The UK was the first country in Europe to divest state-owned energy companies, and to move from state ownership to a market-driven model. The UK also remains one of the few nations to have structurally separated energy retail from distribution, from transmission and from generation. These features of the UK market have led to a few unique quirks, including a rise in foreign investors entering the market, and this in turn has created a new challenge for UK operators on how they explain these nuances to foreign partners.
When looking at the core industry processes that state-owned utility companies have historically undertaken, a number have been spun off into organisations created to specifically run a particular system or part of the process. For example, meter registration, balancing and settlement, managing industry data flow, or building the infrastructure, will underpin the smart meter rollout.
These new organisations have taken different forms. Some, such as Elexon and National Grid Metering, are subsidiaries of others formed to perform a particular service to industry. Then there are those such as Electralink that are collectively owned by distribution companies, and those formed as a result of competitive tender, such as the Data Communications Company. All this creates a level of complexity not previously encountered.
When looking at smart metering in particular, the UK Smart Metering Implementation Programme also has some unique features. The UK is one of only five European states to include gas meters as well as electricity meters in its national rollout. This not only almost doubles the number of meters that will need to be replaced, but means that a number of scenarios around installation, change of supplier, and billing implications have needed to be designed, particularly where customers have a different energy supplier for gas and electricity.
The UK rollout is also the only one of the 16 European rollouts that is not led by the distribution companies. This, in addition to long being a cause for debate, means the interdependencies and hand-offs between energy suppliers and distributors are unique, and the benefits of having a national estate of smart meters are dispersed between multiple organisations.
We in the UK are also one of a small minority (with Poland, Estonia and Denmark) that is deploying or mandating a central data management system.
The centralised communication, data management, infrastructure and systems that underpin the UK rollout will require unprecedented collaboration between suppliers. Each supplier will take an independent and very different approach to the programme and there will also be variations across the whole supply chain, and the network of organisations that have particular market functions to perform.
The features of the UK market approach are reflective of our particular market structure and energy mix. The level of collaboration needed to adopt and ensure compliance with centrally (or internationally) defined standards is a resource burden, which all participants have to shoulder.
Performance measures designed into the Smart Energy Code and programme governance mean that communications providers, device manufacturers, and a host of others, are jointly invested in and mutually dependent on one another for their success through incentives. The associated cost could be viewed as overly restrictive by companies – particularly those from different home markets and more used to steering their own ship independently – unless they are carefully explained.
Other countries have followed different paths and speeds to liberalisation. Spain started the journey to market liberalisation in earnest in 1996, and introduced customer choice in energy supply in 2003, although 95 per cent of the market is still controlled by three suppliers (Endesa, Iberdrola and Gas Natural Fenosa). In terms of its electricity smart meter rollout, Spain has been faster and more aggressive than European targets, with 70 per cent of customers forecast to have smart meters by the end of 2016 and the rollout set to be complete by 2018.
France is substantially less liberal. Former state monopoly EDF floated on the Parisian stock exchange in 2004, although remains 85 per cent government-owned. Much like the UK, France is forecast to start its scale smart rollout in 2016, with completion by 2020. This will build on the early success of the Linky consortium, which installed a central system and hundreds of thousands of smart meters to prove the benefit of smart meters for all participants.
Germany’s domestic electricity market was fully liberalised in 1998. Today it features four vertically integrated suppliers – Amprion (formerly RWE), TransnetBW, TenneT TSO (formerly Eon), and 50Hertz Transmission (formerly Vattenfall Europe). There is also a thriving regional and municipal supplier market with thousands of small distribution and retail energy companies. The initial cost-benefit analysis for the national German smart metering case was negative, leading to a stop-start approach. This was further exacerbated by the complexity of governing or mandating a national rollout in a country where there are thousands of distribution network companies.
In light of the foreign ownership of four of the big six UK energy suppliers, those suppliers particularly are currently facing an unprecedented situation. The divergent national market histories, legacy systems and processes, and the current market structures have led to very different approaches to the introduction of smart meters. The UK smart meter programme has a number of unique features that from the perspective of a French, German or Spanish parent company could be difficult to fathom.
The complexity of the UK market should not be underestimated and industry leaders should view any communication of strategy and investment through the lens of a foreign investor unfamiliar with the landscape. Things don’t look set to get any simpler in the short term, so being a smart communicator when discussing smart metering with investors, is critical.
Amy Marshall is a director in KPMG’s power and utilities practice
Tips for smart communication about smart metering
In order to secure the right investment and support for smart meter deployment from foreign owners, UK energy company executives should:
1. Cut through the noise
Given that the UK smart meter programme has a unique approach with complex regulation and multiple interested parties, it is easy to become swamped in information. Take time to filter everything that’s happening within the market and try to prioritise what the top five issues/announcements are that shareholders/parent companies need to know.
2. Keep it simple
Every market has its own acronyms and terminology and the UK programme is full of its own terms. Make sure any updates that are created contain a clear glossary or appendix for those who are not familiar with the market, or for whom English isn’t their first language.
3. Look for synergies with other markets
Explaining new processes, policies or plans is always easier when the audience has a point of reference. Regularly research what is happening in the other European markets to see if there are any similarities in terms of rollout issues or successes that will help foreign owners understand what is happening in the UK. It is always easier to understand something if you’re experiencing it in your “own back yard”.
4. Ensure regular, consistent communication
When rolling out any smart metering plan, it is critical that all interested parties are kept informed of progress and any potential hurdles. This can be through regular calls, presentations, newsletters or meetings. Sharing updates on what’s happening in the UK energy market, beyond the smart meter segment, will help those not involved in the day-to-day operations to better understand the situation.
5. It’s all about the benefits
Regardless of the nuances of the UK market, each company’s business case must deliver as expected financially, and in terms of benefits to customers. Maintain focus on these two areas in planning and in communication.