Charles Hendry speech to the Smart Metering Forum
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Taking the Foundation Stage forward: an update on the government’s plans for the Smart Metering Implementation Programme Grateful to Richard…
Taking the Foundation Stage forward: an update on the government’s plans for the Smart Metering Implementation Programme
Grateful to Richard for his introduction. I am very pleased to be here this morning. I spoke at this Forum last year, so my invitation today provides an opportunity to look back on the efforts we have made over the last 12 months, take stock of our current position and set out our plans for the year ahead.
Looking around this room, I can recognise many familiar faces and know that this is a very knowledgeable and well-informed audience. But before looking at these points let me provide the background to this initiative.
In the Coalition Programme for Government we said that the rollout of smart electricity and gas meters to homes and smaller businesses is a key priority, forming a key part of action to cut greenhouse gas emissions, decarbonise the economy and support the creation of new green jobs and technologies.
Smart Meters will deliver a range of benefits to consumers, energy suppliers and networks.
Consumers will have real time information on their energy consumption to help them control energy use, save money and reduce emissions.
Suppliers will have access to accurate data for billing and to improve their customer service.
And energy networks will have better information upon which to manage and plan current activities, paving the way for the development of a smarter electricity system.
But this is a huge and challenging project, being the largest changeover programme in the energy industry since the introduction of North Sea gas about 40 years ago. It will consist of the installation of about 53 million meters in Great Britain, and involving visits to some 30 million homes and businesses. Over the lifetime of the project, that means that on average suppliers will need to install more than 100,000 meters a week.
The government’s Impact Assessments estimate that the total cost of the roll-out programme will be around £11.7 billion pounds. Although comparisons are difficult, that’s the equivalent of building two nuclear reactors. And it’s significantly more than the funding package for the 2012 Olympics.
Smart meters have of course been rolled out in a number of countries, including the USA, Canada, Australia and in Europe, Italy and Sweden. Of course we must learn lessons from these countries, including the practical organisation and logistics of roll out and installation.
But the roll out in Great Britain will be especially ambitious, involving the installation of both gas and electricity meters in a framework that will help to ensure that energy consumers secure the £6 billion of benefits we forecast from this programme. That’s why consumers’ interests lie at the heart of this initiative.
Achievements over the last year
So what was the position 12 months ago? At this conference last year I said that we were making quiet progress. Together with Ofgem, we were carefully analysing the 300 or so responses to the smart metering prospectus published in July 2010.
But given the scale of the programme - which was based on a mandate from government - I said then that it was only right for Government and Ministers to be directly accountable for this, DECC therefore would be assuming direct responsibility for managing the implementation phases of the programme.
I also noted that we should have a clear focus on the near term challenges in ensuring that the roll out gets off to a really successful start. I therefore called this interim period the ‘foundation stage’, a stage in which government and the energy industry would make all of the preparations required. And I also underlined my wish to be ambitious over the pace of deployment.
That was 12 months ago. What progress then have we achieved?
Response to the Prospectus
Firstly in March, DECC with Ofgem published the government’s response to the Smart Meter prospectus. It set out our conclusions in response to the questions asked in the Prospectus. This included:
- the overall timetable for the rollout of smart metering across Great Britain
- the benefits which smart meters should provide for consumers and the energy industry
- the strategy for establishing the data and communications services needed to support the smart metering system
Taking each of these in turn, in relation to the timetable, the response indicated that the rollout would be in two phases - the foundation stage beginning in April 2011, followed by the mass roll out, which is expected to start in 2014 and to be completed in 2019.
In terms of the benefits for consumers, the response noted that a consumer engagement strategy would be developed so that those benefits are realised. It also noted the protections that would be afforded to customers, including a requirement for all energy suppliers to comply with a new code of practice governing smart metering installations in homes.
And in relation to establishing the data and communications services, the response stated that in the domestic sector this would be managed centrally by a new licensed Data and Communications Company, the DCC. The DCC’s role would be to communicate with smart meters at all domestic gas and electricity consumer premises.
Government would begin the procurement of the first generation of data and communications services in order to bring forward the date when DCC becomes operational. This would enable the DCC to start providing services to the market in 2014.
The response also noted that industry was working with the programme to develop the technical specifications for smart meters. This is essential to ensure the interoperability of smart metering equipment which is critical in a competitive market.
A number of working groups were involved in developing the specifications including experts from consumer bodies, manufacturers, energy suppliers, network operators and other interested parties, in what was called the hot house process.
Their intensive efforts led to the publication in August of the Industry’s Draft Technical Specifications.
This was a major piece of work. I wish to thank all those involved in the process for providing their expertise, commitment and time to delivering this document to such a challenging timetable.
We are using the industry draft as the basis for the Smart Metering equipment technical specifications or SMETS, adopting its recommendations where appropriate and taking account of comments received in subsequent consultations.
We propose to introduce a licence condition requiring suppliers to install equipment that satisfies the SMETS.
August proved to be a busy month. In addition to the industry draft technical specifications, DECC also published consultations on the draft licence conditions and technical specifications for the roll out, and on draft licence conditions for an installation code of practice.
We also published a call for evidence on data access and privacy.
And we initiated the process for procuring the data and communication services for the DCC.
The communications services will be split into three geographically based lots, with the total contract value of each lot expected to be between £330m and £1,525m.
The total value of the data contract will depend on the contracted term but is expected to be in a range between £60m and £240m.
The DCC and not DECC will actually sign the contracts. The next stage of the procurement process - the invitation to participate in dialogue - is underway.
In September DECC published a consultation on the detailed policy design of the regulatory and commercial framework for the DCC.
This all means that with the publication of the industry’s technical specification, the consultation documents and the contract notices for the procurement of services for the DCC, the early milestones in the foundation phase have been met.
To do this we have mobilised a team which currently consists of about 90 people with expertise in a number of specialisms, which will grow to 100. I am encouraged by the comments of Vincent De Rivaz of EDF Energy at the Public Accounts Committee hearing on this subject last month, who said that he thought DECC had put in place an organisation which he thought was fit for purpose.
Which brings us to the current position and our plans for the year ahead.
We are currently analysing the large number of responses to the three consultations and call for evidence published over the summer. Work on the DCC services procurement is also proceeding.
A government response to these consultations will be published alongside licence conditions and the updated technical specification - the SMETS in the New Year.
The technical specifications and associated licence conditions will be notified to the European Commission, in line with requirements of the Technical Standards and Regulations Directive , before being laid in Parliament here.
2012 will be a key year - the first full year of the Foundation Stage. The Foundation Stage is a critical period, during which we must ensure industry and consumer readiness for the mass rollout. This phase will give industry the space to build and test the necessary systems, both cross-industry systems and companies’ own back office processes.
We are working closely with industry and other stakeholders to make sure Foundation is a success s and that the necessary lessons are learnt from early installations.
It is encouraging therefore to see suppliers proposing these in their Foundation Plans, including British Gas’s plans to deliver one and half million smart meters to its residential and business customers by the end of 2012; and E.ON’s plans to put a million smart meters in UK homes and businesses by 2014.
At the same time, I am very aware of the need to give companies as much clarity as possible at every stage of the Programme, particularly now as companies look to make investments which are so important in this early Foundation phase. So we are working hard to finalise decisions to provide further certainty and confidence, including for small suppliers which are such an important part of a vibrant market.
By early March we intend to publish specifications for meters which will count against suppliers’ rollout completion obligations. As planned, we will notify these specifications under EU rules and then amend suppliers’ licence obligations accordingly.
We will be doing more work during 2012 to examine whether further specifications might help support interoperability in the future. So in particular, as many of you will know, we plan to review the performance of different Home Area Network solutions over the next few months.
However, our strategy of notifying a core set of requirements early in 2012 will give important additional clarity and confidence to suppliers to support their investments in these early stages of Foundation. We also do not underestimate the importance of testing and trialling to achieve an ‘end to end’ system that works effectively and passes compliance and accreditation tests.
So we are developing an overall architecture and high level design for the end-to-end smart metering system that will be shared with industry. A Chief Technology Officer (CTO) is in place with responsibility for this.
We are also appointing a Head of Testing and Trialling and developing a Strategy to ensure that the arrangements for testing the individual equipment components and end-to-end and for trialling the processes are effective and that lessons are learned and shared.
Certainly, the evidence from trials here and internationally is that our decisions that suppliers should provide domestic consumers with an In-Home Display or IHD and advice and guidance at the time of installation to ensure that they benefit are the right ones.
Here in Britain, the results of the Energy Demand Research Project are particularly relevant. This large scale trial - covering 18,000 households showed savings from smart meters with IHDs were generally around 3%. However, savings of up to 11% were observed in the trials. The savings were found to be generally persistent, rather than short term.
And the European Smart Metering Industry Group (or ESMIG) also reviewed 100 pilots involving 450,000 residential customers. These showed savings of 5-6% rising to nearly 9% with the provision of an IHD.
We are carrying out further trialling during the foundation stage to make sure that we learn from early experience. For example two trials, with British Gas and First Utility, were announced in June this year. Households with smart meters will receive feedback on their energy consumption and hints and tips on saving energy, delivered through various channels, including through mobiles and social media.
Consumer Engagement Strategy
But to maximise savings, evidence suggests that we need to provide additional engagement activities. As Christine Farnish, the Chair of Consumer Focus said last month, ‘it is really important that the UK squeezes out the greatest possible benefits for consumers; otherwise, [this programme] ain’t going to be worth doing.’
That is why we are developing a Consumer Engagement Strategy to make sure we do this. It’s also right that it addresses some of the issues of concern which have come to the fore in roll outs elsewhere, such as costs and electromagnetic sensitivity, if we are to gain the public’s acceptance and trust. We will be issuing a consultation early next year, and put the Strategy in place prior to mass roll out. Maxine Frerk from my department will be talking more about this subject tomorrow.
For now I just want to say that it is fundamental that all consumers have the opportunity to benefit, including vulnerable consumers. We are taking action in a number of areas to understand the impact on this programme on these customers. That includes funding research by National Energy Action to get a better understanding of the needs of low income and vulnerable consumers.
In terms of ensuring that the right rules and protections are in place which will give consumers confidence, there is already a substantial body of regulation to safeguard consumer interests. These are set out in the protections afforded as part of the suppliers’ licences and in general consumer law, such as the Data Protection Act.
But smart metering does present some new issues that will need to be addressed.
That’s why we’re introducing a code of practice covering the installation visit . Once we have analysed the responses to the consultation on this matter, the next steps will be to finalise the rules around the installation visit and publish our conclusions early in the new year.
Data access and privacy
Our next steps on data access and privacy are to develop a policy framework, based on the principle that consumers should have a choice about how their data is used and by whom, except where this is required to fulfil regulated duties. We have said that we are minded to define such regulated duties narrowly, given that consumers would not have a choice over whether to provide data for these purposes.
The responses to our recent Call for Evidence on this matter, as well as discussions with stakeholders and our own analysis will inform the development of the policy framework. We are planning to publish a consultation on detailed proposals for the framework early next year.
Whilst we are working on the foundation stage, we will also have a keen eye on the future and the enduring regulatory framework that we’ll need to have in place. It’s not too early to start thinking about this because it is essential that we get this right. Many of the obligations that will form part of the enduring phase will be continuations or developments of those arrangements we have in Foundation.
The enduring regulatory framework will be a mix of obligations including changes to licence conditions and codes. The DCC will be required to have in place a new Smart Energy Code. This will be an important part of the framework, governing the overall arrangements for smart metering and, in particular, all interactions with the DCC.
All of the regulatory obligations will need to be crafted carefully so that we set in place an appropriate regime to deliver the benefits of this initiative , and to deal with the unique environment that a smart metering world will bring.
There will be a number of consultations on our regulatory proposals over the coming months, providing an opportunity for stakeholders to contribute on what the regulatory framework should look like.
Early next year will see the first of our consultations on the Smart Energy Code where we will be outlining our proposals in relation to the Code’s governance. We’ll be drawing on the experience we have from other Codes and Ofgem’s recent Code Governance Review.
Changes to the planning assumptions
I hope you will agree therefore that we have made good progress so far in taking forward the smart metering programme.
However, work since the start of phase 2 in April 2011 has led us to re-examine a number of our earlier planning assumptions. For example, procuring DCC services will involve four contracts rather than one, and further work is needed on a small number of complex technical design issues.
As some of you may know, we have been discussing these planning issues with industry and will consider whether any amendments to the overall plan are appropriate in the light of that.
To conclude therefore, we have acknowledged that this is a challenging project. I have reviewed the progress we have made over the last year, set out where we currently stand and outlined our plans for the year ahead. It is important that we remain ambitious. Over the next year we expect to:
- publish the end to end technical requirements, including the technical specifications for the smart meter equipment
- gain experience from a number of testing and trialling strategies
- launch the start of the DCC licence application and make further progress on the DCC communications and data services procurement contracts
- develop the regulatory framework including legislation covering the installation code of practice and roll out
- And not least we will take forward the consumer engagement strategy, on which so much of the success of this project depends
That’s a big agenda. But we have a good project team in place. We will continue to take decisions as quickly as we can, to give industry certainty, and to ensure that the consumer and other benefits of this programme are realised.
This is a programme in which government, industry and consumers have much at stake. To use a well-used phrase, we are all in this together. I remain very grateful for all the help and support you have provided to date. If we can make this a success, then as well as delivering benefits for consumers and for society more generally, we can also enhance [restore] trust in the energy industry and, dare I say it, in government as well.
That’s a big prize. I look forward to working with you over the coming year in making this programme a success.