Electricity and Gas (Smart Meters Licensable Activity) Order 2012

Lord Reay Excerpts

Monday 23rd July 2012 Grand Committee

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)]

My Lords, by the end of 2019 every home in Great Britain will have a smart meter and an in-home display, empowering people to manage their energy consumption and reduce their carbon emissions. The rollout of smart meters will play an important role in Great Britain’s transition to a low-carbon economy and help us to meet the long-term challenges that we face in ensuring an affordable, secure and sustainable energy supply. This is a huge and challenging project. It is the largest changeover programme in the energy industry since the introduction of North Sea gas about 40 years ago. It will result in the installation of about 53 million meters in Great Britain, involving visits to some 30 million homes and businesses.

There would be little point in such an undertaking without it bringing very real and substantial benefits. Our impact assessments show estimated net benefits of about £7 billion over 20 years. Smart meters will give consumers near real-time information on their energy consumption to help them control their energy use, save money and reduce emissions. They will bring an end to estimated billing, and switching between suppliers will be smoother and faster.

The rollout of smart meters will be led by the energy suppliers, but the Government are playing an essential role to establish the necessary framework, of which the order is a fundamental part. The communications and data transfer and management required to support smart metering are to be organised by a single new central communications body, referred to as the Data and Communications Company. The DCC will be an entity regulated under licence by Ofgem. The intention is to re-compete this licence periodically to put downward pressure on costs.

The DCC will provide a service of remotely communicating with smart meters on behalf of electricity and gas suppliers, electricity distribution companies, gas transporters and third parties authorised by the consumer. It will also provide services to other third parties authorised by the consumer, such as energy services companies, helping to open up that market. The DCC will play a key role in supporting a competitive supply market by delivering a single system that will support easier switching between suppliers. The DCC will not operate these services itself but will contract with data and communications companies for their provision. These contracts will, again, be re-competed periodically. This model delivers the necessary security and interoperability required for the smart meter system. Security is critical, given what the DCC will do, and achieving interoperability ensures that consumers are able to switch energy supplier without the need for additional costly meter changes. This model is strongly supported by the industry.

The order introduces a new activity into the lists of those requiring licences under the Electricity Act 1989 and the Gas Act 1986. It will be unlawful to undertake this activity without holding a licence. The activity is inserted into each Act, but the provisions make it clear that the holder of a licence under one must be the holder under the other. There will be one active licensee at any one time and its licence will be granted for 12 years. A competitive process will be used for granting the licences and an order to set out the process will be made once the order that we are considering today has been made. We have consulted on a draft of the licence, which is available on the department’s website.

We have described the licensable activity in the order as something that only the DCC will be doing—that is, making arrangements with domestic suppliers to provide a communications service for smart meters. This is defined as narrowly as possible to limit the potential for other persons to be caught in its scope. However, in the period before the DCC is established and able to offer services, other persons will be active in the market to support early smart meter installations. We want to support this as part of the foundation of the smart metering programme, which will provide important information and learning for the mass rollout. We have therefore included a transitional exemption, lasting for 36 months from the date the order comes into force. This allows time for the DCC to become established and supports the foundation stage.

To conclude, the Government have consulted on the broad approach to the regulation of the DCC and in detail on the licensable activity for the DCC set out in the order. Our stakeholders support the approach that we are taking. I beg to move.

[Lord Reay]

My Lords, according to the information in a footnote on page 23 of the impact assessment, only 0.5% of households today have smart meters. From this tiny base, the coalition has committed itself to a rollout to 100% of domestic households by 2019, as the Minister explained—an enormous undertaking.

One of the purposes of this policy seems to be to reduce demand. On page 9 of the impact assessment, the Government include in the list of objectives for the policy,

“facilitating demand-side management which will help reduce security of supply risks”.

It is presumed that customers will be enabled, and will choose, to reduce their consumption of gas and electricity when they discover how much each appliance they use contributes to their total bill. At the same time, suppliers will learn and be able to observe much more about their customers’ usage of gas and electricity. Will this make it easier for them to control supply—for example, to ration it selectively in the event of electricity shortages? As far as I can see, the Government do not discuss this in the impact assessment. They have no interest in drawing attention to the possibility of future shortages of electricity, even though—perhaps because—some of us think that this is the likely consequence of their energy policy.

The impact assessment represents the cost of the rollout as being in the region of £10 billion. Many meters that have a long and useful life ahead of them—so-called stranded assets—will be replaced. These costs will presumably be added to consumers’ bills. I do not know whether the Government have estimated how much they will add to the bills of individual customers, both domestic and industrial.

The Explanatory Memorandum describes the new body to which my noble friend referred. It will be regulated by Ofgem and established as the Data and Communications Company. Although described as a company, I imagine that it is classified as a quango. Perhaps the Minister will confirm that.

[Lord Teverson]

My Lords, it is always good to have smart meters on the agenda in this House. They are a very important and often misunderstood area of energy policy. The great thing about them is that, if they are really smart, we could have a smart grid. We hope that that will be the case following the rollout. The sort of decisions that the noble Lord, Lord Reay, mentioned could then be made by the meter, rather than by people. That is where the big benefits will happen. The point is not so much to reduce demand as to reschedule it. That will mean major reductions in investment.

As the noble Lord, Lord Reay, knows, Ofgem estimates that some £200 billion of investment in the energy networks is required. That seems a Soviet-style level of useless investment; I am sure that he would agree that we should not invest for investment’s sake in assets that stay largely unused for a large proportion of the time. A smart grid would enable us to reduce that investment considerably and to use electricity far more intelligently and intensively, as any commercial and private business would. My concern is that the smart meter rollout should enable that, rather than prevent it. That is why it is so important to have that level of investment; it really does bring savings down.

The Minister said that energy companies are one of the big savers on smart meters. The estimated readings that plague my electricity bills will no longer be necessary, nor will inspection. I would like to understand the Government’s thoughts on how they will make sure that the industry’s benefits are brought back into consumer bills.

When I read the order, I found it quite difficult to understand how DCC was anything other than a non-departmental office and, as the noble Lord, Lord Reay, said, effectively a quango. It is a monopoly by statute that does nothing but allocate contracts and yet it still seems to be a private company. I am not sure what the appointment process is. I would be interested to understand it. I still do not understand why it is necessary, but perhaps the Minister will come back to me on that if I have failed to understand from his opening statement.

I am very pleased to have his reassurance that DCC will not get in the way of other operators. One of the increasingly important areas of activity within corporate business is energy management contracts, for which you need a lot of data communicated to you from very dispersed factory plants, not just nationally, but perhaps globally. I hope that that will not be stopped by this. I would like to understand exactly what DCC has a monopoly of. I guess that it has a monopoly of putting out contracts to do the readings. Presumably the companies that do that do not contravene the secondary legislation. It seems a strange way of going about things.

Finally—I did not enumerate the number of questions that I was going to ask just in case I got that wrong, but this is my last one, so the Minister can intervene on me if there are any more—what happens to places, perhaps not far from me, that do not have mobile phones, GSM network capability or other communications? How does that work? They are usually rural areas, but perhaps there are others. How will the Government make sure that they get the benefits of this system?