The ruinous rollout of smart meters

Suppliers fought for the privilege of installing smart meters, but as cost estimates soar and the possibility of a public backlash grows, the big six could find they pay a high price, says Jane Gray.

Many energy suppliers have become used to occupying hostile habitats between rocks and hard places. Under pressure to show they are treating customers fairly and innovating to serve them better while still delivering for investors and adapting to volatile market conditions, they are now more than familiar with having to make trade-offs between popularity and fiscal sense.

However, as the UK’s national smart meter rollout builds up speed, the unenviable market position of energy suppliers looks set to become more unpleasant than ever, especially for the large incumbents.

The predicament for big suppliers is handily demonstrated in the opposing messages of a new report from consultancy EY and an ITV documentary on smart meters that aired on 3 February.

The former issues a stark warning for large energy suppliers, who bear the majority of the smart meter rollout burden due to the substantial market share they have.

The key observation in the report is that the spiralling costs of the rollout, especially costs tied up with major IT programmes, are eating up incumbents’ available investment capital – and a large chunk of management time. These costs are undermining firms’ ability to invest in the really smart and innovative products and services they will need to compete with increasingly agile and techy new market entrants.

In short, the report says, the big six are “paying to build a future they will struggle to profit from unless they are prepared to radically rethink how they do business”.

The size of this risk to incumbents is “massive”, EY’s Rob Doepel tells Utility Week. He says it is difficult to see how big suppliers will “square the circle… something has got to give”.

Those suppliers with overseas owners – which accounts for four of the big six – may find the smart meter rollout even more stressful, Doepel says. This is because the large European utilities behind Scottish Power, Eon, Npower and EDF find the “inherently expensive” UK approach to rollout frustrating in comparison with the network-led method used elsewhere.

“Foreign owners are looking in and saying it is too expensive, that they can’t see the business payback,” says Doepel. “The business case for smart meters is a UK plc business case, not an individual supplier business case. If you’re a foreign owner – or indeed any private equity owner or good business person – you’re going to look at it and say ‘why would I make that investment?’”

So, EY says smart meter rollout costs pose an existential threat to the future of the businesses that serve over 80 per cent of UK energy customers. Meanwhile, ITV’s Tonight programme came to the opposite conclusion. It said that, in fact, it is suppliers who are the “only ones sure to benefit” from the smart meter rollout, which customers are paying for.

Glossing over evidence that early adopters are overwhelmingly positive about their smart meters, and that the devices do seem to be encouraging energy efficiency, the programme stated that, according to “official figures” customers are only expected to see £5 billion in savings as a result of smart metering. Suppliers, on the other hand, will get £8 billion in savings on the back of a programme for which “they are not paying a penny”.

Enthusiastically damning the rollout, ITV also slammed marketing material from suppliers and the rollout’s public awareness body, Smart Energy GB, for advertising smart meters as free when the cost will ultimately be shared by everyone. For good measure, it gloomily reported the concerns of commentators who expect the £11 billion cost of the programme to overrun by at least £1 billion because planners have vastly underestimated the number of homes that will need to be visited multiple times.

What more vitriol might presenter Chris Choi have let loose had he been able to get into the intricacies of questionable SMETS1 interoperability, delayed SMETS2 meter availability and the possible inconvenience and disruption these might cause to consumers?

It is notable that government seemed in no hurry to defend suppliers from ITV’s outraged demand that they ought to bear the costs of the national smart meter deployment from their own pockets. Energy minister Jesse Norman declined to engage with the programme, simply issuing an innocuous statement to say that smart meters are “essential technology”.

In an environment where government has committed itself to protecting the “just about managing” it is, after all, far more politic for ministers to raise concerns about fair pricing than it is to justify a decision to socialise the cost of a national technology deployment of unprecedented proportions – all the more so since that programme has its roots in EU legislation.

A simple action government could take to ease the pressure on suppliers, and increase the chances of a positive consumer experience of the rollout, would be to tweak the 2020 deadline for its completion.

This would spread the cost for suppliers and reduce the risk of a rushed rollout with poor decision-making. However, as EY’s Doepel observes, government and industry are currently locked in “a game of chicken, waiting to see who will blink first” with regards to the deadline, which “everyone knows is unachievable”.

As this stand-off continues, big energy suppliers can only expect to find themselves squeezed harder between the need to comply with regulatory and policy mandates and the need to act with populist expediency.

The furore that followed Npower’s recent announcement of a price hike – partly due to the costs of smart metering, it said – shows that making customers pay more cannot be the go-to solution.