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Electricity and Gas (Smart Meters Licensable Activity) Order 2012

Volume 739: debated on Monday 23 July 2012

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that is has considered the Electricity and Gas (Smart Meters Licensable Activity) Order 2012.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

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.

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.

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?

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.

I have a couple of specific questions. Could the Minister update us on the trials that are under way on the use of different wireless protocols and frequency services? This may help to answer the question from the noble Lord, Lord Teverson, about just how this is going to work. We hear that there are some questions about what frequency might be viable for communications. We are also concerned that using mobile phone-enabled technology could involve quite expensive usage charges, so it would be great to have a few words on that.

The type of meters that qualify for this policy will be very important. I understand that the Government are allowing companies to get ahead and start installing meters before we really know exactly what the specifications will be, but that incurs a risk. The documentation before us says that the risk is being undertaken by the companies themselves, but really it is the consumers’ risk. After all, if the companies install the wrong equipment or it is not compatible with the eventual system, that could preclude those customers being able to gain all the savings and realise the benefits. We argue that the rollout should actually be capped; it should be allowed only for trials, rather than for a mass rollout of a technology that might turn out to be completely different from what we eventually decide to roll out.

I understand that a lower-specification meter has been included within the early rollout. We do not really see the justification for that. We need to have one specification and it should be the best one for the job, enabling all the benefits as outlined in the regulatory impact assessment.

Going to back to the detail of the instrument, other noble Lords have raised the question of the status of the body that is being created, and it would be good to hear the justification for why it is not seen as a quango. We await those answers but otherwise we definitely support the initiative and look forward to further instruments coming forward.

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.

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.

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.

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.

Motion agreed.