The Topic: Smart metering
In 2009 when then-energy secretary Ed Miliband announced that the UK would be embracing smart meters, he said: “Smart meters will empower all consumers to monitor their energy use and make reductions in energy consumption and carbon emissions. They will also mean the end of inaccurate bills and estimated meter readings.”
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Eight years later, and the mass rollout of smart meters in the homes and businesses of the UK has yet to build up a head of steam. However, after all the delays the programme can begin in earnest now that the essential Data Communication Company (DCC) network is live.
Meters on the wall
Smart meters are being installed to replace old, dumb meters which have to be read by the consumer or a meter reader. They use the DCC network, and the home area network, to send information to the supplier, as well as showing the bill payer, via an in-home display, how much energy they are using.
All of the energy secretaries, from Ed Miliband, Ed Davey, Amber Rudd and now energy minister Nick Hurd, have sung the praises of smart meters. Most recently, Hurd told MPs that “the rollout is unequivocally a good thing” and that the government would press ahead towards the 2020 target.
However, not everyone believes the rollout in its current form is the silver bullet the sector needs. Citizens Advice has raised concerns that suppliers may abandon vulnerable customers with the meters, failing to explain how to use them and how they can benefit (see column). Suppliers need to step up their efforts to increase smart meter education to vulnerable customers, allowing those who can benefit most to enjoy the advantages the technology brings.
Energy retailers have been tasked with fitting the meters. This differs from the method used on the continent, where distribution networks have been given the job.
While the debate about how the rollout should be conducted has largely died away, in its place have come concerns about the workers needed for the project and the efficiency of the supply chain.
With the industry already in the grips of a staffing crisis, the National Skills Academy for Power and Energy Utility & Skills have estimated that an additional 7,600 engineers will be required at the peak of the programme, and that the latest timetable changes will drive a requirement for an additional 2,200 engineers.
This could push up the cost of the £11 billion programme.
While the roll out of smart meters is predominantly focused on the energy sector because of the pressure to hit the 2020 target, the water sector is also beginning to embrace smart metering. Thames Water and Anglian Water are among those installing smart meters, targeting business customers (those who are able to switch in Scotland and those who will be able to do so in England from April).
The deployment is slower, but the impact no less significant. Customers are able to closely monitor their usage – and their costs – while water companies are able to find leaks more easily and reduce meter reading costs.
The efficiency angle also applies, and Thames is targeting London as its first area for mass deployment in domestic properties. The aim is to encourage water-saving behaviour, reducing demand and stresses on a stretched resource in the South East.
Once smart meters are deployed, it is hoped consumers will see the benefits. Customer service should improve, as should the ease with which they can switch, and bills should instantly become accurate. A smart meter should also be something of a gateway device, opening up the household to more smart devices and systems, including the potential for demand response.
Another advantage is that they will help cut energy usage, which not only helps to reduce bills, but also cuts emissions.
British Gas, which has led the way by installing more than 1.5 million smart meters, estimates that customers with the device save on average 3 per cent on their bills. As energy minister Nick Hurd said: “The rollout is not the silver bullet for fuel poverty – that is entirely right – but those are not insignificant sums of money.”
This Topic looks at a number of issues surrounding the energy smart meter rollout, its progress, and what still remains to be done.
“Recruiting for the smart economy” - Nicki Hussain, head of the National Skills Academy for Power
To read the column, click here.
“The smart meter rollout needs to be inclusive – nobody must get left behind” - Daniel Walker-Nolan, principal policy manager, Citizens Advice
To read the column, click here.
Get control of the supply chain
John Calder and Rob Gilbert outline five ways to deliver more than 50 million smart meters to the right place, at the right time, for the right cost.
The government has a commitment to “ensure every home and business in the country is offered a smart meter by 2020, delivered as cost-effectively as possible”. The pledge represents 53 million smart meters and 26 million properties, with only around four million smart meters installed to date. Install activity is seeing a major ramp up, with most major suppliers expecting annual installations to exceed one million per year to achieve the target.
The foundation phase has provided invaluable lessons as operators seek to drive up right-first-time installations. Most have identified the supply chain as one of the areas that could be put under stress as volumes increase. SMETS2 also brings additional challenges in the form of an expanded range of materials and equipment to manage.
Right-first-time installation requires the right materials and equipment to be delivered at the right time to the right person. Ensuring this is managed smoothly and at the right cost is achievable by honing in on five key areas of the supply chain.
1. Right-sized inventory
Typically, energy retailers handle more than 100 different stock codes. These need to be forecasted, tracked and replenished to ensure the right kit is available to support successful first-time installations. Overstock, and a company will build up unnecessary working capital. Run too lean, and stock outs will occur, meaning field teams will not have the equipment and devices they need to fulfil an installation first time – a costly headache.
The delicate balancing act is often further complicated by collective responsibility for inventory. Procurement, supply chain, field operations and finance all need to work together to optimise inventory. Clear ownership, communication and use of accurate supporting data increases the chances of right-sizing the inventory. Doing so will increase right-first-time installations, without inflating the program cost.
2. Third-party and subcontractor relationships
Relationships with third parties can take time to settle and are often most strained when activity levels increase. To take the heat out of this, good governance, clear independent metrics and a fair and equitable commercial model are paramount.
We are currently enjoying the relative calm before the storm. The next few months could serve as the perfect opportunity to rebalance relationships and ways of working to ensure they are set up for success. This should include subcontractor relationships for final mile logistics; historically this is where the “wheels have come off” and cost has escalated.
3. KPI overhaul
While a number of useful key performance indicators (KPIs) were put in place during the work to date, managing effectively against them has been challenging. Data has often been unavailable for up to six weeks after the event and operators have struggled to find the balance between lack of data and being lost in too many metrics.
This is eminently fixable. KPIs should be accurate, impartial (self-reporting without automation should be kept to a minimum), timely (so decisions can be made on the front foot) and comprehensive. KPIs should relate to the full supply chain and act as a connection point for procurement, field operations and final collection partners. Turning operational performance numbers into commercial values can also help sharpen the focus on driving continuous improvement.
4. Cracking down on commercial leakage
For every smart meter that is installed, an old dumb meter needs to be disposed of. Dumb meters are often being left to idle in the supply chain in excess of ten days. This represents considerable commercial leakage, with capital tied up in the supply chain, rather than generating interest in the bank, to help pay for the programme.
Energy retailers and their subcontractors would benefit by operating a tightly controlled reverse logistics network (covering both dumb and smart meter returns), with all parties from the field engineer backwards focused on the prompt return, processing and disposal of assets to maximise cash flow as volumes ramp up. Timely reclaims for rejections from suppliers and robust warranty management are also critical to minimising commercial leakage. The supply chain, procurement and finance need to work in tandem to achieve this outcome.
5. Making your supply chain smarter
Leading class sectors such as consumer goods, retail and automotive have achieved a more flexible, visible and responsive supply chain by using a “control tower” model. This dedicated team with oversight of the end-to-end operations (across all parties) is armed with data to serve as the brain of the supply chain, with the key focus on demand and supply planning capability, inventory optimisation and logistics management. Recently, more industrial sectors have started turning to this model to drive significant cost savings and improve service in their field force supply chain.
Whether managed internally or via a third party, this concept better integrates the supply chain with the procurement, finance and field force operations. It will ensure energy retailers can deliver on their rollout obligations while offering significant savings in the form of inventory optimisation, reduced logistics costs, more effective supplier management and increased field force time on tools.
The control tower model is the energy industry’s best chance of bringing oversight and control to the smart meter supply chain, as volumes escalate in 2017. With this supply chain brain in place, the energy retail supply chain could get a whole lot smarter.
John Calder, Partner, Supply Chain & Procurement at Baringa Partners
Rob Gilbert, Smart Meter Supply Chain Lead at Baringa Partners
DCC - The infrastructure behind the meters
The key to the smart meter programme is the Data Communication Company (DCC) network, which will link the smart meters in homes and small businesses with the systems of energy suppliers, network operators and energy service companies.
The DCC has split the UK into three regions – southern, central, and northern – and tendered for the communication service provider to provide the network. Arrive won the southern and central contracts, while Telefonica won the tender for the northern region.
Getting these networks up and running faultlessly is essential for the rollout, because they are necessary for the rollout of SMETS2 meters, the advanced smart meters that allow smart customer to switch supplier and retain their smart functionality.
However, this programme has been beset by delays. It was originally set to go live in December 2015, but all three regions were finally live by November last year – later than event the contingency planing.
Before the northern region went live, which was the last one to do so, KPMG power and utilities director Amy Marshall said: “Once the DCC, which will deliver the infrastructure to support the mass rollout, goes live we expect to see installation rates increase rapidly.
“This is a huge challenge for the industry, with an average of less than 200,000 meters currently being installed per month by large suppliers in 2016.”
This delay has sparked debate about the 2020 end date for the programme, by which the government has promised every household in the UK will at least have been offered a smart meter.
Shadow energy minister Alan Whitehead has called for a pause to the programme while it gears itself up to hit the target, but this call has been ignored by the government.
Energy minister Nick Hurd told MPs the date stands for now because changing the plan would send the message that the rollout can slow down.
However, now that the DCC has gone live, and the Department for Business, Environment and Industrial Strategy still wholeheartedly backs the programme, the mass rollout can begin in earnest, with SMETS2 meters being installed and data flowing over the DCC networks.
Why water should join the revolution
Smart meters can have an even bigger impact on reducing usage in the water sector than in the energy sector – so it’s no surprise that early adopters are deploying the technology now.
Since its privatisation in 1989, the water industry in England and Wales has functioned as a non-competitive market in which regionally regulated businesses operate as both network provider and retailer – managing storage, treatment, supply, billing and customer experience. Customers, as a result, have not been able to switch provider to get a better deal or better customer service.
This is about to change for business customers: competition is being introduced for the first time for all business users in April 2017, in one of the most transformational changes to hit the water industry in decades. As participants and the interested public alike wait to see how this will materialise, it looks likely that domestic market competition will not be far off.
As water companies prepare for further retail competition, many – particularly in the south and southeast of England – have also begun universal smart water metering programmes for domestic customers as a means of future-proofing water supplies in areas which the secretary of state has deemed to be severely water stressed.
In advance of a further shake-up, these companies can learn valuable lessons from the competitive energy retail sector, where the adoption of smart meters in energy is transforming the way in which consumers interact with companies. Energy retailers are focusing on richer, data-driven customer experiences and are expanding their presence in the digitally-enabled “connected home”.
Smart meters can deliver significant opportunities to both customers and suppliers. Being conscious of this is critically important to the strategic decisions and direction taken by each organisation. As a result, water companies not in water-stressed areas may still opt to roll out smart meters (albeit not on a compulsory basis), so that they too can reap the benefits, some of which are briefly covered below:
Reducing water usage. Smart water meters can help reduce water usage by making customers more aware of what they use, helping them to reduce their water bills, and allowing water companies to better manage peaks and troughs in demand. There have been some successes: customers with smart water meters have reduced consumption by 10-15 per cent compared with 2-5 per cent in energy. There have also been some challenges: some households are more susceptible than others to bill increases compared with their historic rateable value charge, so are less willing to engage with companies trying to install them.
Southern Water has been something of a flag bearer for smart water meter trials in the UK, with other companies starting to follow suit. A five-year scheme to install meters across the UK’s water-stressed South East saved 27 million litres of water every day, according to the provider.
Transforming the organisation. Energy retailers have used new metering technology as a mechanism to deliver large-scale transformational change. Water companies could follow suit, using the opportunity to lower operational costs by investing in people, process, technology; or leveraging smart water meters as a proactive customer positioning vehicle ahead of likely future domestic competition. Companies with data-rich customer service and an ability to offer various tariffs, bundling utility or additional services together, may find this a valuable competitive advantage.
Improving the network. Smart water meters allow utilities to better understand water usage and identify where usage is abnormal. They can act as additional sensors on the network, identifying leaks and providing information to enable better decision-making for capital investment. Better decisions translate to better allocation of large cash-intensive network replacement programmes, ultimately providing water to customers at a cheaper cost.
In conclusion, Great Britain’s smart metering programme has been transformative and placed pressure on all market participants. Companies first off the mark, as well as fast adopters, are competing for a differentiated position in the marketplace while balancing the inevitable risks associated with large-scale rollouts of new technology.
With water smart meters and the impact of competition, it is very likely that new challenger brands will emerge in the water industry and eat into market share. Horizontal growth is a key growth area – where market players can offer extra services related to the core product or a range of different product options. A different strategy is based on being “lean and simple”, targeting operational efficiencies and products and propositions that reduce the effort of the customer to understand, purchase and transact.
Smart meters are important components of evolving smart networks. Electricity and gas companies are increasingly able to predict and meet demand more effectively through smart meters. For water companies, they are – and will be – a key enabler to optimise the water resource itself and spend money in an optimum way to produce and deliver this essential resource into customers’ homes.
Stephen Haw, partner, Steve Airey, senior manager, Hayley Speller, manager, Baringa Partners
Unlike the energy sector, in water smart metering is something that has been left to the discretion of companies. Thames Water and Anglian Water have taken up the mantle and are installing them, while many others are not.
Thames began its industry-first rollout of smart meters in February 2014, with the aim of metering all 3.3 million properties it supplies.
The £300 million programme of works is estimated to be completed by 2030, and it has been targeting London first because that is where its water resources are tightest.
Thames claims its metered customers generally use 12 per cent less water than those who are unmetered and that the data from the 100,000 smart meters it has installed so far has been revolutionary.
Thames Water’s former chief financial officer, Stuart Siddall, said: “We go and see our engineers and they’re excited by the information they’re getting and the way they are going to be able to run the networks differently with the information they’re going to get from something like smart metering.”
Anglian Water began its smart water metering fixed network trial as part of its plans for a long-term smart metering programme in July 2016. It installed 7,500 smart water meters in and around Newmarket in Suffolk.
It hopes the four-year trial will achieve a 100 per cent customer satisfaction rate, ensure no bursts or leakage, and reduce water consumption to 80 litres per head, per day.
Anglian Water programme manager Paul Glass said: “Smart metering has a key role to play in giving our customers access to information about their water use – helping them to understand how much water they are using, and therefore how to reduce their consumption and bills. In combination with our efforts on the wider network, this will help secure water supplies for the future.”
The water sector is taking small steps in adopting smart meters, with companies in more water-stressed areas making the early moves. Unlike the energy sector, there is no government-mandated rollout, so customer demand, and environmental pressure, will need to drive the programme forward. There remains a long way to go.
Counting the cost
The cost of the rollout of smart electricity and gas meters is a cause for concern. Government and Smart Energy GB are sticking by the initial cost estimate set out in the 2014 impact assessment for the programme of just under £11 billion.
This estimate was made before the multiple delays to the Data Communications Company (DCC) network, which saw its go-live date fall back from December 2015 in the original plan to November 2016.
Baringa partner Stephen Haw describes the goal of fitting more than 50 million meters by 2020 as “still a challenging one”, while PwC global leader for smart energy Steve Mullins is also concerned about the volume required in the timeframe. “The thing you can be really sure about is that because of the volumes of meters, a lot of the scenarios you can dream up, and probably a lot you could never dream up, are going to happen and potentially cause a lot of problems,” he says.
These issues, coupled with a shortage of engineering staff and the ever-decreasing timeframe, have led to concerns that the cost of the programme will increase. For instance, Citizens Advice chief executive Gillian Guy warns of cost increases, and a reduction in the assumed benefits. “[Delays] could make the overall project more expensive and hit consumers with higher bills down the line.
“It’s crucial that the government is clear on whether the compressed timetable for installation will result in additional costs to consumers.”
The Institute of Directors estimates the smart meter programme will add approximately £400 to each customer’s energy bill, while British Gas trials have revealed annual savings for smart meter customers are on average 2 per cent, or £26.
The government puts the cost per household of installing smart meters at £214.50, while Smart Energy GB director of communications Claire Maugham insists the savings are still deliverable.
She states that savings will come through changing energy usage, automatic meter readings, and easier management of the energy network.
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