Warmly welcomed by the smart green technology industry, the Government has unveiled plans for every home in Britain to be equipped with smart meters by the end of 2020, bringing an end to estimated billing from domestic energy suppliers.

In the biggest revolution in energy use since the 1970s when British Gas converted all the nation's homes to natural gas, over 26 million electricity and 22 million gas meters will need to be fitted at a cost of £7bn. The scheme will allow suppliers to remotely record customers' gas and electricity use and allows customers to monitor their own energy use.

It is hoped that the scheme will reduce the UK's energy use, cut carbon emissions and save customers money.

What is smart metering?

"Smart meters" is a catch-all phrase used to describe a new generation of devices with an extra layer of functionality than the existing "dumb" devices. Whilst the latter are only capable of measuring gross gas and electricity consumption in a home, smart meters can:

  • be read remotely;
  • display energy consumption in monetary terms; and
  • allow customers to monitor over the internet where in their house energy is being consumed and particularly where it is being wasted.

It is hoped that smart metering will encourage customers to reduce energy use, bringing both financial and environmental benefits. Nationally, it is predicted that smart metering will cut £100m from consumer bills by 2020. Government reports anticipate that the average consumer will save 2% to 3% of their energy use each year (which is estimated as saving each consumer £25 to £35).

Equally, it is hoped that the technology will reduce costs to the supplier, a benefit which can be passed on to the consumer. The 'Big 6' energy suppliers generally see smart metering as a means to clean up industry data, which in turn should lead to a reduction in back office requirements to deal with billing and switching complaints.

Furthermore, this initiative will assist the Government's carbon reduction commitment, the principal measure in place being the Carbon Emissions Reduction Target. Homes are responsible for around 27% of total carbon emissions in the UK and it is hoped that the smart metering initiative will reduce the CO2 emissions by 2.6m tonnes.

Practical implementation

The logistical challenge posed by these proposals cannot be overstated. Replacement of the existing 50 million gas and electricity meters in all households and small businesses by 2020 means, when the deployment starts in earnest in 2012, the average number of replacements required over the following eight years is around 30,000 per working day. Labour mobilisation and meter manufacturing will need to be carefully managed.

Inevitably, smart meters are more expensive than their 'dumb' counterparts. The cost of replacement is estimated by industry sources to be £7bn, working out as £15 per household per year. £10 of this cost will be absorbed by suppliers in cost savings, with the end consumer paying the difference.

Proposed market model

The Government have been considering the most appropriate means of setting up and managing the smart metering technology. The Government report concluded that the preferred market model is the "central communications model". This model would introduce a new body to implement and manage the communication infrastructure and data carriage. The proposal presupposes the communications provider is organised on a national basis and will be procured through tendering for a time-based contract. Suppliers would access the communications provider by license. It is anticipated that the meters themselves would be procured from competitive metering markets.

The fully centralised model, favoured by the 'Big 6', comprising a nationally managed communications infrastructure and regional franchises, was rejected as it was considered it would take too long to establish and could negatively affect both competition and innovation. The fully competitive model was predicted to result in the greatest benefits but implementation would prove too costly.

Comment

Putting to one side commentary that the benefits of smart metering have been vastly overstated, there are other concerns. The proposals have not been good for pioneers in smart metering technologies; a compensation fund has been ruled out to cover the costs of replacement of those already in situ where they are not of the new required functionality.

Equally, there are concerns about the procurement of the meters themselves. It remains to be seen how the non-incumbent and small suppliers can obtain the necessary equipment and services at the same cost as the 'Big 6'. It will be interesting to see whether, as a result of the consultation, any provision is made in respect of this moving forward.

The consultation is open until 24 July.