Electricity and Gas (Smart Meters Licensable Activity) Order 2012

Lord Teverson Excerpts

Monday 23rd July 2012 Grand Committee

[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?

[Baroness Worthington]

I thank the Minister for his introduction to this statutory instrument. I believe it is the first of a number that will be coming forward on the smart metering policy, which we support. It is good to hear the Minister reaffirm that by 2019 every home will have a smart meter. However, there are still some questions we would like to have clarified about exactly how smart those meters will be. I shall come on to them.

The first point I want to raise is that today we have received the report from the Energy and Climate Change Select Committee that has been doing pre-legislative scrutiny on the draft Bill. I urge the Government to join up the dots between these processes. RWE npower gave evidence to the Select Committee and clearly pointed out that if we emphasise demand management within that Bill, this smart metering spend could be money wasted. The amount of money proposed here is not insignificant and some of the benefits will not come to fruition if we carry on down the supply-dominated route which, at the moment, the energy Bill seems to be doing. We keep hearing reassurances from the department that work is going on on the demand side, so let us see some of the detail. It should be being done in parallel with the draft Bill, and the earlier it can be published, the better. Noble Lords have mentioned that we are seeking mechanisms to enable us to manage demand so that we do not have hard-to-meet peaks in demand that cause us to keep a huge amount of spare capacity in the system. It is often the most carbon-intensive and expensive to bring on, so smoothing out that demand profile is a real prize. Done well, smart metering will enable that, and that is what we all want to see. The time-of-use tariffs that smart metering could enable are a great prize. Time-of-use tariffs are available today but they are not smart or dynamic; they are the Economy 7 of decades ago. We need to see a modern set of tariffs based on time of use so that we can smooth out the demand as well as using the demand to back off when we have large amounts of renewables on the system. That is a prize worth having, which is why we support the Government’s moves towards enabling this rollout.

--- Later in debate ---

[Lord Marland]

My Lords, I thank noble Lords for their contributions. I particularly welcome the noble Lord, Lord Reay, whom we have missed from our debates of late. I am glad to see him back with, as always, his resumé of the industry from his viewpoint. He is right in many of the things that he says—5% of the country have smart meters and there is an awful long way to go—and he makes the same point that the noble Baroness has just amplified about the companies that are out there installing smart meters that may become redundant because of the smart meter that the Government eventually approve. I think that the noble Baroness answered the question for me: she said, quite rightly, that it is at the companies’ own expense. They have to behave responsibly, and Ofgem and others will ensure that they do. If they have supplied the wrong smart meter, they will have to put the right one into homes.

That links up slightly with my noble friend Lord Teverson’s point about the energy companies’ savings. Yes, this will mean big savings for the energy companies. It will save them having to send a man to check the meter every quarter, to argue over bills and to send money back and forth through the post, thus improving their cash flow, and this is a good thing because we want to ensure that this is passed on to the consumer, and indeed, it will be. We often wrongly criticise our energy companies; they are very much under the microscope; they are regularly scrutinised, they rarely get away with anything and they make a great contribution to the sector. If they make windfall profits out of this, it will be spotted early on and dealt with.

A number of noble Lords mentioned the key point about whether this was a dreaded quango, following the bonfire of the quangos that we have seen. This is not a quango. It is a private sector company that will be responsible to Ofgem. It will have no relationship with government and quite rightly will be set up, as I said in my admittedly exhaustive opening gambit, to manage data transfer and a communication system, among other things. We need a specialist in the field and such a specialist will be appointed under the terms that I referenced.

My noble friend Lord Teverson made a critical point—one of at least four that he made—about how we will get communications into some remote areas. This is a big challenge. The DCC will have to ensure that it happens; that is part of its remit. As the noble Lord rightly said, it is no small challenge if we are to get to our 100% target.

Again, I express my gratitude to the noble Baroness, Lady Worthington, for her fundamental support for the smart metering process. She rightly drew to our attention—as she had done on a few occasions previously—the issue of demand management, which should be at the heart of everything that we are trying to do. If we reduce demand we will reduce supply and therefore bills. Smart metering is at the heart of demand management.

The noble Baroness referred to the type of meter. It is being designed at the moment and will have to meet universal approval. She also referred to the protocol frequency. We are carrying out a number of trials and have not yet come to a definite answer. Clearly it will have to be a bespoke and dedicated frequency, and it will come as no surprise that those trials are being carried out. I hope that I have satisfied the thirst for answers and commend the order.

[Lord Teverson]

The noble Lord knows that he has my complete support for this measure. However, I still fail utterly to understand how the DCC adds value. It will have to be controlled by Ofgem or the department. If it is to negotiate with suppliers, it will have to have its budget controlled and its performance and value very carefully monitored. At that point the situation is like that of the former Strategic Rail Authority. In the end the government department decided not to have an intermediary because it could do things better itself.

The East India Company was a private company that ruled half the British Empire—but I suppose that is not what this organisation is supposed to do. I do not get it. I hope that the noble Lord will forgive me, but I find it difficult to understand why we have this extra level of organisation that must then be controlled further up by the department, because it involves money and at the end of the day that will be reflected in bills.

[Lord Marland]

The noble Lord is quite right to challenge this. I come from a school that does not think that the Government are the right entity to run many things, although they are very good at coming up with policies. Our department is straining at every level to manage the huge challenges that we have at the moment, and we are very happy to put up our hands and say: “We are not experts in data transfer management. We are not experts in promoting competition through the market. We are not experts in providing emergency services when things go wrong. We are not experts in the enablement of the national grid”. Those are a number of things that this entity will be set up to do. I am very happy, incidentally, to write a more expansive note.

[Lord Teverson]

The Minister has answered my question quite appropriately.

[Lord Marland]

This is friendship on a very high level; I think all those in the Room will know this. With that, I will quit while I am ahead.