Oral evidence: Smart Meters follow-up, HC 103-i
Oral evidence, 9 June 2014.
Witnesses
Stephen Lovegrove, Permanent Secretary, Department of Energy and Climate Change, Daron Walker, Senior Responsible Officer, DECC, and Dermot Nolan, Chief Executive, Ofgem, gave evidence.
Chair
Welcome. This is a return to an issue that we looked at two years ago—or was it three?
Jill Goldsmith
Three.
Chair
Three years ago. We said we would come back to it, and this is a good time to do so. I don’t think you were in the job at that point, were you?
Stephen Lovegrove
I wasn’t.
Chair
I am going to start on the consumer. I am right, aren’t I, that the consumer will pick up the tab for this £12 billion investment?
Stephen Lovegrove
Yes, that is correct.
Chair
Entirely.
Stephen Lovegrove
The consumer is picking up the tab in the most part, although, of course, the savings that we expect the energy companies to make will ultimately flow through to consumers.
Chair
We will ask how and whether we can track that. You have not put a cap on the costs, have you?
Stephen Lovegrove
No, we haven’t. We have different types of enforcement mechanism, apart from the cap.
Chair
So you are relying on something you call “commercial incentives” between the suppliers to keep costs down. I am right about that?
Stephen Lovegrove
That and regulation.
Chair
Let’s just deal with the commercial incentives. We will come to the regulation. Am I right in saying that Ofgem has just referred the industry to the Competition and Markets Authority?
Dermot Nolan
Actually, Chair, we have proposed a reference. The consultation period has finished, and we anticipate making a final decision later this month.
Chair
So you referred it when?
Dermot Nolan
We proposed a reference at the end of March.
Chair
So, in that context, Ofgem has some concerns about competitive incentives in the market. What comfort can the Department give consumers that the way this is rolled out will include competitive incentives to ensure that costs are minimised and the benefit to the consumer in terms of price is maximised?
Stephen Lovegrove
We have devised this system within the framework we have for the supply of energy in the UK, which is private sector companies competing with each other in a regulated framework. We believe that the combination of regulation, through the obligations we have put on the energy companies, and the competitive environment will mean that the costs are passed through to the—
Chair
I am delighted you have beliefs, Mr Lovegrove, but I am interested in how they translate into reality. The real question I asked was about Ofgem questioning the competitive nature of this market. Ofgem, along with others, believes that this is not a very good competitive market, but I am interested in why you—I accept you have some regulation, and I have told you we will come to it—have confidence in a competitive nature that will drive down the cost to the consumer of this £12 billion proposal. Apart from saying, “This is our framework. This is how the world works,” have you got any evidence you can use to give us, and therefore consumers, comfort that there really will be competition, because I cannot see it?
Stephen Lovegrove
If you are asking me whether there are problems with competition in the energy market, the potential for a market investigation reference clearly tells you that there are issues that we want to be able to deal with and that, through the CMA and Ofgem, we will be able to deal with. At a high level, though, we do believe in competition and its ability—
Chair
I don’t want the policy—I really don’t. You can give us the policy, but we are not here to question that. What I am interested in is that you have built this structure on the basis that you believe that competition will contain costs and drive the savings into lower prices. That’s how you have built this structure.
Stephen Lovegrove
Correct.
Chair
And I want you to tell me whether there is anything at present that gives consumers comfort that that will happen. You haven’t put a cap on costs. You have chosen not to do that, which might have been one of the ways you could have protected the consumer. You have chosen not to do that. You have accepted, in what you have just said, that there are problems with the competition in the market, so what are you doing that will give comfort to the consumer?
Stephen Lovegrove
Smart meters are one of the key competitive tools through which we will be able to drive competition and better deals for the consumer. Our aim is to bring into existence a group of lower-cost suppliers that, through the agency of the market, will pass those lower costs on to the consumer. If they don’t do that or if one individual company doesn’t do it, inevitably what will happen is that another company—there are more every day—will pass those costs on, and the competitive dynamic, which is what this industry is based on or at least this framework is based on—
Chair
I don’t think you have really answered the question. Mr Walker, you look as though you might.
Daron Walker
I think it is worth breaking down the costs and then seeing whether the benefits could be passed through. First of all, these are commercial organisations that have shareholders, who are challenging them all the time to be as efficient as possible, so they have all the right incentives, as companies, to do and deliver this programme in the most cost-effective way.
Chair
Not if they’re cartelled and the competition is not working.
Daron Walker
I would say it’s not a cartel, but let me carry on with my response. First of all, you have cost pressure already. A chunk of the costs are actually price-regulated; the comms and data services are price-regulated by the DCC.
Nick Smith
Say that again a bit more slowly.
Daron Walker
Okay. The market is divided into the meters and the installation of meters, and the suppliers are doing that. We have set up in the framework a licence body—the DCC—that will be overseeing the design, build and test of the comms and data services that will operate to support the roll-out of the smart metering programme. Those costs have been competed and have now become contracts in the market that belong to this private company, the DCC, and Ofgem is responsible for overseeing and price-regulating that part of the market. That’s probably worth about £2.4 billion of the costs in this system. At the other end, the consumer obviously is not without benefit in this market, because one of the things we are doing—smart meters will see the end of estimated billing. They will give them, through the IHD, better information about how much energy they are using and what it costs. In due course, they will be able to make much more informed decisions. Obviously, if you don’t know how much you are using and how much it is costing, it is much harder to make informed decisions. All of that will start creating pressure at the consumer end for them to expect more of their companies. If not, they will switch to other companies. There is going to be consumer power as a result of this programme. The combination, with further interventions that may or may not come about through the process that my colleagues have described, will ensure that costs are kept to a minimum and that, in due course, some of the savings are passed on through more effective competition.
Chair
Just out of interest, Mr Nolan, are you satisfied that the competition on the communications infrastructure did bring the price down, given your concerns with competition in the market?
Dermot Nolan
Are you referring to the DCC—
Chair
Or have you not looked at that? I am not sure whether it is in your remit.
Dermot Nolan
The DCC, as Daron has described it, will be in our remit, and we will look very closely at price regulation in that, but I think that’s for the future. The company that Daron described that has been set up will be directly price-regulated by Ofgem in that regard.
Mr Bacon
The contract for the DCC has been let, hasn’t it?
Dermot Nolan
It has, yes.
Mr Bacon
Can you just remind us of its value?
Dermot Nolan
The value is roughly £2.4 billion. The vast majority of that will be the contracts that the DCC itself will have with the various providers, and a portion will be the DCC’s costs, so our regulation of the DCC will be composed, I suppose, of two main elements, in the sense that we will examine the contracts, which will have been competitively tendered. We will absolutely make sure that those competitively tendered contracts are giving value for money. We have the ability to question and, potentially, disqualify them.
Mr Bacon
Who let the contract? Was it you, Mr Lovegrove?
Stephen Lovegrove
The Department did; yes, that’s correct.
Mr Bacon
Mr Nolan said it will have been competitively tendered. How many people tendered for it?
Daron Walker
There was a process. As a Department, we ran the competition on behalf of the industry. There were various stages, at which point companies were effectively got rid of out of the competition. There were three main stages. The overall contract value came out at several hundred million below what was estimated in the original impact assessment. This Committee looked at the impact assessment two and half years ago; about £300 million lower costs came out of these competitively tendered contracts. For each competition there were three competitors for the DCC licensee at the start. There were at least five for each of the other two competitions: one for the communications-service provider that was in three lots, and one for the data-service provider.
Mr Bacon
So who won?
Daron Walker
CGI has won the data-service contract. In the north a company called Arqiva won the communications contract; in the middle of Britain and the south, a company called Telefónica.
Chair
You said five competitors.
Daron Walker
For each of these individual elements at least five. With the DCC licensee there were three competitors.
Mr Bacon
Can you send us a note summarising all that, please?
Meg Hillier
I am interested in the whole tendering approach. Although it was carved up, these are quite big businesses that won. Was there any thought in the Department about tapping the technological revolution that is overtaking this country and the world and going for smaller suppliers, basically setting a specification that allowed others to bid?
Daron Walker
There will be small companies involved, subcontracting for these major suppliers.
Meg Hillier
Is it part of the contract agreement that they have to subcontract to smaller companies?
Daron Walker
As part of the competition they had to make clear who their subcontractors were and the other parties.
Meg Hillier
So they have already named them and there is no prospect of anyone else.
Daron Walker
There may be opportunities for them to look further. As part of the competition, they had to make clear who their partners were. We did break down the contracts. At the beginning of the process back in March we considered having one single supplier doing the data and the comms. Through the development of our procurement strategy we split them up. You are balancing the ability of these companies to operate on a national scale against the fact that the smaller you make the contracts, the more competition you have. We struck that balance after careful consideration and consulting with interested parties.
Chair
I am anxious to bring Justin in, but let’s have Nick and then go to Justin.
Nick Smith
Mr Walker, I think the extra information will help consumers, though I am not sure how. One of the things you said was that consumer power will reduce costs. How do think consumers will do that? How much do you think the cost will be reduced by?
Daron Walker
If I may, I will break that down into two elements. Having this information will allow consumers to make much more sensible choices about how they use energy in their home. There is quite a lot of good evidence to show that if you give real-time data to consumers, they can make changes to how and when they use energy. In the impact assessment we have assumed a 2% reduction in gas usage because of that, and a 2.8% reduction in electricity use. Those are very much at the prudent end of international trial information. In fact, it is set out in the NAO Report that actually some of the international trials have seen 6% or up to 9% reductions when you combine energy efficiency advice in IHD, so quite a large amount of saving is directly in the control of the consumer. The second part is actually about making sure that the cost savings are driven by having smart metering in the system because you are effectively making the cost to serve lower. The consumers will have information about how much they are using.
Mr Bacon
So you are effectively making what?
Daron Walker
The cost of serving consumers lower. At the moment, you have metering forces out there, but you will be able to do these meter reads remotely. A lot of the call centre traffic that comes to these companies is based on people not knowing what their bill is—estimated bills lead to people complaining or being confused about their bills. Again, that issue will disappear because you will have real-time information and accurate bills. All of those things lead to your business case for the savings that get delivered by the energy suppliers.
Nick Smith
What is your estimate on that then, on those people who walk around their houses looking at information on walls or ringing up to say, “What is my bill?”
Daron Walker
In the impact assessment, we have made an assessment based on all of the costs that are going to be rolled out from the smart metering process and the comms and the data services. By the time the roll-out is complete in 2020, we estimate that the average dual-fuel consumer will be saving £26 on their bill as a result of this programme; by 2030 around £43.
Chair
How are you going to acknowledge that? How is the consumer going to know?
Mr Bacon
Is that £26 per year on an average bill?
Daron Walker
Yes.
Mr Bacon
Can you remind us what an average bill is?
Daron Walker
About £1,400 or £1,500.
Mr Bacon
It is £26 on £1,400.
Daron Walker
Yes.
Mr Bacon
That is quite a small saving, well within any margin of error, isn’t it?
Daron Walker
It is a prudent, small saving. As I said, there is scope and there is evidence to show that the savings could be larger, if the consumer makes use of this. This is the average saving. When you scale that up to what we are saving over all bills, this is £700 million you are taking out of consumer bills in 2020.
Mr Bacon
You said it would make it cheaper for the companies to supply the consumer. At the moment, how often do they get data from the consumer that they then process?
Daron Walker
The companies?
Mr Bacon
How often do companies get data—information—from the consumer that they then process to work out how much to charge them?
Daron Walker
There is a requirement for them to read meters at least once every two years, I think, but—
Mr Bacon
How often under this system are they going to receive information from the—it will more or less be in real time. Am I right in thinking that they will basically be getting it steadily?
Daron Walker
The consumer will be getting real-time information.
Mr Bacon
No, I am talking about the company.
Daron Walker
Once a month. That is without consumer consent. If they achieve consumer consent—that is, to have the data more regularly—they can get daily data with an opt-out. If the consumer does not opt out—
Mr Bacon
If they had daily data, they would be getting it 365 times a year, which is 720, or whatever it is, times more often than they do at the moment.
Daron Walker
Yes.
Mr Bacon
That would have a systems implication for the company, would it not?
Daron Walker
So, what the—
Mr Bacon
Sorry, is that a yes or a no?
Daron Walker
All the system costs to build and support this roll-out are built into our impact assessment costs—built into the assessments we are making in the bills that—
Mr Bacon
Having looked at your impact assessments, I am just wondering whether you can explain, because I cannot begin to understand how this happens. The impact assessment that was originally done by the Department for business and enterprise had a net present value of about minus £4.5 billion. The one that was done four years later had a positive net present value of about £4.9 billion. There was about a £9 billion difference. How do you account for that enormous swing, from a considerable net present value negative number to substantial positive number? It is a huge variation.
Daron Walker
I can account for that. Under the Treasury Green Book, to make option appraisal and assessments you have to include optimism bias about anything that is uncertain about costs until you get better evidence. So some of the cost data that we had in that impact assessment had cost optimism bias of 200% or 300%, because you were very much at the end of not yet knowing what the cost is. That is best practice, because the danger within these kinds of projects is that you become optimistic about the costs and—
Mr Bacon
So you basically got rid of the optimism bias by getting more detailed facts.
Daron Walker
Yes, and as we went through the process we have refined and updated this impact assessment five times since that date. At the same time we have got much better data about understanding what benefits might be achieved and being able to quantify and monetise those. Those two effects—
Mr Bacon
Yes, I understand that. At the time that you dialled down the optimism from several hundred per cent—100% or 200%—what did you dial it down to? For the central comms system, what did you dial it down to? From what to what?
Daron Walker
I cannot give a specific figure on the central comms system, but I can tell you—
Mr Bacon
The numbers I have are from 150% to 10%. I am wondering if that sounds fair to you.
Daron Walker
It does sound fair, because as it turned out the numbers we had in the impact assessment turned out to be several hundred million higher than the contract that we were actually awarded, so that came down in a sensible and logical fashion. It started high, before we knew exactly what the system design was; it got improved and iterated down to a lower level as we understood the evidence and the costs; and then, as it turned out, the costs that were delivered through those contracts were lower than even than 10% optimism bias.
Mr Bacon
So the central comms system has been fully specified now, has it?
Daron Walker
It has been fully specified and it is now in the design, build and test phase, which is what is happening between—effectively—last September and the end of next year.
Mr Bacon
When was it fully specified?
Daron Walker
It was part of the procurement process. It was specified in more detail as we went through that process, so that each time it went through part of the procurement there was more detail against which the bidders bid against.
Mr Bacon
When was it fully specified?
Daron Walker
The comms and data side of things, in the contracts, was fully specified by the time we asked for final tenders, back in May 2013.
Chair
Let’s go to Justin, and then there are lots of people who want to come back in.
Justin Tomlinson
On the theme of consumers, I would actually welcome a £26 reduction. It might not be a huge amount, but certainly to some people—it is not often Governments of any political party actually deliver cheaper things, so I think that is a welcome step. I just want to drill down a bit further on this. I get the point that, at the moment, someone has to come along every two years and manually take the figures. In my case, every time my energy supplier e-mails me to remind me to do my own reading, it is always raining and so I invariably end up relying on that. I get the point about providing the information on a monthly basis. How proactive will the suppliers be able to be with the data they receive?
Daron Walker
This is where, with all of these things, you have to balance different interests. We have said that, for regulatory purposes, they do not have to get consent from the consumer—so, to bill for the product they are selling. We have said that a monthly read for that is perfectly adequate for their needs. If they want to do more with the data or if they want to start offering more tailored advice and energy efficiency off the back of it, they have to explicitly seek the consent of the consumer.
Justin Tomlinson
Brilliant. So if I, as a consumer who wants to drive my bill down, tick all of the boxes and say, “Help yourself to as much data as you want, as often as you like. Save me money,” in what ways can they do that? How much information will they get other than, “You have used 8 or 10 units today”? Are they able to say, “You are using a lot of a washing machine. You are using a lot of a fridge-freezer”?
Daron Walker
This market is developing now, and there are actually other companies that are likely to join the system that are not interested in selling you energy; they are actually interested in selling you services to reduce your energy consumption. In that world, you have actually got the energy suppliers competing with these companies, so a yet more competitive dynamic. The kind of things they can do—
Chair
You are talking about the market but is anyone in the market? Have you actually got people supplying smart meters?
Daron Walker
Yes.
Chair
How many? Tell us.
Daron Walker
There are two companies that are now actively rolling out; two of the major six. There is at least one small supplier that is rolling out smart meters.
Chair
So, one small supplier is your example of new entrants.
Daron Walker
No; you asked specifically about smart meters.
Chair
About new entrants.
Daron Walker
There are several new entrants. Not all of them are yet operating smart meters.
Chair
Who is operating in the market?
Daron Walker
There are lots of questions at play now. Shall I take yours and then go back? British Gas have been rolling out smart meters for quite a few years. They are now rolling out smart meters that meet our specification. Before, they took a commercial decision as part of their offering to roll out—
Chair
But they are not new in the market.
Daron Walker
They are not new in the market.
Justin Tomlinson
Hold on; why have they gone so quickly?
Daron Walker
This is what is quite interesting. This is massively exciting as a programme. It is going to be transformational. They see commercial value in actually providing a better service to their consumer, so the consumer can know how much energy they are using. There is lots of really good data to say that a consumer who has a smart meter is much happier and much more likely to promote you as a company to their colleagues and friends. So they have taken a decision to roll these out. There is another company, E.ON, that is rolling out—
Justin Tomlinson
Just to be absolutely clear—I would need to be a British Gas customer to be able to get that from British Gas now?
Daron Walker
No, you could switch to them.
Justin Tomlinson
Yes. So, in effect, they have made a commercial decision that as a marketing initiative, it is a very attractive thing.
Daron Walker
Marketing and the ability to, off the back of that, effectively offer other energy services to that customer.
Stephen Lovegrove
On the timing—as you know, we are in the foundation stage at the moment, where effectively the roll-out of smart meters is, to a certain degree, kind of optional. The actual roll-out phase is due to start in quarter 4 of 2015, and that is when we would see the majority of the activities taking place, between then and the end of 2020.
Chair
We will come back to those dates, because I am sceptical you will meet them. What I am interested in is, where are these new entrants that are not energy suppliers? British Gas is a big, big energy supplier.
Daron Walker
Since 2010, there have been 12 new companies entering this market; 12 new energy suppliers. We now have 19 independent suppliers in the domestic market, and all of that has taken place since 2010. There are companies like Opower—this is not smart, this is energy supply.
Chair
So how are they using the smart meter stuff?
Daron Walker
Smart is at the foothills of becoming the future. Companies such as Utilita are rolling out smart PPM meters.
Chair
PPM?
Daron Walker
Pre-payment meters. A company called First Utility originally based its model on smart meters—it is a small supplier that has grown rapidly over the past few years. We expect to see more new entrants off the back of smart. Once it is all in place at the end of 2020, we expect people will compete to be new suppliers because the cost to serve will be lower for the new entrants and there will be fewer barriers to entry. There are also suppliers that are interested in using your data, subject to your consent, to offer you other services and advice. A company called Opower, for example, does peer comparisons. It says, “Your neighbour has an equivalent house that looks broadly the same, and they are saving 20% relative to you on their energy use. We can help you work out how to do that. It might be offering advice about insulation, thermostat controls or your pattern of use—turning down your thermostat by just a degree can make a big difference.” All those things will come off the back of having a much richer source of data for the consumer and sharing it with the people they want to share it with.
Justin Tomlinson
I will keep on this theme—that was part three of my question, but I will link the two together. Fast-forward to 2020, when it is going to be much easier for challenger brands to come into the market because the consumer has the data. Now I have to phone up somebody, and, if I am not a particularly savvy customer who has braved the rain to get my meter reading, they have to send somebody out, so the barriers to entry have been removed.
Daron Walker
Yes, absolutely.
Justin Tomlinson
So there is a plus side to that. Going back to the data, I have ticked all the boxes. I know that one of the reasons why some companies are holding off is that they are waiting for the technology to catch up to the aspiration. As it stands at the moment with the technology that will be available, proactive-wise they will not be able to tell whether I am using a washing machine rather than a television; they will still only be able to get my daily usage and compare it to a like-to-like house.
Daron Walker
I think that is right. If you would like more information, I can find out and write on that.
Justin Tomlinson
In your factoring—we know technology advances very quickly—how easy will it be to upgrade things further down the line?
Daron Walker
That is one of the things this Committee challenged the programme about when we came in in 2011. We have done several things. First, we have worked with a range of experts on what kind of functionality you want built into the meter. There are several things built in—smarter grid-type things—such as the ability to have time-of-use tariffs, so you can encourage people to switch use by giving them different prices at different times of the day, and voltage alerts and voltage quality information that can go back to the network to allow it to understand where reinforcement is needed. There are several future-proofing elements that we have built into the meter. In addition, we are going to allow people to bridge securely between the metering system and the data to allow it to start talking to other devices in the home. Our basic system will allow you to send pricing signals to smart appliances in the home, so those appliances can turn on when prices are low and turn off when prices are high. That is all built in. For the comms and data services, we have effectively worked with the energy companies, the network companies, IET and other experts to work out the likely demand forecast scenarios for different potential futures. We have worked out all the different use cases for different types of things you might want to do. We have procured several times the capacity beyond those most likely scenarios, so the system is flexible. A big part of this is building it once and having flexibility. Once you have built it, the costs to change the amount you are using it are marginal. Again, we have done all that to future-proof the system. If you imagine that the basic data and the basic flows will be there, what you can do in the home with lots of technology that makes use of that data is limitless.
Justin Tomlinson
You talked about the evidence from the international studies that shows there will be a 2% fall in the usage of gas and 2.8% in electricity. Have you been using any of the data from the British Gas and E.ON roll-out to see what is happening? I am going to base this purely on one person I know who got their smart meter and thought they had turned everything off, but, in blind panic, realised their television was on standby, etc., and a huge amount of power was being used. They then turned everything off and had a 10% reduction. But it is about what happens further down the line when people get out of that habit. Do we have any information yet from what British Gas and E.ON have been doing?
Daron Walker
It is too early to have any robust data, partly because you haven’t got the full range of services in some of the meters they rolled out early. You have obviously got to take account of what the average customer does when you are doing a prudent impact assessment, but, as I was saying, the international trials are showing 8% or 9% reductions. We did our own trials in GB before 2011, and 18,000 homes were looked at through those trials. Over the period of the trials, the savings that people were finding were sustained. What we do not yet know is whether they would be sustained over 15 years, but for the period of those trials, over the time they operated, the savings were sustained. They were in the ballpark of, and slightly above, what we had assumed in our impact assessment.
Justin Tomlinson
You just talked about the fact that one of the advantages of the data is getting more tariffs that reflect time of use. The problem is that we can produce enough energy in this country, but at half time in the World cup match on Saturday and during the advert break of “Coronation Street” it is a particular problem. Presumably, the data will allow for those tariffs, and people will put their washing machines on overnight and we can spread out our supply and demand problems.
Daron Walker
All of this is possible with the system. Time-of-use tariffs, in and of themselves—I think you need consumers to be informed and educated ahead. At the moment, most people do not have a clue how much they are using day to day. Where time-of-use tariffs have been mandated in other member states or other countries, because they were mandated before people really understood their use, there was quite a lot of consumer push-back. That capacity is built into the equipment and the specifications we have made, but at this point we are not requiring time-of-use tariffs.
Stephen Lovegrove
You are quite right to say that smart meters are the first step towards a much smarter network, and we have been talking to National Grid extensively through this process to make sure that they have their input. Clearly, one of the challenges that we will want to try to address is, as you say, the imbalance of supply and demand. The extent to which we can smooth those out is going to mean that our overall energy use and the cost of overall energy use in the UK is lower.
Justin Tomlinson
Presumably, when you are balancing value for money, obviously any reduction in the use of electricity and gas—whether that is 2% or 8%—is a reduction in CO2, so that is ticking your green box. I get that. The fact that you are empowering consumers with more data allows them to be more savvy, informed consumers. The market, with the help of people like moneysavingexpert.com and all the comparison websites, will be able to help residents drive down their bills. I get that. But have you been factoring that in to your value for money? It strikes me that if further down the line, you are getting more people to use their washing machine at night through price incentives, you are not going to need to commission and subsidise quite so many power stations in the future. As power stations are decommissioned, we will not have to run around in a blind panic with huge bucket-loads of taxpayers’ subsidy, which is ultimately funded by the consumers. Has that been factored into your calculations of the cost? To me, that is probably the most exciting bit from the taxpayer’s perspective.
Stephen Lovegrove
It will certainly be the case that, as a result, in a purely stable system we would expect to see lower electricity generation required for the reasons that you state. However, as we seek to move heating, in particular, and also transport away from fossil fuel reliance, we will need a lot more electricity within the system full stop because we will be heating our electric heaters and possibly driving our electric cars. The system-wide impact of trying to build all of that in is very complicated, but you are absolutely right to say that it is definitely a step in the right direction and a very helpful development.
Mr Bacon
Just to follow up on Justin’s point, are you saying that you expect electricity consumption to be lower, because of the savings from this in the future, than it is now? That may have an impact, as Mr Tomlinson was saying, on the amount of generation capacity that you need.
Stephen Lovegrove
Taken purely in isolation, that would be the case. However, at the same time, we are seeking to electrify, as much as we can, our domestic heating systems and we will be wanting to electrify our transport systems. This is slow burn, obviously, but it will mean that there will have to be more generating capacity in the UK than there is today.
Mr Bacon
So you are expecting it to go up, not down.
Stephen Lovegrove
Over a period of time, I would expect the average house in the UK to use more electricity. I would expect it to use much less gas, because that is how we heat our homes at the moment, and we want to get away from gas and to heat our homes through electricity.
Mr Bacon
I understood Mr Tomlinson’s point to be about needing less generation capacity, and I thought I heard you say, “You are absolutely right,” but you are actually saying—
Stephen Lovegrove
No, no.
Justin Tomlinson
If all things were equal, that is the case, but as a nation, we are consuming more power anyway, so compared to if we did nothing, it will help reduce the number of power stations.
Stephen Lovegrove
Correct.
Chair
If consumers change their behaviour.
Daron Walker
Going to the point you made earlier, even more powerfully, if you imagine you are generating more electricity, and if you can switch more of that load away from peak moments, you can smooth the usage across time and you will need less electricity capacity relative to what you would have needed without smart metering and peak load shifting.
Justin Tomlinson
My last question on the consumer bit. It is just a comment, but I have to say that of any possible initiative that any Government can do to try and reduce CO2, empower the consumer and reduce the need for power stations, I cannot think of anything more effective. I think the principle of the scheme is absolutely spot on. There are obviously other questions, but this is the best way for us as a nation to be able to manage our problems with energy supplies. Finally, I have a query about switching. It is 2020 and my energy supplier has installed a brand-new smart meter in my house. I am now empowered with loads of information and realise that my energy supplier is not the most cost-effective one. Am I then free to switch, even though I have got that supplier’s equipment in my house?
Daron Walker
A big part of why the Government are setting out the frameworks is to ensure that all the equipment is interoperable, so that when you switch through the DCC, all the DCC has to do is route the data to a different supplier. If you left the market to do its own thing, you might find a new supplier has to install new kit or that it cannot speak to that kit when it takes over that home, so you will be free to switch.
Chair
Who owns the kit in my home?
Daron Walker
Just like today, it is the energy supplier. They either own them directly or they rent them from other companies.
Chair
So if I change—
Daron Walker
If you change, the new supplier will have to take over. They will have commercial arrangements, as they do now. When you switch at the moment, the new inheriting supplier—
Mr Bacon
Anyone who has had a Sky or a Virgin package will be familiar with the fact that when you switch, some engineer comes along with a yellow van and unscrews one from the wall and screws another one on to the wall. Are you saying that not only will that not be the case, but that energy suppliers will be required to offer a service whereby they can use the box that was there before?
Daron Walker
All of the system will allow them to use the meter.
Mr Bacon
That wasn’t my question. I am not asking whether they are will be allowed to. What I am really asking is, will they be in a position where, if they were to say to the consumer, “I’m sorry, love, your box doesn’t work; I’m gonna have to put a new box on,” the consumer will say, “Oh no you’re not; you’re gonna make that box work”? Will that be the position?
Daron Walker
They will definitely use the kit that is in there once the DCC is in place. All the incentives will be aligned.
Mr Bacon
I’m really asking about what they are required to do, not what the incentives are. Will they be required to use the previous box and to make sure that the previous box works? Yes or no?
Daron Walker
I will need to check on whether they are actually required, but in practice—
Mr Bacon
So that is a no.
Daron Walker
No, I am not saying no. I am saying I need to check.
Mr Bacon
Did you say in principle or in practice?
Daron Walker
If they switch the kit out, they will have to install £200-worth of kit to go and visit that home, or they can get free access to that without spending any more money. All the commercial incentives are aligned for them to carry on using that kit when they take over that customer.
Justin Tomlinson
Last point: am I right in thinking that one of the reasons the energy market might not be as competitive as we would all like is because we as consumers either cannot be bothered or are simply not informed enough to be able to shop around, and that this in theory is going to really open the door up not only to the challenger one, but even to the existing big six? All consumers will instantly know whether they are getting good deals, and this should further drive prices down.
Stephen Lovegrove
Yes, that is exactly right. For the competitive market to work properly, you have to have informed consumers and you have to have a system where the consumer can exercise choice. At the moment, we do not have well-informed consumers. I would say we have got incredibly badly informed consumers, and the ability to exercise choice is very constrained, because switching is complicated and slow. Both of those two things are designed to be addressed by the smart meters.
Chair
Yes, I know. This is one of the crazy things about the whole system. I am not as optimistic as Justin is, as is becoming clear. The organisation that is going to inform consumers to enable them to exercise this stunning choice is funded and run by the very suppliers who will benefit out of our carrying on using more of the stuff, isn’t it?
Stephen Lovegrove
The CDB? The—
Chair
No. You have got so many acronyms in this world. The organisation that is established to inform consumers so that they can exercise choice is being funded and run by the energy suppliers, is it not? How on earth is that—isn’t that right? I want to bring in Mr Nolan on this one. In Ofgem, you are supposed to be protecting the consumer. Are you happy with that sort of settlement? It seems plain daft to me.
Dermot Nolan
I think the set-up will only work in so much as the regulator is enforcing—
Chair
You’re not very effective so far, Mr Nolan.
Dermot Nolan
We will have to do our best in future, and I promise you that we will do our best. On the nature of the situation, enforcement will obviously be an absolute part of the regulatory framework going forward. As Mr Bacon referred to, the suppliers will be required to have the compatibility mechanism spoken about—
Chair
We are not talking about compatibility. Everyone is saying that we are going to save a little bit of energy here, if consumers are informed and exercise choice. We set up an organisation, funded and run by the very suppliers that make the most money if we use a lot of energy, to help support consumer information. What you are telling me is, “We will regulate them.” Is it not a design absurdity to allow those who benefit from maximum consumption to fund an organisation that is supposed to help educate and inform consumers, Mr Nolan?
Dermot Nolan
I don’t think that it is a design absurdity, Chair. I can only come back and give you the direct answer that we will enforce. The central delivery board—the body itself—will be tasked with the idea of persuading and informing consumers that smart meters are a good thing, that they should use them and that they are to be trusted and welcomed. I take the point about suppliers having incentives, and I absolutely accept that, but in that sense, rigorous enforcement by the regulatory body will be in place, and will be—
Chair
But the record is not very good. What we are doing in the new world is establishing a situation where we depend on you regulating, and you have not got a very good record on that.
Mr Bacon
Mr Nolan, I was not very comforted by Mr Walker’s answer to my previous question about the meters. It is one thing to say that compatibility will be required, but what I am really interested in—you, as the regulator, should be able to insist on this, I would have thought—is that once a smart meter has been installed by the energy supplier, if the consumer then switches, the same equipment, the same meter and the same plastic, electronics and chips should be capable of carrying on with the new competitive energy supplier to whom the consumer has switched. You should require that to be the case.
Dermot Nolan
I agree, Mr Bacon.
Mr Bacon
Mr Walker’s answer was going on about commercial incentives for the suppliers, which is not really my point.
Dermot Nolan
The main point would be that incentives should be in place.
Mr Bacon
No, no. With respect, you did not listen to my question. It might be Mr Walker’s main point that the commercial incentives would be to do something that costs less money, rather than something that costs more money, but that is not—I repeat, not—my main point; my main point is on what will happen. Will a supplier be required to take on the previous meter, or will they be able to turn around and say, “I am sorry, we cannot make that one work”, and then put in a new one at further, higher cost?
Dermot Nolan
I do not think that they will be able to put any further cost on the consumer.
Mr Bacon
Of course there will be further cost to the consumer at some point. Whether they are billed directly or billed indirectly later is not the point. When a consumer switches from one energy supplier to another, will they be able to use the previous meter in all circumstances?
Dermot Nolan
Yes, they will, is my belief.
Mr Bacon
So it will always be interoperable in all places at all times.
Dermot Nolan
That is certainly my belief. If I am incorrect—
Mr Bacon
Mr Morse has a question about that.
Amyas Morse
Just to check, if I switch, who then owns the meter? If I take a new supplier, they become the owner of the meter, right?
Daron Walker
I understand what Mr Bacon is saying. The issue is that these are assets that belong to these commercial organisations. In effect, they will have to have arrangements, as they do now. When there is a dumb meter in, that is not ripped out when someone switches, because it is not in the company’s interests. But we are not going to intervene in what is a commercial set-up for all of the arrangements that they have for these meters. I can’t see an issue where someone would go and spend an extra £70 when all of the standards and regulations that we are putting in place will ensure that they can operate this new meter. But, as I understand it—I need to double-check—we are not—
Mr Bacon
Can you say that again? All the regulations that you are putting in place will ensure what?
Daron Walker
Will ensure that they are able to operate that meter without having to visit the home. They will be able to talk to it, send messages to it and get data back. So there will be no reason for them to go and install an alternative—
Mr Bacon
You are talking about ability, but I am talking about requirement.
Stephen Lovegrove
If I may, there is an absolute standard that all of the meters are going to be interoperable and operable by all suppliers, so all suppliers will be able to talk to the meter because they are all specified against the same specification. My understanding is that when a switch in energy supplier takes place, the new energy supplier will then own the meter for the period of the contract that they have with the customer, however long that is.
Mr Bacon
And then the ownership would switch yet again.
Stephen Lovegrove
And then the ownership would switch yet again. There is no scenario in which a new supplier would say, “I am sorry, we can’t work with that one.” They have to be able to work with them all, because it is all one big system. I do not know, but we will happily go and check and get back to you on whether there is a requirement that they do not come in and switch the meter out. I do not know why they would, but—
Mr Bacon
It was 9 June at 4.11 pm when you said that there is no scenario where they will say, “I am sorry, we can’t work with that one.” We will hold you to that, because it will be interesting to see how long it is before someone gives that answer to a consumer.
Justin Tomlinson
I think that that is almost irrelevant. The point, which was the whole point of my question, is that you do not want a barrier to stop people switching, where companies say, “I’m ever so sorry, it is not worth us coming to change your meter.” By law, they will have to work with it. It may be that they then say, “Actually, we have an even more modern version that can give you even more data that you can sign up for and we will not charge you.” Then, it is a case of “be my guest.”
Mr Bacon
There is no such thing as a free lunch. They will have to get the money to pay for it from somewhere.
Austin Mitchell
The basic principle is: I, the consumer, pay for the bloody thing in the first place. It is my meter, so I’m going to keep it. Would that be the principle?
Stephen Lovegrove
No, that won’t be the principle. You, the consumer, will pay for the meter. The reason why that is a sensible economic decision to make is because you will save money on your electricity bills by doing so. The gas and electricity meters at the moment are owned by the gas and electricity suppliers.
Austin Mitchell
So you can, as a company, in certain circumstances, tell me, “You can’t use that meter—you’ve got to buy another meter,” if you think it is not suitable or if there are certain problems, and I will have to buy another meter. That can happen.
Stephen Lovegrove
No. The new sets of meters are all designed to be on common standards, and—
Austin Mitchell
So you can guarantee that I will not be forced to have a new meter if I change suppliers.
Stephen Lovegrove
If you change to a smart meter, you will not be forced to have another smart meter subsequently, no.
Austin Mitchell
Okay, that is what I wanted. That leads me to another principle. Mr Walker was insistent in saying that there will be savings to the consumer, but £26 a year on a bill of £1,400 is frankly peanuts compared with the savings that the utilities will make. What are the savings for the utilities? They will not have to send anyone to read the meter, and they will not have to take part in a long, acrimonious and expensive correspondence with my wife over their estimates of the amount of electricity or gas or whatever that we have used. There is an enormous saving for them. In that case, since the company is making big savings but the consumer only small savings, why shouldn’t the company pay for the meter?
Daron Walker
The company pays for the meter, and it is part of all of the things that are paid for—
Austin Mitchell
But they put it on the bill.
Daron Walker
Just like they do today. It is part of delivering and billing you for a service for energy.
Austin Mitchell
So the consumer is paying for the company to be able to make bigger profits because it does not have to do the readings.
Daron Walker
This is where we go back to the discussion that we were having earlier with the Chair. Ultimately, as the costs get driven down to serve consumers—because the smart meter will allow them to make efficiencies—you are relying on the consumer being savvy and switching to other suppliers that are offering better value and, broadly, competition to ensure that these savings that the supplier is seeing are being passed through. That is just like if the suppliers make other efficiency savings, they would look to pass those on in a competitive market. That is what we are relying on, as part and parcel of—
Austin Mitchell
I am glad you trust the companies. Just let me ask one other question. Where are the meters made? Are they made in this country, or do we import this equipment at enormous expense to the benefit of some foreign manufacturers?
Daron Walker
Most of the components are actually made overseas, but—
Austin Mitchell
We are putting an enormous bill on imports to increase the profits of the electricity utilities.
Daron Walker
If you bear with me, I just want to finish off. The components are often made overseas, but many of the meters are assembled and put together—
Austin Mitchell
But the profits still go overseas.
Daron Walker
Not for the costs of assembly. For example, if I talk about the deal that British Gas recently made with Landis+Gyr for £600 million—
Chair
So the profits do go abroad, but never mind—go on.
Daron Walker
1,200 people are employed by Landis+Gyr as a result of working on smart metering, in the UK.
Austin Mitchell
So the profits will go overseas.
Daron Walker
I can say that employment happens in the UK, because of the smart metering.
Austin Mitchell
We have a balance of payments deficit already, so if you want to add to it, good for you. There is a submission here from EDF, which suggests that there should be a central purchasing authority to buy the meters and to get the price down—to get them more cheaply. What is wrong with that?
Daron Walker
These are private sector companies, and this is a core part of their business. Meters are basically how they measure how much of their product that you are using. It is absolutely right that the suppliers are responsible for purchasing these assets. What we are seeing is—and the whole concept in the ’90s of introducing metering into the competitive part of the market is that we wanted to see—innovation in metering. We have seen some of that. We wanted to make sure that there is an incentive for them to try and—
Austin Mitchell
You do not want diversity—you want innovation, but you do not want diversity.
Daron Walker
We want common functionality, but we also want companies to innovate to find cheaper ways of doing it.
Chair
We want to save the consumer cost. EDF has said, as the other energy companies have, that you can save £1.24 billion by having national procurement of smart meters.
Stephen Lovegrove
Have the other energy companies said that? I think it is just EDF that has that particular view?
Chair
According to press cuttings, they have, but it doesn’t matter—let us just say that EDF is the only one. Why not do it?
Daron Walker
Because what you are effectively doing is, first, to ask Government to procure a key asset for a private sector company.
Chair
If it saves £1.24 billion to customers—
Mr Bacon
That is what they have done with broadband.
Daron Walker
I am not convinced that it would save £1.2 billion—
Stephen Lovegrove
We would have to look at whether or not EDF’s analysis actually—
Chair
You must know about it. Don’t tell me that this is a surprise to you. I cannot believe that they have not been talking to you. The press cuttings suggested to me that it was a consortium.
Stephen Lovegrove
I am almost certain that it is only EDF—
Chair
It doesn’t matter if it is only EDF. If it is true, it is £1.24 billion and you should be protecting consumer interests.
Daron Walker
There is nothing to stop these companies doing it together—creating a consortium, but doing it in the private sector. There are two companies that have said that they can—
Chair
Is it true, Mr Walker? Could they save £1.24 billion?
Daron Walker
We cannot make an assessment—
Austin Mitchell
Have you investigated the possibility of saving £1.2 billion by central purchasing?
Daron Walker
We have looked into EDF’s idea. I think it would be for others to challenge whether those £1.2 billion savings are legitimate and realistic. What we are—
Mr Bacon
Why would it be for others to challenge?
Daron Walker
Fundamentally, these are the companies’ assets—these are meters that they buy to run their business. It would be quite a strange world for us to start buying their meters on their behalf.
Chair
You would have this company buying them. You are setting up endless new organisations; the organisation that is putting in for DCC, or whatever it is called, could buy the meters. If there is £1.24 billion, that is a lot of dosh.
Guto Bebb
We’re in danger of doing what we have condemned another Department for doing in relation to BT. I think we should be very careful before we go down that route.
Stephen Lovegrove
Typically. I am certain that it is only EDF that has made this suggestion. As a matter of principle—
Chair
I don’t care about principles—
Mr Bacon
Says Margaret Hodge!
Chair
I do care about principles in Barking, but the principle here is to minimise the cost to the consumer. That ought to be your interest, and it is certainly our interest.
Stephen Lovegrove
It is absolutely our interest. All historical evidence has shown that the private sector is better at procuring things than the public sector.
Austin Mitchell
There is a possible further saving. SSE—I suppose that that is Scottish and Southern—suggests that it is not necessary in every case to have an in-home display, and that people can read it from their personal computer or their tablet or their telephone. Is that correct?
Stephen Lovegrove
It is correct.
Austin Mitchell
Would that be a saving?
Stephen Lovegrove
If you were to roll that out completely, there would be a saving. I think the in-home display itself costs some £15 a home. However, all the evidence that we have at the moment shows that the existence of an in-home display means that the cost savings to the consumer go up quite substantially. If you have a clock on the wall in a room and a clock on your smartphone, you are much more likely if you want to tell the time to glance at the clock. Indeed, the fact that there is a clock in your room might mean that you check the time more often. All the evidence has shown that there is an extra 2% to 4% of saving that is available to consumers if they have an IHD. Overall, therefore, not rolling out IHDs would actually lose the consumers money.
Austin Mitchell
Just one further question. We talked about savings to consumers, which do not seem all that great to me.
Stephen Lovegrove
It’s £43 by 2030.
Austin Mitchell
My father used to go around the house shouting, “Put wood in t’oil,” and, “Switch that bloody light off!” Now, are the savings that I get from having a smart meter going to be any greater than those my father gave us from his big mouth?
Stephen Lovegrove
I think the smart meter is going to take the place of your late father. That is going to be the motive force for you to turn the lights out and close the windows and to ensure that the—
Austin Mitchell
But those are the obvious things.
Stephen Lovegrove
It is common sense, but unfortunately consumer behaviour does not typically mean that we are necessarily putting our washing machines at the most economically sensible time of the day or night. The smart meter will enable you as an informed customer to be able to make those choices, which otherwise your father might have imposed upon you.
Justin Tomlinson
It’s also the stand-by bit. You are right about the lights and we all go around turning the lights off, but it is the fact that you don’t realise that stand-by modes use about 70% anyway. You will soon realise that when your thing is whirring around and you have turned all the lights off.
Stephen Lovegrove
Especially when the devices are smart as well.
Mrs McGuire
Except all the information about stand-by, such as how many power stations it takes to generate the power for the stand-by modes that we do not switch off, has been out there in the public domain for many years. The way that this conversation is going, I have this horror that I will tweet to my electricity bill. May I bring you back to coverage? The NAO Report indicates in paragraph 14 that some 30% of homes are not able to be included in the roll-out programme because they either have thick walls or are high-rise flats. I don’t know how high-rise you have to be to be considered out of the system, but given that a great many buildings, in particular older buildings, do not have modern, cavity walls that you can stick things in between and all the rest of it, are you comfortable at this point in the process with the fact that around 30% of homes may not yet be able to be covered because the technology is not there?
Stephen Lovegrove
I would be very unhappy if it were the case that we could only cover 70% of homes.
Mrs McGuire
So the NAO Report is not quite accurate.
Stephen Lovegrove
It is accurate. I think what I would say is as follows: 70% of properties are capable of being covered with the 2.4 GHz technology that we have operative at the moment. We are working hard with the industry to use another frequency—868 MHz—which should by mid-2016 be able to cover 25% of that missing 30%. That still leaves the 5%, which we have to be able to fix by the end of 2020. We are working very hard on that at the moment and there will be a range of different technical solutions, some of them possibly wired. But it is very important that the technology is capable of being rolled out to 100%. We have 70% now that will be covered, 25% will be covered by 2016, and 5% yet to work on for 2020.
Daron Walker
This is to do with the technology for the home area network so that the devices in the home can talk to each other. The ability to talk to the meter and get meter readings to the electricity meter will be much higher from day one. This is so that your in-home display is getting the relevant information from the different meters. If your gas meter, for example, is quite a long way from the kitchen and there are thick walls, you need to have other frequencies to allow that to communicate with the IHD. The wide-area network will be hitting high levels of 90% from early 2016. This is to make sure that the equipment in the home can talk to each other. We have a solution for 70%.
Mrs McGuire
Could I take us from buildings to people? Again the NAO Report indicated that not all energy suppliers have developed a viable system for pre-payment meter users. Could you update us on where we are with that? I would have assumed that that should be one of the priority areas, given that we are all interested in tackling fuel poverty. Although we can disparage £23 or £46 in terms of those with larger incomes, for those with real pressures on their incomes it may not be a significant saving, but it will make a difference.
Stephen Lovegrove
That is an area we are working on absolutely intensively. It is very important that pre-payment customers are capable of benefiting from the smart meter programme.
Mrs McGuire
Can I ask you, what percentage of the pre-payment customers are part of the whole? Are they included in your 30% of homes that are not going to be covered, or are they a separate category?
Stephen Lovegrove
Daron will have a better sense of this, but just as an overview, probably of the 30% who typically tend to live in flats, the preponderance of fuel poor households in flats is actually less prevalent than it is the rest of the population, so it is likely, in fact, that it wouldn’t quite work like that. It is absolutely imperative that the energy suppliers are in a position to be able to offer pre-payment customers the smart meter service. They must do that for the beginning of roll-out.
Chair
So, you’re making it a requirement that pre-payment meters will be offered to every customer in time for roll-out.
Mrs McGuire
We have talked about the buildings, and the fact that 30% of the buildings may or may not be covered, depending on whether or not you’re an optimist, but what I am trying to dig into is how many customers, real households, are not going to be covered by the roll-out if they haven’t yet got the technology to deal with pre-payment meters?
Daron Walker
You’re asking about two things at the same time.
Mrs McGuire
Well spotted.
Daron Walker
First, the pre-payment thing. We have agreed with all the parties expectations that they need to be ready by the end of next year.
Chair
We’ve agreed or we’re required?
Daron Walker
It’s not a regulatory obligation, but we could regulate if they are not making sufficient progress. By the end of next year, the major suppliers will be able to offer credit customers and pre-payment customers a smart-metering service. The second part of your question is to do with the 30% that we’re talking about that won’t have a hand technology from day one. Stephen Lovegrove is absolutely right; the preponderance of fuel poverty is actually lower in multi-dwelling units, as they are called. It is actually more likely that it will be the non-fuel poor who won’t have this hand solution from day one. It will be ready by the end of 2016, so the full 95% plus will be ready from the end of 2016. That will mean that all customers can benefit from that.
Mrs McGuire
You’re saying today that although the NAO has said that there is not a viable pre-payment technological solution in place at the moment, by the second quarter, or the third quarter of 2015—I can’t quite remember—
Daron Walker
Q4 2015. All the suppliers have committed to that.
Mrs McGuire
By Q4 2015, all customers, including those relying on pre-payment meters, are going to have the technology to benefit from the savings—is that a firm promise?
Daron Walker
All suppliers have committed to being able to—[Interruption.] Because it is going to take five years to roll these smart meters out, so by the end of the next year, the energy suppliers have committed to being able to provide pre-payment services and credit services on smart metering.
Stephen Lovegrove
If I may pick up the Chair’s point, it is not a specific requirement at the moment, but the way in which we have set this up is with our colleagues in Ofgem, and they will be looking very regularly at the business plans and roll-out plans of the various energy suppliers. Obviously, pre-payment customers are part of the broader universe of energy customers and if they believe that the plans are not capable of covering the entire universe of energy customers, they will be capable of taking enforcement action.
Mrs McGuire
Given that pre-payment customers are already the most disadvantaged in the market, and those who pay by standing orders and debits and all the rest of it get the advantages—I do not know who wants to answer this—should it not have been a greater priority that those with pre-payment meters are at the front of the roll-out, rather than saying, “It might be, and we might have to look at it in the fourth quarter of 2015.”? They are also the ones who, in terms of the percentage of their income, will have the greatest savings.
Daron Walker
I think it is absolutely right—my own Secretary of State and I, as the director of fuel poverty, care a lot about pre-payment customers.
Mrs McGuire
We all care about pre-payment customers. You have your hands on the levers of something that can make a difference.
Daron Walker
What we’re seeing is that, for instance, British Gas and at least one other supplier can see massive commercial benefits, because the cost of serving these customers, at the moment with dumb systems, is very much higher than it will be once the smart PPM solution is available. So, commercially, we expect all of them to start providing the service as early as possible, because it will allow them to reduce their own costs. In addition, in terms of what we expect to the service to become, one of the things that the Fuel Poverty Advisory Group talks about is destigmatising PPM, and the hope is—some of the suppliers are talking about this—to make it a bit like mobile pay-as-you-go, so it becomes a much more universal product. All these smart meters will be able to do pre-payment, so you could have it becoming a mass-market product, rather than a minority-market product. I am confident that the commercial incentives on this particular issue are very well aligned between Government and the energy suppliers.
Mrs McGuire
Since you raised the issue that you are also senior in the fuel poverty side of the Department, how will you ensure that those who are in fuel poverty benefit? One of the things that has changed over the years is that you could identify, via the energy companies, who we are disconnecting, because the energy companies disconnect, but we are now into a hidden environment of self-disconnection. I am wondering how you are going to monitor it. Whether it is Ofgem or the Department, how will you monitor the impact of this fancy new technology, which we all think is wonderful, because we sit with tablets and all the rest of it? How is that going to impact on those who are seriously facing fuel poverty, and how are you going to monitor it?
Dermot Nolan
I think we’re going to monitor it relatively constantly.
Mrs McGuire
And then do something about it.
Dermot Nolan
Absolutely. The number of disconnections is relatively low—I think it is about 450 of electricity and 160 gas per year in GB. The potential risk—I think this may have been what you were referring to—is that there is at least the theoretical possibility that a company could disconnect someone remotely. That is something that Ofgem are extremely mindful of. We have already put protocols in place to make sure that the same protections that customers currently have in terms of not being disconnected will be put in place, and therefore someone cannot be remotely disconnected. Before anyone can even contemplate disconnection, they will have to go through a whole series of steps that will make it extremely difficult, including absolutely checking, and being required to check whether the customer was vulnerable, and that the customer had been offered every other possibility to avoid disconnection. In general, I think I could hope to give you the assurance that because of smart metering, the risk of disconnection will not have risen in any sense and may actually have fallen.
Mrs McGuire
Is that going to be a regulatory requirement?
Dermot Nolan
That is a regulatory requirement.
Mrs McGuire
That there will be no remote disconnection.
Dermot Nolan
I cannot say there will be no remote disconnection, because there are disconnections.
Mrs McGuire
Before checking.
Dermot Nolan
Before checking, absolutely a regulatory requirement.
Amyas Morse
Can I just supplement Anne’s line of questioning? Forgive me, Mr Walker, but in your answer about the availability of these pre-payment meters, is there not a bit of a step in between? Do I understand rightly that some companies have this technology at the moment and are trying to get a market advantage out of it? How are you going to resolve that?
Daron Walker
I don’t quite understand what you are asking.