it adds.

According to the NAO, around 70 per cent of first-generation devices “go dumb” when customers switch supplier because the supplier is unable to communicate with the meter. In total, 943,000 SMETS1 meters have lost their smart functionality and are currently operating in “dumb” mode.

BEIS plans to resolve this issue by connecting SMETS1 meters to the central communications infrastructure that has been built for SMETS2 meters by the Data Communications Company (DCC).

But the project has been delayed by six months (to May 2019) and the NAO says it is not certain if it will work for all SMETS1 meters.

The cost of the smart meter rollout was estimated to be £11 billion in 2016, with £16.7 billion worth of economic benefits. The NAO says the £11 billion figure “underestimates” the true cost of rolling out the devices, which has since increased by at least £0.5 billion – the equivalent of an extra £17 per household.

There is uncertainty as to whether all of the industry cost savings forecast by the government will materialise, in part because of the extra 7.1 million SMETS1 devices rolled out. Network companies have expressed doubt that the first-generation devices can be used to provide the “full range” of functions the SMETS2 meters offer for managing electricity networks more efficiently.

Even if industry costs are cut, the report says BEIS is not monitoring whether these savings are passed on to consumers. The department believes competition between suppliers will ensure that they pass on any cost savings but has “no way of knowing if this is happening in practice”.

The NAO also says the £0.5 billion cost increase is a conservative estimate as it does not include the potential cost of replacing less technologically advanced SMETS1 meters. Nor does it factor in costs which will be incurred if energy suppliers do not bring installation costs down from the level they were at in 2017.

With regards to the SMETS2 rollout, suppliers can currently only install the devices in “at most” 70 per cent of all households due to the limitations in technology currently available to them.

BEIS expects suppliers to start rolling out new technology in spring 2019 which will allow them to increase coverage to between 95 per cent and 96.5 per cent of homes. However, the technology required for the final 3.5 per cent to 5 per cent of buildings such as high-rise flats, is still being developed.

Multiple components of the communications system are still being tested or in some cases have not yet been deployed or even developed.

In Britain, the installation of SMETS2 meters is “lagging behind” in the north of England and Scotland due to problems integrating them with the communications infrastructure in these regions. More than 140,000 of the devices have been fitted in total but at the start of November only 3,000 had been installed in the north of England and Scotland.

In the report’s summary, the NAO recommends that BEIS update its cost-benefit analysis, assess the value for money of leaving the 2020 deadline in place compared with adopting a new deadline and draw up contingency plans for maximising value for money in scenarios where the DCC and SMETS2 system encounters further delays or cost increases and SMETS1 meters are unable to enrol within the DCC.

The spending watchdog suggests Ofgem work with the Competition and Markets Authority (CMA) as part of its review of the prepayment price cap to understand the impact of SMETS1 meters on competition and set out how issues will be addressed.

It says the regulator should also work with BEIS to improve the transparency of DCC costs, both for price control and for public and parliamentary scrutiny.

Crucially, the NAO wants to ensure that by March 2019 no energy suppliers are “falling materially short” of their obligation to provide advice on energy efficiency.

Amyas Morse, head of the NAO, said: “Costs are rising, and timescales slipping, but smart meters can still succeed over time.

“BEIS has taken most of the decisions that matter on the programme so far. They now need to take responsibility for getting it back on track and protecting the interests of consumers who will ultimately meet the bills.”

Energy and clean growth minister Claire Perry said in response: “Millions have already chosen to have a smart meter and take control of their energy use to cut their bills.

“We’ve said everyone will be offered a smart meter by the end of 2020 to reap these benefits and we will meet that commitment.

“This world-leading upgrade to our national infrastructure is the cornerstone of our move to a smarter energy system of the future and will bring benefits to consumers and industry worth up to £40 billion.”

An Ofgem spokesperson said: “Ofgem is closely monitoring suppliers’ approach to the rollout of smart meters and are ready to take action if suppliers do not stick to their plans and meet their obligations.

“In addition, Ofgem is protecting consumers by monitoring the resources needed to build an effective communications system for smart meters while keeping the costs as low as possible.

“Ofgem will take on board the findings of the National Audit Office in our work to help make sure consumers can enjoy the benefits of smart meters.”

A DCC spokesperson said: “The smart meter upgrade is an essential modernisation of Britain’s energy system, and one of the most significant infrastructure projects for a generation.

“Smart DCC has built the secure network that carries smart meter data, linking almost every home with more than 60 licenced energy suppliers.

“The network is open for business throughout Scotland, England and Wales. Suppliers are installing smart meters onto it at an ever-increasing rate – up to 4,000 are being installed every day, connecting homes and small businesses.

“We’re proud to have built the first secure national data network to connect more than 99 per cent of Britain’s homes to a smarter and greener energy system.”

Matthew Vickers, chief executive at the Energy Ombudsman, said: “Smart meter problems account for just 6 per cent of the complaints that we handle – a figure that has barely increased as the rollout has progressed. In contrast, billing issues make up around 75 per cent to 80 per cent of complaints that reach us.

“The smart meter rollout represents a once-in-a-lifetime opportunity to tackle the problem of inaccurate energy bills, so it’s vital that it’s done properly with consumers as the priority.

“It’s good to see more and more second-generation smart meters being fitted, because in our experience the limitations of the first-generation meters were frustrating for consumers.”