Summary and implications

In order to meet its targets for the reduction in greenhouse gas emissions and renewable energy production, the Government has recognised that electricity networks and the way we use them will have to be “smarter”.  

“Smart grids” and “smart meters” are needed to provide a system which is capable of encouraging and integrating more renewable electricity supplies and which enables consumers to actively manage their demand.  

There is currently no coherent overall EU or UK policy on smart grids. However, there have been a number of recent developments which will help set the agenda, whilst a more robust framework for the roll-out of smart metering has been developed:  

  • The EU Smart Grids Communication was published in April, setting out the priorities for tackling a lack of EU state development in this area;  
  • The UK “Smart Metering Implementation Programme” was published in March, which represents the Government’s response to their consultation on the topic and, the beginning of the implementation phase for smart meter roll-out.  

EU smart grids Communication

Due to the lack of development and a lack of willingness on the part of grid operators to make long term investments in grid upgrades (rather than simple infrastructure maintenance), the Commission has published a Communication explaining priorities for trying to tackle these challenges. Published on 12 April 2011, the strategy paper outlines the actions the EU intends to take on the following:

Developing common technical standards

The Commission has issued a mandate to the European Standards Organisations (ESOs) to develop standards to facilitate the implementation of high-level smart grid services and functionalities by the end of 2012.  

Ensuring data protection for consumers

The “Smart Grids Task Force” established by the Commission has agreed that a “privacy by design” approach is needed, which will be integrated into the standards being developed by the ESOs. To that end, the Commission will also monitor the provisions of national sectoral legislation that might apply to take into account the data protection specifics of smart grids and will continue to bring together the energy and ICT communities.

Establishing a regulatory framework to provide incentives for smart grid deployment  

The Commission recognises that the regulatory framework must be conducive to smart grids investment and should encourage network operators to earn revenues in ways that are not purely linked to sales, but are rather based on efficiency gains and lower peak investment needs (i.e. moving from a “volume-based” business model to a “quality and efficiency based” model). The Commission are, therefore, proposing the following actions:  

  • Revise Directive 2006/32 on energy end-use efficiency and energy services: Article 10(1) of the Directive obliges Member States to remove volume-based incentives. If evaluation of the implementation of the Directive shows that this provision is insufficient, the Commission will consider whether to amend it or to complement it by a network code on tariffs;  
  • Establish guidelines for smart meter implementation: in accordance with the obligations in Directive 2009/72, the Commission will define a methodology for smart meter implementation, as well as for their cost/benefit analysis;  
  • Request Member States to produce action plans: beyond the targets for smart meters in Directive 2009/72, the Commission will request Member States to produce action plans for implementation of smart grids. If insufficient progress is being made during 2012, the Commission will consider introducing stricter regulation;  
  • Tackle regional regulatory barriers: the Commission recognises that large differences between national energy infrastructures will prevent businesses and consumers from reaping the full benefit of smart grids and, therefore, is encouraging and promoting coordinated action at a European and regional level.  

Guaranteeing an open and competitive retail market in the interests of consumers

The Third Energy Package requires Member States to create well-functioning and transparent retail markets. The implementation of obligations such as the facilitation of consumer switching and the improvement of billing information will be relevant to the deployment of smart grids, particularly in respect of the interaction between utilities’ and consumers’ energy management and the much wider use of time-differentiated electricity prices. The Commission intends to revise Directive 2006/32 to introduce minimum requirements for the format and content of information provision for customers and for access to information services and demand management.

Providing continued support to innovation for technology and systems

During 2011, the Commission intends to propose additional new large-scale demonstration initiatives for rapid smart grid deployment. They will include new ways and means to leverage financing, in line with the Energy Infrastructure package.  

The Commission also intends to launch a Smart Cities and Communities initiative in 2011 which will focus on the integration of various energy supplies and users to maximise energy efficiency.  

UK Smart Metering Implementation Programme

In July 2010, DECC and Ofgem consulted on a prospectus setting out their joint proposals in relation to smart metering.  

On 30 March 2011, DECC and Ofgem published their conclusions in the “Smart Metering Implementation Programme: Response to Prospectus Consultation” (the Prospectus Response), following the joint consultation on the roll-out of smart meters. This marked the end of the policy design phase and the beginning of the implementation phase which is likely to see the beginning of the mass roll-out of smart meters from 2014.

During the implementation phase (or “foundation stage”), steps will be taken to develop arrangements to support the technical and commercial interoperability of smart metering equipment, enabling consumers to switch suppliers during the foundation stage and involving the testing of equipment, systems, processes and consumer engagement strategies.

Alongside the Prospectus Response, DECC has published a Functional Requirements Catalogue (the “Catalogue”), which sets out the minimum requirements that the smart metering system must provide. These functional requirements will be converted into technical specifications against which meters can be manufactured.

Energy suppliers’ code of practice for smart meter installation

  • Provide consumers with information on how to benefit from their smart meters;
  • Deliver a good standard of service to all customers;  
  • Provide appropriate support to vulnerable customers;  
  • No engagement in unwelcome sales activities at the point of installation for domestic sites (i.e. suppliers should not conclude any sales at the time that smart meters are  installed, without the customer’s express prior consent);  
  • No imposition of upfront or one-off charges on domestic customers for the smart metering equipment that the suppliers are required to provide.

The key proposals

New obligations on energy suppliers

To deliver the roll-out, energy suppliers will be required to procure and install smart meters for their customers in the domestic and smaller non-domestic sectors.  

This requirement will include:

  • An obligation to meet minimum functional requirements (the Functional Requirements Catalogue published with the 30 March 2011 Response sets out these minimum requirements);  
  • An obligation to meet minimum technical requirements (these will be developed from the functional requirements, to a timetable consistent with compliant meters being commercially available at volume by the end of 2012);  
  • A completion date for the roll-out (the Government states that it will consult later in 2011 on an obligation on suppliers to effectively complete the roll-out in 2019);  
  • Mandatory reporting of progress.

Energy suppliers will also be required to comply with a new code of practice governing smart metering installations, as part of their licence conditions. Amendments to standard licence conditions will, therefore, be a pre-requisite to the imposition of the requirement.

A new central communications provider

In order to deal with the transfer of large volumes of data from smart meters, the Government has concluded that a new licensed Data and Communications Company (DCC) be established. This company will (according to the Prospectus Response):  

  • Have functions that cover both the electricity and gas sectors;  
  • Be regulated by Ofgem in a similar way to other monopoly service providers in the energy sector, including in respect of its service levels and means of recovering its costs;  
  • Be granted its licence following a competitive process run by Government;  
  • Be required to be independent from its contracted service providers;  
  • Have a limited scope of activities in the first instance (secure communications, access control, scheduled data retrieval and translation services);  
  • Subsequently take on the role of meter point/supplier registration, with the potential, in the future, to provide the data collection, processing and aggregation services, where analysis indicates significant potential benefits of centralisation within DCC;  
  • Start to provide services to the market at the end of the first quarter of 2014;  
  • Be required to adopt communications contracts associated with compliant meters installed before its services are available, subject to these contracts meeting pre-defined criteria.  

The application process for DCC will start later this year and the aim is for a licence to be granted to DCC in the fourth quarter of 2014.

Improvements for customers

The proposals intend to deliver a number of benefits for domestic and smaller non-domestic consumers, including:

  • Real-time information to help customers understand and manage energy use by way of an in-home display (IHD);  
  • The opportunity for the receipt of new services, such as the provision of tailored energy efficiency advice and more innovate tariffs;  
  • Ability for suppliers to read meters remotely, without the need to visit customers’ premises;  
  • More efficient change of supplier processes;  
  • Minimisation of disruption to customers, by way of quick identification of power cuts;  
  • Additional flexibility with regard to payment methods with easy switching between credit or prepayment methods and the potential for a wider pay-as-you-go market.  

The legal framework

The Government will legislate, under the Energy Act 2008, powers for the roll-out of smart meters by way of:  

  • Amending licence conditions, including an amendment to require suppliers to develop and comply with a new code of practice for the installation process of the smart meters;  
  • Consequential licence and code changes;  
  • A new Smart Energy Code to govern the overall arrangements for smart metering and, in particular, all interactions with the DCC;  
  • A prohibition order to define the monopoly activity for DCC;  
  • The creation of new licence and licence application regulations in respect of the DCC.

The detailed licence obligations will be consulted upon later in 2011, with a view to these coming into effect in the first half of 2012.

The functional requirements and technical specifications will be notified to the European Commission later this year, to enable completion of the design process by early 2012.