Smart metering: Challenging times lead to strange bedfellows

As cost and operational and technical hitches mount around the supplier-led rollout of smart meters, unusual alliances are being considered. Jane Gray reports

The relationship between suppliers and the government mandated rollout of smart meters is shaping up to challenge the “abusive” affair that Iain Wright MP infamously said suppliers are imposing on their loyal customers.

It has so much scope for happy outcomes, but is on a worryingly destructive path.

Hope

Energy retailers want to love the rollout. It will provide a platform for new and innovative products and services, which are sorely needed by firms struggling with thin margins. It also promises an opportunity to transform transactional and largely negative billing interactions with customers into valued exchanges which deliver satisfaction all round, via reduced costs, improved transparency, and empowerment.

Early insights into sentiment and experience among those who already have smart meters show this hope is realistic.

A survey of over 1,000 UK consumers conducted by Utility Week and market research partner Harris Interactive showed that 64 per cent of those with meters in place are enjoying better visibility of their energy costs, 36 per cent said they had achieved savings and 76 per cent said they were impressed with the technical and service expertise of the individuals who completed the installation (see opposite).

Furthermore, research carried out by You Gov shows these positive experiences are improving customer perceptions of their energy suppliers. In line with a doubling of smart meter numbers since January 2016, it found that the proportion of consumers that considered energy suppliers to be “reliable” increased from 26 to 29 per cent, and those rating them as “professional” rose from 17 to 20 per cent.

Despair

However, cost, installation issues, unmeetable targets and technical hold-ups are landing heavy blows to this optimistic outlook. Something must be done to salvage a happy ending for all parties – suppliers, government, and consumers.

At the core of many of the issues facing the smart meter rollout are fundamentally unrealistic predictions regarding the ease with which installation will proceed.

Government has suggested that just five per cent of properties will require more than one visit in order to complete installation, over the course of the rollout. But Utility Week’s recent market research, shows that the current rate is more like 13 per cent.

“First time installs are probably about as good as they are going to get right now.” Rob Doepel, partner, EY

This magazine is not the only source to suggest that the requirement for multiple visits is emerging as significantly higher than anticipated. The Big Deal, a collective switching enterprise, has previously warned that it believes between 10 and 15 per cent of properties will require more than one visit and that this could push up the cost of the rollout by as much as £1 billion. 

The reasons for first-time install failures are many and varied. They range from the customer being absent, to unexpected problems around the location and condition of meters.

A source at the department for Business, Energy and Industrial Strategy (BEIS), told Utility Week that it expects these teething problems to settle as the roll out ramps up and suppliers improve the efficiency of their installation operations. But their optimism is countered by commentators who point out that many of the most difficult installations – for multiple occupancy properties and properties with meters that are located a significant distance apart, for instance – are being pushed to the back of the programme.

Rob Doepel, a partner at consultancy EY, told Utility Week, “first time installs are probably about as good as they are going to get right now”.

The reason these kinds of installations are problematic links to another big, and growing, source of concern for suppliers, and that is functionality.

Despite and major “go-live” event in November last year (twelve months behind schedule) the central communications system for smart meters is still lacking in a number of core areas, including interoperability of first-generation or SMETS 1 meters and communications with SMETS 2 meters, prepay meters and meters in multiple occupancy dwellings.

A spokesperson for the Data and Communications Company (DCC), told Utility Week: “The DCC went live in November 2016 and is ready to support energy suppliers to install and operate the next generation SMETS2 smart meters on the national network.”

They added: “It is a matter for individual suppliers to determine their meter roll-out plans.” 

It’s a message which conflicts directly with the experience that suppliers have privately shared. Sources are unwilling to be named for fear of damaging their working relationship with the DCC, which is critical to progress – though Eon UK’s outgoing chief executive Tony Cocker did admit in the recent interview with Utility Week that hold-ups to the release of key DCC functionality are “disappointing”.

Elsewhere, suppliers have said that testing for SMETS 2 meter communications with the DCC, using real meters rather than “emulators” is still ongoing. None are willing to deploy and commission SMETS 2 meters until this testing is fully complete and any issues resolved.

While suppliers wait for this next phase of DCC functionality – known as phase 1.3 – to launch, the installation of SMETS 1 meters continues.

There are now more than five million SMETS 1 or earlier iteration smart meters on walls in the UK, significantly overrunning what was planned for at start of the rollout.

EY’s Doepel says “I’m not sure that as an industry we have really understood the impact of the unexpectedly high number of SMETS 1 meters in the marketplace. What is the risk and the stranded cost that we are carrying?”

An impact analysis to uncover the implications of DCC delays and high SMETS 1 deployment is now required, he argues.

A prominent worry is that switching limitations for SMETS 1 meters – which cannot reliably transfer smart functionality between suppliers if a consumer decides to move their custom – will deter customers from seeking out the best deals on the market. Stuart Cook, head of utility strategy and regulation at PwC tells Utility Week that “Ofgem have not put enough weight on the impact this will have on competition.”

A possible shrinkage in switching is not the only unintended consequence smart metering may have on competition.

Earlier this year, experts at EY warned that the heavy cost burden imposed by the rollout, which has seen suppliers invest billions of pounds in IT systems, regulatory compliance, installation contracts and so on, will squeeze supplier resource for innovation – via new products like time of use tariffs and connected home services.

In February, Doepel told Utility Week that while suppliers are being “hammered on price and competitiveness” and urged to bring innovative smart energy services and tariffs to market, they are also committed to make “a massive investment in an incredibly complex programme that no other country in the world has chosen to do in the way that we have chosen – a way which is inherently expensive”.

This negative impact on innovation is important, because it is widely acknowledged that smart meters themselves will not initiate and transformation in the way energy is consumed. Rather, it is believed that new approaches to retail, which explore bundling and lifestyle-based contracts and which are enabled by smart meters, will trigger a radical change in customer experience.

Doepel now says the squeeze on suppliers’ costs, and the room for innovation, has worsened as the year has worn on. Following the Conservative manifesto pledge to introduce a retail price cap, which “has hit everyone’s P&L hard”, Doepel believes firms with “diminished scope for revenues and looking to shore up their balance sheets” are increasingly concerned about the cost of smart.

A way out

But despite the cloud of worry, Doepel insists that the future need not be gloomy and fractious for suppliers and the smart rollout. He sees the increasingly tough energy market environment as a potential trigger for a rethink on rollout strategy.

It has already been argued here that smart meters themselves provide no competitive differentiation for suppliers. It is what they can offer on the back of them that will make the difference.

If suppliers accept this, then Doepel argues there is scope for collaboration on the high cost, low value nitty gritty of installation.

Such a suggestion has been “taboo” to date, but Doepel insists “the pure economics are pushing people to start exploring different models”.

He reveals EY is having conversations with “senior stakeholders – budget holders and heads of smart, and above” about how supplier collaboration, to optimise speed and efficiency and control rollout costs, might work. “They are not quite there yet, but there is interest,” he says.

Ideally, a collaborative approach would give “density” to rollout by pooling the customers of many suppliers with a mutual meter installation company – essentially achieving a rollout approach similar to what might have been the case with a network-led programme.

Doepel knows there are “some blockers” to achieving this – for instance supplier contracts with installation providers will need revisiting and commissioning will be tricky due to the many different kinds of meters provided by different suppliers  – but he reiterates: “If you accept that the opportunity to differentiate is post-install, then it frees up opportunity to talk about collaboration.”

Jumping into bed with rivals to deliver a programme which involves direct contact with customers may go against the grain. But desperate times call for desperate measures.