UK smart meter project unlikely to meet government's initial expectations, says Martin

Chris Martin, a specialist in smart metering and technology contracts at Pinsent Masons, the law firm behind Out-Law.com, said that while energy suppliers face regulatory obligations to help spur interest in smart metering among property owners, it would be unfair to blame them if take-up of smart meters remains lower than had been originally anticipated in cost-benefit analysis carried out by government.

Martin was commenting after Ofgem, the UK's energy regulator, published an open letter (6-page / 352KB PDF) outlining its observations on suppliers' smart meter progress reports and roll-out plans.

Smart meters are one of the smarter energy technologies of the future, according to a special report by Pinsent Masons, the law firm behind Out-Law.com. The meters have been identified as having the potential to reduce unnecessary energy use and emissions and to cut consumers' energy bills, and the UK government has set a target for their installation across the UK by the end of 2020 – it has said more than 50 million smart meters could be installed under the initiative.

UK electricity and gas suppliers are under an overarching obligation to take all reasonable steps to ensure that a smart meter is installed on or before 31 December 2020, but consumers are not forced to accept them. To aid the scheme, the suppliers have been under a licensing obligation to submit smart meter roll-out plans. The largest of those suppliers – those that supply to 250,000 or more gas, electricity or dual fuel customers – have also been required to submit binding annual milestones for the installation of smart meters alongside those plans.

In its letter, Ofgem said that smart metering "brings immediate benefits to consumers", giving them "control of their energy usage", and that the technology is also "a key enabler for the transition to a more flexible energy market and the move to a low carbon economy".

The regulator said that, for 2017, the number of smart meter customers that energy suppliers had was "in line" with the annual milestones the companies had set themselves. However, it called on suppliers to do more to ensure that installation of SMETS2, the second-generation smart meters, as opposed to first-generation, is prioritised this year, and take steps to enrol their smart meters with the Data Communication Company, which is responsible for operating the data and communications hub that sits at the heart of the smart metering system.

Ofgem said the suppliers must also ensure they offer smart meters to all their customers, and said it would like to see evidence from the suppliers of the measures they are taking that are designed to improve "conversion rates". It said it will be open to the energy suppliers to revise their adoption targets for 2019 on the basis of actions undertaken this year, but called on the companies to step up their consumer engagement activities.

"We expect suppliers to deploy a variety of channels and continuously test, learn and adapt their engagement strategies," Ofgem said. "Suppliers should monitor the effectiveness of different channels, approaches, and propositions to develop customer journeys that are appropriate to specific customer cohorts. This includes the use of more sophisticated customer segmentation and tailored messaging, taking into account information gathered about customers’ motivations, needs and concerns, and using this to refine the consumer engagement journey."

"While consumers are not obliged to have a smart meter installed, suppliers should consider appropriate re-contact strategies based on customers’ preferences, contact history and reasons for not previously accepting a smart meter. Overly repetitive and coercive approaches to consumer engagement, as opposed to innovative and tailored re-contact strategies, can be counterproductive to the successful achievement of the rollout obligations," it said.

Martin said that the clear message from Ofgem is that it expects suppliers to "up their game" in certain areas, including in relation to consumer engagement strategies and ensuring that arrangements with third party installers and meter manufacturers enable them to ramp up installations to meet demand for SMETS2 meters. However, he described the fact that  consumer interest in smart meters is significantly below what government had assumed when it carried out its original cost-benefit analysis as "the real 'elephant in the room'".

Martin said: "The government elected not to make accepting a smart meter mandatory, which is fair enough. However, there are only so many levers for energy suppliers to pull to increase engagement. Whilst the overall cost of the roll-out has continued to rise, consumer interest has remained relatively low, which, in effect, means that the overall cost per smart meter installed will likely be significantly greater than had been assumed by government, bearing in mind the costs of implementing the required technical infrastructure and governance that sits at the heart of the roll-out."

"Lower than expected volumes of installs will also mean that hardware and per-install costs may very well increase as meter manufacturers and installers will not achieve expected economies of scale. There are limits to what energy suppliers can do to counter lower-than-expected consumer engagement. Using more innovative re-contact strategies may help, but is unlikely to deliver the step-change in consumer interest that is needed if the roll-out is to deliver the net benefits anticipated by government when it mandated and set the rules of engagement for the roll-out," he said.

"There is no doubt that the smart roll-out offers significant potential benefits in terms of enabling a more flexible and connected energy market and empowering consumers to manage energy consumption more proactively. However, it looks increasingly unlikely that Ofgem’s 2020 aspirations will be met and, given the technical and operational challenges of implementing the roll-out that are outside the direct control of energy suppliers, as well as the apparent general ambivalence of the public to smart meters, it would be unfair to lay the blame for low uptake at the door of the UK’s large energy suppliers.”