Ofgem is proposing to amend the Data Communications Company’s (DCC) performance incentives to cover contract management and procurement after some service providers underperformed.
As a monopoly, the smart meter network operator needs incentives in lieu of competitive pressure to ensure it efficiently manages its costs whilst delivering an appropriate quality of service.
Ofgem says there is concern amongst itself, the Department for Business, Energy and Industrial Strategy (BEIS) and DCC’s customers that the current operational performance regime (OPR) does not incentivise DCC effectively.
In a working paper Ofgem explores how the OPR could be updated to incentivise better performance in three areas:
- System performance
- Customer engagement
- Contract management and procurement
The latter two are new incentives.
The paper reported that to date, not all of DCC’s outsourced service providers have performed to the level it expects.
It added that a “significant number” of modifications proposed to the Smart Energy Code (SEC), which governs the rights and obligations of companies involved in smart metering, impact the DCC’s outsourced systems.
“We anticipate that this rate of change will continue as a requirement to support the UK’s net zero decarbonisation delivery agenda drives change throughout the energy market. DCC is in a position where relatively small efficiencies in assessing, refining and delivering change can have a disproportionately positive impact across industry.
“As such, we are exploring whether, in addition to Ofgem’s annual assessment of whether DCC has incurred external spend efficiently and effectively (and the disallowance of any spend which does not meet these criteria), DCC is provided with a further incentive (in the form of retained margin) to drive improvements in contract management and procurement”, the paper said.
Ofgem further noted that customers have “repeatedly raised concerns” with the DCC’s engagement and that it has made clear it expects to be provided with evidence of customer engagement in its annual price control submission.
While Ofgem said DCC had recently made some improvements to customer engagement it was not confident that the improvements will be implemented quickly enough and to the standard required.
For the corresponding incentives, DCC would have to explain how it undertook customer engagement from end-to-end; including strategy, implementation and the outcomes of its engagements.
Regarding system performance Ofgem noted that most of the metrics for this incentive category measure technical outputs which do not appear be strongly correlated with customer experience and outcomes. Ofgem instead wishes to replace them with more outcome-based measures.
Areas in system performance it wishes to incentivise include all services required in the installation and commissioning of a smart meter and those concerned with the DCC’s service requirements during a change of energy supplier.
The working paper concluded that Ofgem’s initial view is that system performance should have the largest weighting of between 60-80 per cent and contract management and customer engagement should both have a 10-20 per cent weighting.
Ofgem said it plans to issue a formal consultation on its proposals in the spring, with the amended OPR expected to take effect from 1 April 2021.
Responding to the paper, a DCC spokesperson said: “We welcome Ofgem’s review as we have long had concerns that the current measures do not reflect what customers value.
“We will work with Ofgem, our customers and our supply chain on the detail of the Ofgem proposals and how they intend to implement them.”