Oral evidence: Smart meters, HC 993Tuesday 3 May 2016

Oral evidence, 3 May 2016.

Witnesses

Lord Bourne of Aberystwyth, Parliamentary Under-Secretary of State for Climate Change, Department of Energy and Climate Change, Daron Walker, Senior Responsible Owner, Smart Metering Implementation Plan, Department of Energy and Climate Change, and Sacha Deshmukh, Chief Executive, Smart Energy GB, gave evidence.

Chair

Welcome to today’s inquiry. Thank you very much for your patience in waiting for us for so long. I know that you have been outside for some time. We got rather caught up in some of the technical details around SMETS 1 and 2 and other issues of 2G, which I hope that we will explore in a moment. Minister, can I ask you about some of the evidence that we have just heard? Dr Darby spoke to us about the smart energy code. She said that it was over 800 pages long and that the first 79 pages were on definitions. She made the very sensible statement that it is important that the smart meter programme does not try to do everything at once and that we need to know exactly what its priorities are—what it is trying to achieve. The question I asked the previous panel was whether the priority was for it to be an energy-saving tool for consumers, a system for improving billing and switching or a means of improving the system’s energy efficiency. My question to you is: in the context of what is a very expensive system, what are the key priorities of this programme? Are you confident that the product that is being rolled out will deliver on those priorities?

Lord Bourne of Aberystwyth

Thank you, Chair. I appreciate your comments about the delay. There will be some key votes in the Lords, so forgive me if I have to rush off. You can indicate if you want me back, depending on the timing. The overarching aim of the programme is to engage with consumers, to give them information about their energy use, which they do not have at the moment. Essentially, we have an analogue system, rather than a digital one. It is the last redoubt of estimated billing. On delivery in 2020, the programme will end that for consumers. From the evidence that we are seeing, consumers are very grateful for that. Of course, because of that overarching theme, at the same time consumers will get better information on tariffs, which will enable them to switch, and they will get better information on energy efficiency. Those are secondary benefits from that overarching, broad theme. The evidence so far is that, overwhelmingly, people are saving on their bills and are very pleased with the system as it rolls out. Admittedly, we are in the early stages of that at the moment.

Chair

Some of the evidence that we have had talks about the granularity of the data, our grid resilience and whether we are doing enough to make sure that we are taking the opportunity to use that data effectively, so that the system can respond to peaks of energy use. We had evidence just now in which one of our witnesses commented that consumers have to opt in for data to go to energy companies half-hourly. Would it be more sensible for that to be an opt-out system?

Lord Bourne of Aberystwyth

At the moment, we are still on the SMETS 1 stage of delivery, rather than the SMETS 2 stage. The benefits of the roll-out of meters that is happening at the moment are that people are able to see when their energy use shoots up. For example, if they plug in the kettle or have something that is high consumption, they are able to see that. The evidence is that people are responding to that in their conduct. When SMETS 2 is operational—all the signs are that we are on target for it to go operational at the end of August—it will roll out gradually, ramping up significantly in 2017 and 2018. At that stage, people will be making comparisons with other energy suppliers. The evidence is that most people are keen to do that, because it will enable them to get a tariff that is more appropriate for their needs. It could be organised as an opt-out or as an opt-in, but we think that we have the balance right as things stand.

Chair

That does not quite answer my question. Perhaps Mr Walker would like to come in.

Daron Walker

We have developed the data access and privacy framework very carefully over a number of years, through a range of consultations. The principle behind all of it is that we want consumers to be in control of their data and to have confidence that their data will be used appropriately, and that they give their consent when that data is used by others. The existing framework is that energy suppliers will have access to monthly data automatically, to allow them to do billing. The more disaggregated you get, the more explicit the consumer consent has to be. For daily data, individual consumers have to opt out. When you get down to the really granulated half-hourly data, consumers have to opt in actively and explicitly. The whole framework is about making sure that consumers take the decisions about how other parties make use of their data. If consumers feel that they are getting really good benefits from giving greater access to their data, they can choose to do that. It is incumbent on energy suppliers to demonstrate to the consumer that, if you opt in and they get your half-hourly data, they can give you a series of additional benefits. We have taken a great deal of time to establish the framework. Where other member states did something a bit more opt-out from the start, there was quite a big privacy backlash; consumers were concerned and the roll-out was delayed. We are taking a much more proportionate approach. As time goes on, we may well see that consumers feel very comfortable, have confidence in the way in which their data are being used and are more inclined to consider a different approach, but that is how we have established it from day one.

Chair

Is it your expectation that the majority of consumers will have their daily data going to energy suppliers?

Daron Walker

My expectation is that consumers will be able to see near-real-time data, through their in-home display. It will vary from energy supplier to energy supplier, depending on how much they want to start engaging with that data access point from the start of their roll-out. British Gas, which you have heard from, has a standard opt-out with daily data and is encouraging people to opt in with some of their half-hourly data. It will vary across different suppliers, depending on what their commercial proposition is and how they want to develop that part of the market.

Chair

We are moving to the point where we will be producing what is potentially a very valuable dataset for our energy resilience in the UK. I am trying to understand what is your modelling of exactly how useful that will be, given the privacy system that you have put in place.

Daron Walker

It is quite a difficult question.

Chair

It is a difficult question—sorry.

Daron Walker

Can I try to answer it slightly differently? Fundamentally, in the business case as established, the energy consumer has near-real-time access to the data, and the evidence shows that they can make savings of 3% or 4%. We have very prudent estimates in our business case. Some of the stuff you are talking about, which I know the Committee will want to come on to, around time of use is further down the line, because you need other changes in the system to facilitate that. To take one example, at the moment Ofgem is working to introduce the ability to have elective half-hourly settlement with suppliers from early 2017. On the back of that, some energy suppliers may start to offer time-of-use tariffs to consumers who are a bit more engaged with the market already. Those tariffs would allow them to encourage people to switch to different times of day. In terms of how I see the programme developing over time, step one is getting consumers to understand how they use energy right now—how much they are spending and consuming. Once they are a bit more informed and empowered, they can start to engage with more sophisticated products on the market. What we do not want is uninformed and unengaged consumers starting to engage with complex tariffs, because that could have unintended consequences.

Chair

What work is Smart Energy GB doing to make sure that consumers are informed and know the choices that they are making, so that when those decisions about opting in or opting out come along they are made on a sensible basis?

Sacha Deshmukh

Our work has that at its very heart. In the work that we are already seeing with consumers who have been engaged in the roll-out thus far, we have found very high percentages of consumers—in the high 80s, almost up to 90%—who are very satisfied with understanding the data and the data usage from their meter and are finding it genuinely useful in planning their daily lives. There are also strong levels of recommendation. That kind of feedback is giving us a good sense that consumers have a strong understanding. The roll-out is at its foundation stage. It would be a good and right challenge for the Committee to say, “That is a good beginning. What comes next?” This will and has to be the biggest behavioural change programme that this country has seen—in some ways, you could argue, that the world has seen—on a very important subject. We do not just stop with those pieces of information. We have a programme of activity that we call smart energy for all, which is our programme of work on how to ensure that behavioural communication can happen with consumers from all sorts of different backgrounds and demographics, as we are trying to do this with every household in the country. At the moment, the message we are focusing on is the initial message to do with understanding what a smart meter is and how to access that meter and some of the initial benefits that it delivers, because it is important that we explain to people what is real. We have already worked with a number of experts, and consumers themselves, on how that will evolve as time of use becomes real, as smart metering enables much more confident shopping around and switching and as there are smarter appliances that are able to talk to a grid because it has been digitised, thanks to the smart meter. We are ready for that to become a bigger part of our message and volume. Even with the initial engagement and the more focused message that we have had, it is very encouraging that consumers are reflecting back to us a sense of what they think the future will be like. It is a very accurate sense. They are able to take even from those initial messages a sense of why this is being done, as a nation and an energy system.

Chair

As I understand it, the key systemic analysis or piece of research that has been done is the 2012 to 2014 early learning project, which is based on a dataset from 2011. Is there a plan to do, hopefully, a larger and more up-to-date analysis to see how the project has fared since then?

Lord Bourne of Aberystwyth

You are absolutely right about the early learning project. That has led us to believe, consistent with what I said earlier, that savings are being made on energy bills. As the system evolves, both on SMETS 1 and on SMETS 2, we will monitor progress continually and engage in research, to make sure that we are getting the best value out of the system. We need to do two things. First, we must look at the system to see whether there are policy tweaks that may be necessary. Secondly, we need monitoring to make sure that consumers have the requisite information and are making use of the system as it rolls out. Both of those things will be done on an ongoing basis. You are absolutely right. They will be key to it.

Sacha Deshmukh

The early learning project was incredibly valuable. There have been other studies in addition to that, by the Centre for Sustainable Energy, Kingston University and a number of others. It is worth the Committee noting that Smart Energy GB carries out its own research, including a twice-yearly, 10,000-person piece of research—the largest single sample in the energy sector. It looks at energy for both non-smart and smart customers. Clearly, as it is a national sample, the smart sample within it is relatively small at the moment, although considered robust; that is why we made the overall survey so big. It is getting broader and bigger. It is published every six months and gives a regular view on smart meter usage, reported energy savings and the overall customer experience, further adding to the research that the Department has.

Chair

But there are no immediate plans for a large-scale repetition or update, covering the next stage of the project.

Daron Walker

There is no large-scale update to that, but you will have heard from British Gas about some of its findings on savings from its installation. It will have a rolling programme on that. We have taken forward some research on the back of the early learning programme. That identified that one of the most effective ways of engaging consumers with the data they have is to start tailoring the advice, so that you do not just have generic energy efficiency advice, but the installer looks at the property they are in and tailors the information that they give the individual consumer. Right now we are working with the energy suppliers and university experts to create a materials pack that could be deployed in that way. As the Minister said, we have an ongoing programme where we have access to data. There is the smart metering code of practice for installation, which is reviewed annually to see what progress we have made. Learning from that will be fed through into ongoing policy development. It really is based on evidence from start to finish. We have a whole series of evaluations. It will be an ongoing process.

Chris Green

There are a number of trials going on at the moment. We have not had full roll-out of smart meters, so the way tariffs may be applied later on may be distinctly different from how they are applied while we are going through a trial period. When the possibility of peak-time tariffs being double or perhaps treble the standard tariff was raised with the last panel, it was not ruled out. Lord Bourne, would you be happy for suppliers to charge double or triple the standard price for peak-time electricity usage in order to change consumption behaviour?

Lord Bourne of Aberystwyth

The first point to make is that the supply side—I speak regularly and frequently to the big nine suppliers, as well as to others, on occasion—is at arm’s length. Essentially, we have a market system. What we anticipate happening, based on evidence from elsewhere—we have looked at the position in Australia and the States and some of the European countries we work with—is that people will make informed choices based on the tariffs that are available. With the market system that we have, we are confident that the market will respond by offering cheaper tariffs for people who are able to make use of them. That will not be everybody, admittedly. We readily recognise that there will be some vulnerable people—it is part of our mission to protect them—who are at home all the while and cannot make use of a time-of-use tariff. They may need to have the heating on all day, for example. However, for those who can make use of a changed, cheaper tariff, we expect the market to respond. If some of them do not, others will.

Chris Green

Are we being given to believe that currently consumers choose their energy supplier with informed choice? At the moment, are we seeing people switching tariffs on a regular basis because the consumers of Britain are well informed and have the desire to change their tariffs?

Lord Bourne of Aberystwyth

At the moment, they do not have the information. That is the point we are making. This is not based on estimated bills; we are moving to a system where there will be half-hourly settlement of bills, so people will know each half-hour what they are spending on electricity. For example, it will not make sense to put on the washing machine when there is peak demand. People will say, “Hang on a minute. Why don’t we make use of it when the cost is lower?” At the moment, we do not have that facility, because we are working from estimated billing. As we move to precise billing, people will be better able to determine the best tariff for them. As I said, it will not be right for everybody to have that type of cheap tariff, because some people will need a constant supply throughout the day, but there are an awful lot of people for whom it will be appropriate to look around and see whether they can choose a tariff that will not be as costly. It is also beneficial to the nation at large, because it will smooth demand, which will mean that demand is less at peak times, and enable us to manage the whole system better.

Chris Green

To achieve that smoothing, are you comfortable with double or triple the price at peak times?

Lord Bourne of Aberystwyth

I did not say that. I said that it will be a market mechanism. I do not think that will happen because of competition. We have many more energy suppliers now than we had even five years ago, so I just do not see it happening.

Chris Green

Mr Deshmukh—if that is the right pronunciation—you referred to your expectation of huge behavioural change. Clearly, to make that behavioural change happen, you would be comfortable—or would even find it desirable—if very high tariffs were applied at peak times to stop people using energy at those times, because of all the ramifications that has for the number of power stations and the network.

Sacha Deshmukh

You are talking about a classic debate around the ladder of interventions and what drives behaviour change. There is no doubt that one end of the ladder of interventions theory around behaviour change is enforcement around price or around the law. That is not the only mechanism that could deliver behaviour change—certainly on the scale the policy framework has been designed around already, or even on a bigger, more ambitious scale; you need only look at areas such as recycling, where good behavioural change campaigning has got us up to 72% or so recycled materials. Change4Life and smoking cessation are the kinds of campaigns I was involved in prior to this. I am not an energy sector person; I am a behaviour change person by background. I do not believe that time of use is the only tool, or even a necessary tool, to deliver the scale of behaviour change that we want to achieve in energy at the moment. In an analogue system, with lack of information, it is very difficult to support anyone in changing their behaviour. That has been a vicious cycle that has trapped many of the attempts to do so in energy to date. It can be broken with smart metering, good information systems and good engagement around those, even at the beginning. That will be a very big step forward. What will build from that is automation—appliances and systems. The reason why people like Martin Lewis, at MoneySavingExpert, are so keen on smart metering is that they see that automation can help people to make the right choices, to find the right tariffs that match their existing behaviour. Price could play a role over and above that, but with the kind of public policy protections Lord Bourne was just talking about for the more vulnerable.

Chris Green

You have highlighted two examples. I get quite a few letters from people concerned about recycling—the bins—in my constituency, to do with the coercion, as they see it, in the way in which recycling is happening. The way the Government, or previous Governments, have applied smoking cessation policies has also been quite coercive. Are you comfortable with coercion financially, if necessary?

Sacha Deshmukh

I am comfortable with public policy makers. All of you in this room are public policy makers; I am not. These are the decisions that public policy makers have to make around any intervention and any behavioural change necessity. Thanks to digitisation and smart, I think that behaviour change in energy will be driven primarily by the combination of informed consumers, engaged consumers and a much better functioning market. To take the example of smoking, Government policy was to make sure that the market was not flooded with cheap products. No one is talking about Government having to make that kind of choice on energy. We want a highly functioning competitive marketplace. We are moving to a place where people lead lives and consume energy in very different ways. We have done research, together with UCL, looking at time of use. We have also done research on pre-payment customers, where there is a huge service improvement from smart. Up to 48% of people say that they are interested in buying and using their energy on pay-as-you-go. That is partly a reflection of the complexity of the way we work, an increasing rental market and the increasingly mixed households that we have in rental. Those are the kinds of new services that will be provided by a marketplace, and can be supported within that, to enable people to change their behaviour. Personally, I do not think that you will need some of the styles of intervention that have been necessary in other places—particularly in the health area, which you talked about. However, those are examples of the fact that you can see people make a behaviour change through a combination of understanding that it is good for them in a marketplace and good for their household, and that it has a national benefit.

Chris Green

Mr Walker, has DECC modelled how many consumers can be expected to move to time-of-use tariffs if they are not made mandatory?

Daron Walker

It is really early days for time-of-use tariffs. Obviously you cannot offer time-of-use tariffs until you have half-hourly settlement. Time-of-use tariffs are really interesting and the benefits to the system are potentially enormous, but it is important to recognise where we are in the stage of development of that market. In the impact assessment for smart metering, we have assumed very low levels of penetration of time of use. Smart metering is about enabling future possibilities, as well as delivering real benefits right now. The smart meter will allow you to record consumption data for every half-hour and to have different prices for each half-hour. That does not necessarily mean that the market will do that rapidly. To an extent, we have time-of-use tariffs—static ones—right now, in the form of Economy 7. We recognise, however, that there needs to be broader change in the system before you can start talking about the benefits that might come from those. The short answer is that we have not done modelling, because that is more for the future. It is not embedded in our business case.

Chris Green

Do you have a view on current consumer opinion on time-of-use tariffs? Has any work been done on that? To put it in context, why would consumers choose time-of-use tariffs if 39% of them end up paying higher bills as a result, as the consumer-led network revolution project found?

Daron Walker

That is why this is an area where you have to tread with care. Step one, from my perspective, is having consumers who understand how and when they are using their energy, as otherwise they are going in blind to sign up to a tariff that may be completely incompatible with their usage. We have found from the studies that do exist that, when people are engaged and it is explained to them how the time-of-use tariff works, they can see the benefits. Economy 7, which is something that many people in GB use right now, is a very good example. They are used to turning on their storage heaters or immersion heaters during the night, when electricity is cheaper, and they avoid doing that during the day, if they are on that particular tariff. The key thing is to make sure that you give consumers the tools they need to understand how they are using energy. At that point, people can start marketing tariffs to them. They can decide to sign up to a time-of-use tariff, when those start to emerge, or that they prefer to stay on a standard tariff with the same price for every minute of the day.

Chris Green

Lord Bourne, are you comfortable with the idea of surge pricing for electricity, in the same way that Uber changes its prices according to demand?

Lord Bourne of Aberystwyth

To repeat the point made by Daron Walker, we are a long way from the situation we will be in on SMETS 2, when people will make the changes of tariff that we anticipate will happen. That is further down the line. At the moment, the key point about the installation of smart meters—I have seen some installed and have been there when apprentices were training—is an explanation of how people are able to monitor their electricity use. That is what is happening under SMETS 1. It will continue to happen while SMETS 1 runs through, until the summer of next year. I will come to your point in a second. Just so that people are aware, we are talking about something that is some way down the line. At the moment, the point is to make people comfortable with a device that explains their electricity use, and that there is an explanation to them of how they could save money. For example, when I was at one installation, the installer said to the householder, “It seems a bit high at the moment, but you haven’t got anything on.” She said, “I haven’t really got much on, except for a fridge—oh, and I have a big freezer, with virtually nothing in it.” He told her, “That’s not a good idea.” Straightaway, that sort of conversation is taking place. To come back to your question about the way in which the different tariffs will operate, clearly I want consumers to have the best possible choice of tariffs available and to make the best choice that is suitable to them. I am not comfortable with their paying more than they need to pay. This is about getting consumers’ bills down by making them better informed and better able to interact with the system, hence the need to protect the vulnerable, and we have mechanisms in place to do that. We are a long way from it, but would I be comfortable with people paying more than they need to pay? No—not surprisingly, perhaps.

Chris Green

There are all kinds of different models that may emerge in the future. Mr Deshmukh, would you be concerned about the kind of surge pricing that Uber uses for its taxis?

Sacha Deshmukh

My only real concern would be about lack of transparency of information for the mainstream consumer who is able to engage with that information and lack of public policy protections for people who are more vulnerable or in some way have a barrier to engaging with it.

Chris Green

Presumably a surge would be a time when there was a huge amount of pressure. If you were not interacting with the prices, you would be unaware of it and would be consuming energy at what you might consider an extortionate price.

Sacha Deshmukh

I have a fair background in some of the issues to do with confusion and lack of transparency for the more vulnerable to date. For five years or so, I was a trustee and vice-chair of Citizens Advice England and Wales. At the bureau network frontline, both in the contact centre at the telephone service and in the face-to-face bureaux, there is a huge amount of contact with people who are struggling to date with an analogue system that is very unsophisticated when it comes to differential pricing. To give you one illustration of existing confusion, in one piece of research that we conducted, we found that almost a third of people thought they were currently on a package where energy was cheaper at night. We had pre-selected everyone included in that research to ensure that they were not on Economy 7. They absolutely were not getting energy at a different price, yet a third of them thought that they were. You cannot criticise those people, because what information did they possibly have to enable them to understand what they were spending at any time? They were pre-smart. Going forward in the marketplace, you absolutely could have some very dynamic prices and some well-informed consumers, supported by intermediaries of the MoneySuperMarket- type and by information they are engaging with themselves, using very dynamic tariffs that reflect the way they live their lives. Just as there has already been a huge amount of thinking about what protections are needed for the more vulnerable to make sure that they can heat and eat in our society in today’s system, I am sure that public policy makers will consider and make the right decisions about what is required to protect those people going forward as well. I am also sure that organisations like my previous one, Citizens Advice, will communicate hard to make sure that those decisions are incorporated, but it is already very much there in all the cross-party thinking that I hear in this area. I feel that that will be reflected forward, as it has to be in any digitising marketplace.

Matt Warman

We were talking earlier about the reliance of smart meters on 2G mobile networks. Lord Bourne, could you talk to me about how comfortable you are with that reliance, and whether you expect the problem of stranded assets, which we heard about, if the 2G networks are not supported?

Lord Bourne of Aberystwyth

I will answer very briefly and then hand over to Daron Walker for the more technical aspects of the question. We are not solely reliant on 2G at the moment; it is a mixture of 2G and 3G, and ultimately we will move on to 4G, so it is not quite as straightforward as that. I do not think that there is a serious issue of stranded assets. Daron, perhaps you could address that.

Daron Walker

It is probably worth breaking the question down into the post-DCC world and the pre-DCC world. As Lord Bourne said, the technology that will be used by Telefónica, which is the only communications service provider using cellular technology, will be dual 2G-3G from the start. The first 15%, roughly, of the communications hubs will be based on that technology. They are not susceptible to any 2G concerns, because they can work on 3G. The next iteration is likely to operate on the 4G network. That is the post-DCC world. One of the issues the question about 2G may be poking at is to do with the first generation of smart meters—the SMETS 1 meters. First, all the energy suppliers have all the right incentives to make sure they have procured communications to allow them to carry on talking to those devices for the whole of their life. The incentives are already aligned. I can tell you that we have spoken to individual suppliers. They have contracts that mean that, from the last point at which they install a SMETS 1 meter, they will have at least 10 years of communications coverage. Not only are the incentives aligned, but the data they are handing us show that it will not be a concern. Then you have to ask the question: is 2G going to be closed down anyway? Our understanding from working with Ofcom is that there is no evidence that it will close down in the early 2020s.

Matt Warman

Realistically, in 10 years’ time, do you think that one of those first-generation meters will still be considered good enough by the Department, the industry and so on?

Daron Walker

Yes, I think so. As far as the consumer is concerned, the SMETS 1 meter pretty much does everything that a SMETS 2 meter will do. The main difference is around the fact that currently it operates outside the DCC. It has the ability to do time of use and to talk to an IHD. There is the ability to extract data through a consumer access point. All of that is embedded in the first generation of meters. Fundamentally, where innovation will happen is in the home, making use of the data. We do not see massive innovation in terms of the smart metering system itself; it is more about taking the data and innovating with that. The smart meter will be able to send pricing signals inside the home. If you want to sign up to a time-of-use tariff, devices in your home will be able to listen to the fact that the price is different at a given time of day. It is absolutely right that these meters will still be on the wall in 10 years’ time.

Matt Warman

As we heard earlier, effectively some of the meters were developed 10 or 15 years ago. Do you really think that technology will not have moved on in 20-odd years, since they were first thought of?

Daron Walker

There are two things. Do I think that technology will move on? It will. I imagine that smart meters will move on through time. What they are doing is sending text messages, effectively, from an energy company and sending back data. It is smart, but it is not like a broadband service. These are not complex messages. It is not video streaming. The innovation and the exciting part will happen when you take the data that are sitting and recording every half-hour, start to consolidate them and offer products off the back of that, subject to the consumer consenting. It is important to separate those issues. The technology will develop, but I see that as happening in the home, outside the smart metering system. This is a very simple thing—recording the energy that you use every half-hour. Then you can extract the data remotely or from within the home.

Matt Warman

By the time we get to the 10-year horizon you are talking about, do you think that smart meters will be virtualised as an app for the vast majority of consumers anyway?

Daron Walker

Again, it is worth separating the two things. You will always need metrology, to measure how much electricity and how much gas you are using.

Matt Warman

I suppose that I should have said the in-home display, rather than the meter.

Daron Walker

We are open-minded about the in-home display if there is really strong evidence that alternatives could generate the same sorts of benefits. When we went through the process of establishing the initial consumer offer, we consulted very broadly. There is very strong evidence globally that the combination of a smart meter and an IHD can drive savings of 3% or 4%. Our business case has 2% on gas and 2.8% on electricity. The Minister would be keen for me to say that we issued guidance very recently to allow suppliers to trial apps or other alternatives to IHDs, exactly as you were saying. However, it is incumbent upon us to make sure that the evidence is really robust before we start to adapt our policy and switch from something that is very well understood and that we know delivers savings consistent with our business case. There is also the issue that 30% of the population do not have smartphones. The IHD is really a gateway into starting to understand your energy consumption. There may well be other developments. At this point, the evidence is strong for that combination and it is emerging for the other aspects.

Matt Warman

Finally on that point, what about the 20% or 30% of people, or whatever it is, who decide for some reason that they do not want a smart meter? How does DECC plan to explain to them that this is still a good idea? What number of those refuseniks is acceptable?

Lord Bourne of Aberystwyth

You are right—there are some people who do not want them. They are perfectly within their rights, as smart meters will not be made mandatory. We suspect that the educational programme that is going out explaining the possibilities will make a difference; I will ask Sacha to come in on some of that. Understandably, people—particularly those in vulnerable groups, perhaps—may be a bit anti and say, “This is something new. It doesn’t look like good news. We don’t understand how it works.” I identify with a degree of that myself. You need to be convinced. First, there is the talking in the post office queue and the chat in the pub or over the garden fence with a neighbour, as it becomes much more commonplace. There is evidence to suggest that people change their minds if a relation or a friend has had one and has said that it has really been great, that they have saved a bit on their bill, they can now see how the system operates and they do not have estimated bills. Alongside that, of course, we are having engagement through radio broadcasts and, ultimately, TV, as DCC goes live in August. That will be ramped up a bit with Gaz & Leccy, whom you have probably all seen. When we get to the stage of wanting to strangle Gaz & Leccy—I reserve the right to do that myself at some stage—people will understand much better the system and what it is seeking to achieve. We are not there yet, but it will happen over time. Sacha, do you want to explain more about the programme?

Sacha Deshmukh

I was asked a similar question on the radio recently. I said what I genuinely believe, which is that most good things in life do not have to be compulsory. That has been the starting philosophy that has gone into this programme. I think it has enormous benefits for the consumer and for all sorts of different household types, including the biggest benefits for the most vulnerable. That is what drives me personally and why I wanted to be part of this and not some other behavioural campaign or issue at the moment. We have to think incredibly carefully, and we have been doing so, about who may be less engaged merely by being outside a mainstream message or who may feel that there are barriers to their engaging with this with enthusiasm. That is one of the biggest things to think about. As people understand why this is happening and what it is there to deliver for a household or the country, we see very high levels of support—way higher than the numbers that you indicated. We have to make sure that the engagement campaign reaches all those different groups. You cannot stereotype. We published a big piece of work called “Smart energy for all” that looked at the engagement journey that would be necessary not just to complete a successful installation but to ensure usage. Sticking with installation, even there it is important not to stereotype. To date, some of the elderly have been among the most enthusiastic in taking up and using. That is partly to do with how they are already trying to monitor energy and the fact that this could bring them something. You talked before about the display, which is a relatively straightforward piece of technology for them to use, and they like it and enjoy it. There are other communities that we will support on installation through our work in Smart Energy GB in communities. For example, for cultural reasons, if there is a woman home alone, they may not like to accept a man coming into the house to do an installation. That may be seen as something that is not acceptable in a cultural community. Those are the kinds of things we have to be ready for and which we are dealing with in what will be the biggest single infrastructure transformation, in the most comprehensive way, that this country has done for a generation. It is important to separate whether people are enthusiastic when they are educated and understand—the levels are very high, and they see strong benefits—from whether we have a comprehensive plan. I believe that we do, but it has to be a very sophisticated one, to make sure that we get it to the huge breadth of people around the three nations of this country.

Matt Warman

You raise an interesting point. You are right to say that the most vulnerable groups have the most to gain from this. If some of those groups are also the most resistant, what is the balance between the carrot and the stick for this sort of project?

Lord Bourne of Aberystwyth

We are very much against making this mandatory. As Sacha indicated, we believe that education on the benefits is far preferable. Sacha is absolutely right. If you drill down into the detail, a lot of the people you might suppose would not engage with this project and whom you might consider vulnerable—some of the older people—are actually very engaged with it from the installation, perhaps because they are at home more and therefore have the time and the interest. That has been interesting, looking at the facts. Yes, we need to be on our guard for some people who are vulnerable. That is why it is part of our mission to ensure that the vulnerable are protected and we have that written into the contract with Smart Energy GB. We can do that in many ways. At the most obvious level for a vulnerable group, those with poor eyesight, we are making sure that the visual displays have large letters and that a Braille system is being developed—things of that nature. We also want to ensure that the benefits for vulnerable groups are appreciated by those groups. We work closely with citizens advice bureaux, which sit on the monitoring panel, for example, to make sure that we can get messages to them about some of the good aspects. Pre-payment meters will become a thing of the past. Already a lot of suppliers have indicated that they are phasing them out. That is in their interests, as they are very expensive to administer, but it is certainly in the interests of many people who are on them at the moment. There are many benefits. We must make sure that we protect groups who are vulnerable. We must move relatively slowly, to make sure that we are not rushing this and that people are on board for the benefits before we roll the system out further, bearing in mind that it will not be rolled out completely until the end of 2020.

Jim Dowd

Earlier this year, the FT reported that there were “glaring loopholes” in the design of smart meters until GCHQ intervened to ensure they were closed. Who instigated the involvement of GCHQ? Was it GCHQ itself or was it the Department?

Lord Bourne of Aberystwyth

I am not sure about that, to be honest. I will pass the question to Daron in a minute. I know that we work very closely with GCHQ, because we take the issue of security extremely seriously, but I do not know who instigated it.

Daron Walker

I will give a few facts about this, because I saw the FT article as well. We have been working with GCHQ on the design of the security system since the beginning of the programme in 2009, through the initial design phase, until we created a high-level implementation plan.

Jim Dowd

Did the Department invite GCHQ to get involved?

Daron Walker

We invited them from the very get-go. We have been working with them since the very beginning. Procurement for the DCC and its associated services started in 2011. As the detailed design of that emerged, we worked with GCHQ to look at the overall system design again. As you understand more about the detail, you can adapt and modify your security framework. From the very start, security has been designed in. You will hear from other witnesses in this context, but in the system we have now, which we co-developed with GCHQ, there are lots of safeguards embedded. The only people who can send a message that affects supply are the energy suppliers. They have to send it to the DCC, which has to countersign it to validate that it is coming from a valid supplier. Only then will it pass through to the meter. If the meter does not have the relevant signatures from both those parties, it will just discard the message. There are split responsibilities, lots of encryption and cryptographic signatures. On top of that, the DCC has anomaly detection. You can imagine that you would expect a certain number of disconnect messages or change-of-tariff messages per day. The DCC has anomaly detection, so if there were suddenly large numbers of those messages flowing through the system, the DCC would quarantine them. There are safeguards at every level within the system. In my view, the FT article was not consistent with the facts.

Jim Dowd

Surely not—not in the press. So you are confident that the smart meter system is as secure as it needs to be and will remain so.

Daron Walker

We are, yes.

Jim Dowd

In DECC’s submission, the Department mentioned the security sub-committee but did not give any further information. Could you give us a brief outline of its remit and how it operates?

Daron Walker

At the moment we are in a transition, with the Government still chairing various committees, including the relevant security committee. That works with industry to look at the security credentials, the standards and that kind of thing. Once the system is in the enduring stage and effectively it becomes business as usual, then there will be a security sub-committee that is a sub-committee of the Smart Energy Code Panel. The smart energy code effectively sets out the rights and obligations of all the different parties using the system, and there is a sub-committee that has the energy suppliers on it. It has access to the security services for advice, and they look at the security of the system and look to recommend or take views on new emerging threats or new technologies that might come along. That is how that works.

Jim Dowd

Has the Department done any contingency planning in the event of an attack on the smart meter system?

Daron Walker

What do you mean by contingency planning?

Jim Dowd

If your security were to fail, for example. We heard from a previous witness how the programme could be set up to cause disruption.

Daron Walker

We think that there are lots of appropriate safeguards to avoid any significant attack on the system. The DCC has within its licence conditions a requirement to do contingency planning should there be some kind of disruption, but this is a contingency; this is not in any way expected. In addition, if any of the relevant keys were somehow disrupted, then again you can replace all those keys and certificates on the system. There are contingency plans built in, but obviously the best way of avoiding the need to have a contingency is to have a secure system from the get-go, which is what we have worked hard to do.

Jim Dowd

Prevention is, indeed, better than cure in most cases. Lord Bourne, who owns the data on the smart meters?

Lord Bourne of Aberystwyth

The consumers own the data and we are very keen to ensure that that is the case.

Jim Dowd

Can they access it readily?

Lord Bourne of Aberystwyth

When the system is up and running, they will get detailed half-hourly settlements; so they will be able to see the data in real time effectively.

Jim Dowd

Can smart data or data generated by the smart meter system be shared with security services without the permission of the consumer?

Lord Bourne of Aberystwyth

Again, we have been very keen to make sure this is exceptional. The main driver here is to make sure that the consumer is in control of the data; it is their data. But as in many areas of life, if there is a serious crime involved, you would expect—and it is the case here too—that the security forces and the police would have access to the data if they were seeking to avoid a crime or for evidential purposes to prove a crime. For example, perhaps a large cannabis factory may be indicated by very high usage round the clock—that sort of thing—but we have been keen to confine that to very specific situations where there is a serious crime involved.

Jim Dowd

But that would be provided with or without the consumer’s consent. Clearly, if it is a criminal, you would not tip him off.

Lord Bourne of Aberystwyth

Essentially, as a last resort, we would need to do that, just as I suspect at the moment—I do not have the legislation in front of me—presumably it would be the case now that you would be able to access telephone records, for example, where it would be sensitive use of data; but it is very much confined to those specific situations that are exceptional.

Jim Dowd

What do you perceive to be the greatest threat to the smart meter system? Would it be attack, fraud or issues around personal data?

Lord Bourne of Aberystwyth

The system as it is, as Sacha has indicated, is a massive project; it is a very exciting project, without equal, I think, in this country. Certainly in recent years it is far greater than the switch to North sea gas, for example. It is not without its risks, admittedly. I live with this 24/7. There are risks, as I would be the first to admit, but one of them is DCC going live. That has been the immediate risk, but we have been hitting all our targets and dates. That is good news as we go forward and I am very pleased to be able to say that. There are other things. We have to make sure there are enough SMETS 2 meters available for the SMETS 2 system. All the evidence suggests there are. We have to make sure there are enough installers to put them in. These are the sorts of everyday issues that we are looking at. I am not seeking to minimise the security of the system and the possibility of hacking in, and it is something I have been keen to look at, as we all have. I think we have put up appropriate protections for that; it is something that we look at very carefully, but I would not put that as the highest risk by any means at the moment.

Derek Thomas

I would like to understand a bit more about the benefits of smart metering of gas as well as electric. We grasp the opportunities that are available if we put in smart meters for electricity. Is there such a thing as a smart grid for gas, and what would you say the benefits of metering gas will be through smart technology?

Lord Bourne of Aberystwyth

Essentially, the benefits of smart metering for gas on SMETS 1 are very much the same as the benefits for electricity customers on SMETS 1. It will put an end to estimated bills. It will give a reading of what the person’s actual consumption is. It will put them in control of their energy use, and they will be able to tell exactly what they are spending on it. Again, the evidence that we have seen so far is that people are not just saving on their electricity Bills, but saving commensurately on their gas bills. There is a very obvious benefit there. In relation to SMETS 2, I suspect that new tariffs will come forward and people will be able to make their choices as to what the most appropriate tariff is. I would have thought, again, that that benefit is going to be there on SMETS 2. Gas and electricity are not the same, but they have some great similarities in terms of what we are seeking to do. The point is sometimes made that gas can be stored, so it is not quite the same as electricity. That is true up to a point, but that misses the interaction with the consumer that we seek to achieve from the system that we are introducing, where the consumer is able to see what their energy use is and shop around for different tariffs as the system progresses into SMETS 2 from early next year onwards.

Daron Walker

The smart system benefits are that there is upside from what we are trying to achieve through smart metering. We have not tried to monetise those in our business case. If you imagine having smart electricity meters but dumb gas meters, you would still have to have all your meter readers; you would still have estimated bills; you would still have all those costs. There are massive synergies in rolling them out together, and then you start to get those benefits. About £9 billion of the benefits go directly to the suppliers, which are then passed on to consumers. The business case stacks up without all the smart system stuff, and that is upside for the future when the broader landscape evolves and you have half-hourly settlement. The synergies are just so obvious for the operations of the two sets.

Derek Thomas

Given that gas is mainly used for heating, certainly in domestic use, would it make more sense to supply customers with smart thermostats as opposed to smart meters? I hear what you have just said, but if you are trying to help people reduce their bills and use their gas more efficiently, is it better to give them smart thermostats?

Lord Bourne of Aberystwyth

I do not think that enables them to have the same interaction that we think is desirable to know what their usage is and how they could save money on SMETS 1 through energy efficiency measures. It may be better than nothing, but I do not think it achieves the same ends—not with the same clarity, to be honest.

Daron Walker

In a way, to add to what the Minister is saying, there may well be a case for smart thermostats. Some of the evidence that was submitted to the Committee talked about the benefits of those, but this programme is about upgrading and updating dumb meters to smart meters. It is about modernising the way energy supplies record and provide data on electricity and gas use. That would probably be a different programme, and whether it is appropriate for the Government to subsidise or drive that kind of thing is a different policy question.

Derek Thomas

Given that we are concerned about people in winter, particularly older people who might turn their heating down if they thought it was costing a lot, particularly around smart meters on gas, how would we ensure that people do not put themselves more at risk, because they have the information that might put the fear of God in them?

Sacha Deshmukh

The first thing that is key is to understand the level of risk that exists. Groups that do a lot of work with the more vulnerable are right to ask whether this will become a future fear. If you talk to them and you look at some of the studies that have been done, I am sorry to say it is an existing fear already with analogue meters. There is a term that I had never heard before I came into the world of energy—self-disconnection. It makes it sound terribly abstract, terribly safe and terribly administrative. It means people turning off their heat or not cooking when it is cold. That is what it means in real terms, and it happens right now. One of the major drivers for it is the fear of the bill. It is being driven by the lack of information. That is causing a huge problem already. The second thing is that, when people have information, some do have a fear. I spoke to a woman who told me she was not cooking her family fish fingers in the evening at the end of the month because she was worried about what the bill would be. She was working, by the way; she was a teacher. Hopefully, she would be in a position to manage and not have a fear, and she would not make that kind of self-disconnection. But there will be others who need greater support than just information in order to know that that cost is something they can manage. Smart will finally give us a chance to break through with that. It would need consumer consent for the data; that is absolutely right. But organisations such as Citizens Advice, some of the age charities and some of the more vulnerable charities—even some of the energy suppliers themselves—are looking to see how they could develop a relatively simple algorithm that would allow you, if you wanted, or, let us say, a parent if you were caring for them, to have data matched against temperature. If the data indicated they were not heating at the time when the temperature was dropping to show that they should, you can either speak to them directly if you are the care service or speak to their designated carer. That can all happen very speedily, and that is one of the reasons why gas is so important in this and why gas data in a good time can be helpful. It does not need to be instant. The temperature does not tend to drop 20 degrees in five minutes. It tends to happen over a day or two rather than in that kind of instant. But it could finally mean that we can get information support and advice for people to say, “Don’t turn your heating off, or, if you have run out of money, we’ll solve the money problem but in the meantime we don’t want you to freeze to death or end up in an NHS hospital,” which costs us all a lot more rather than targeting some of that support.

Victoria Borwick

I have a couple of questions on that point about helping the vulnerable before we move on to businesses. My understanding is for those people who are on those sorts of lists that we do know who they are, and therefore the energy companies already have an obligation to look after people on those sorts of lists. How can we combine that information with what you have just said?

Sacha Deshmukh

You are right. I think you are currently talking about the priority services register, which looks at a number of different characteristics or life situations. It certainly looks at a number of very important drivers for why people might be more vulnerable. With the best will in the world, while the system has been analogue, I do not know how many of you get a bill that says something like, “Dear householder” or “Dear bill payer”; I suspect some of you do. That is an indication that, in an analogue system, there is a lack of information as to who the more vulnerable are, even with the existence of the priority services register. Smart finally gives a chance for that to be addressed. The installation moment helps spot the more vulnerable who could or should have been pre-identified but have never had any engagement with their energy company, and then in an ongoing way changes that into a more digital system. It offers a really important opportunity for that to happen. Daron Walker made the point earlier that a smart meter is a very comprehensive system, in some days doing a relatively simple thing, which is providing data. I would say the opportunity for the goal that you were seeking, which is to say, “Let’s use that data and make sure that it is being used to support the more vulnerable of lots of different types,” absolutely creates that opportunity, and it would be a relatively straightforward thing to build on as we get to the kinds of levels of smart penetration that we are talking about. It gives us a unique chance to do that.

Victoria Borwick

I hope the Minister found that interesting. Minister, you mentioned briefly earlier that people could choose what sort of meters they had in order to make sure they were accessible to the vulnerable. You referred to larger typefaces and such. I had understood from the earlier session that people could only have the meter that was supplied with their particular supplier; in other words, there was not a choice of what in-home display you had.

Lord Bourne of Aberystwyth

As I understand it, you have the one given by the particular supplier, but we are working to ensure that for those who have particular difficulties—I have certainly been told that those who have poor eyesight are one example—each supplier has those available.

Daron Walker

That is right. The energy suppliers have been working with RNIB to create an IHD for people who are partially sighted, and for other types of vulnerability. I think that is what the Minister was describing there. More broadly, for the average consumer, we set a minimum level of requirements for the IHD, and then we are quite keen for the energy suppliers to innovate and try to create products that—

Victoria Borwick

We were told at the earlier session that each energy supplier has chosen one supplier, and each of the machines is different. There was even a doubt that they would communicate with each other. So, if you did switch, maybe your in-home display would not work with your new energy supplier. There is all this talk about making switching easy. That may be easy but it will not be easy if you still want to have an in-home display.

Lord Bourne of Aberystwyth

There is an element of truth certainly in that in relation to SMETS 1. In SMETS 1 they will not necessarily be interoperable where you are switching from one supplier to another. When we get to SMETS 2, which, as I say, we will be rolling out from—

Victoria Borwick

August, you said.

Lord Bourne of Aberystwyth

That is absolutely right. When we go live with the August date, they will be interoperable. There is the difference between the earlier system and the—

Victoria Borwick

That will also affect people with vulnerabilities: those who are unable to hear or unable to see; those with difficulties with accessing and small fingers, or arthritis—all those sorts of things.

Lord Bourne of Aberystwyth

We are looking at that to ensure that we do protect those with all those particular difficulties to which you have referred. At the moment I am only aware of action in relation to partially sighted people—people with difficulties with their eyesight. But I understand there is a group that is looking at this to make sure that we protect all those groups with vulnerabilities.

Victoria Borwick

Some of the concerns we are receiving correspondence about are people feeling this is going to be forced on them; they are very concerned about the monitoring and the accessibility, and what is going to happen when it is at its coldest. There is all this talk about help that is going to be given, but there is tremendous fear—heating, not eating; and eating, not heating. I do think you should give some extra time to consider those points.

Lord Bourne of Aberystwyth

Thank you for that. Wherever you have a system involving change of a fundamental nature, as we have here, I can quite understand that there will always be some unease, but, again, I can offer some reassurance about the monitoring that we do on the Smart Energy Board. Citizens Advice is represented there. We have thorough discussions on these issues. Smart Energy GB, as part of its mission, has to protect the vulnerable, and Sacha is never slow to raise these issues. But thanks; that is absolutely right. We do need to monitor to make sure that we are protecting the vulnerable, because it is fundamental to what we are seeking to do that the vulnerable, above all else, will benefit.

Daron Walker

The early learning project that was talked about earlier found that, as well as delivering savings through IHD, vulnerable consumers and people on pre-payment sometimes need additional support. There is a research project going on right now looking at what kind of additional follow-up support might be appropriate for those kinds of consumers. That work is due to complete by the summer and is very much driving towards some of the concerns you raised just then.

Victoria Borwick

Thank you very much. I have a final quick question. Is there anything you want to say about the small businesses and what the potential impact is for them of time-of-use tariffs?

Sacha Deshmukh

I would absolutely like to talk about small businesses. It is an important part of the roll-out. In absolute numbers, there are more households in the country than there are businesses. That is just the nature of the country, but it is a very important part of smart metering. It is a very important part of Smart Energy GB’s work as well. I am independent of Government but I do think that Government have made some policy decisions that are right. I know it is not necessarily fashionable to say that, but Government sometimes get it right. Aligning the micro-business and domestic roll-out was important, because about 42% of micro-businesses are run out of a domestic premise, and there is a huge amount of overlap. There are many, many millions of micro-businesses but a huge amount of overlap of the motivation and communication for behavioural change in the domestic setting and in a micro-business setting as well, given the nature of the size of the groupings in there and some of the ways in which you often have a family running businesses. I am sure you are well familiar with this from your constituencies. We have published another document “Smart energy for business”, which sets out our analysis of the micro-business group. It is an unusually diverse group in and of itself, reflecting the general population. We designed our campaign from the very beginning to work in both a domestic and non-domestic setting. I hope you love Gaz & Leccy, but, love them or not, one of the key points is that they are not just a domestic family in a domestic setting. It allows us to run and develop our micro-business campaigns. We find very strong engagement with micro-businesses. The drivers and what people take out as behavioural difference can be very different. I was at a conference in Glasgow the other day and did a round table with a number of small businesses. I was with the leader of the Scottish Association of Convenience Stores, who had been talking about using the meter in his own particular store. He identified that the freezer and fridge that had been given to him promotionally by a large cola manufacturer and a large ice-cream manufacturer were incredibly inefficient and were costing him more than it would have cost him in two years to buy his own refrigeration. He was an evangelist solely from that experience. Next to him was an accountant who talked about the value of the data they got out in a more abstract way, but it was an illustration. There might be different motivators and we have to get that right in our engagement, but they can be very strong if you are talking about the right context.

Victoria Borwick

That is really interesting; thank you very much for a very valuable input.

Chair

Thank you all for the time you have taken to give evidence to us. You have given us evidence for more than an hour and 20 minutes, and I know you had to wait for some time before you came. We will not detain you any longer. I know that there are votes in the Lords. This is an important inquiry for us. It not only has potential to affect our energy infrastructure in the UK but, as we have heard, consumer interaction with the way in which we use energy. We may have some follow-up questions on technical details that we did not get time to go into today, but, as you can see, we are very interested. I hope that you will be generous and write back to us on those points. In the meantime, we are going to adjourn for five minutes while we clear the public gallery and get in our witness for our informal session. Oral evidence: Smart meters, HC 993 2