Ofgem’s “traditional regulatory mindset,” focused on penalising suppliers for missing their installation targets, may be hindering the severely delayed smart meter rollout.
The Public Accounts Committee said the regulator and the government need a better understanding of the current costs and benefits of the programme, the reasons behind disparities in installation rates among different types of households, and how this information can be used to inform decisions on the future of the rollout.
Although the programme was originally due to be completed in 2019, the committee said only 57% of meters in Great Britain (32.4 million out of 57.1 million) were smart as of March 2023. Around 3 million smart meters were not functioning properly and an estimated 7 million will lose functionality when the 2G and 3G mobile communication networks are shut down.
The PAC said the Department for Energy Security and Net Zero (DESNZ) is now aiming for smart meters to be installed in 74.5% of homes by the end of 2025 but only one large energy supplier hit its installation targets for both gas and electricity smart meters in the first year of the new regulatory framework in 2022.
The committee said there are large disparities in installation rates between different areas and demographic groups. They are lower in London, remote areas and rural areas, and among women, young people, poorer people, and renters. They are higher among men, older people, wealthier people and homeowners.
Suppliers have binding installation targets but consumers are not required to accept an offer. Ofgem has previously used its enforcement powers to require an energy supplier that missed its targets to pay more than £1 million in redress, and the regulator told the committee it is considering even more severe penalties.
However, the PAC said this “traditional regulatory mindset” may actually be detrimental to understanding and supporting the behaviour change that is necessary for the success of the rollout. It said the regulator may need to adapt its approach, “moving beyond merely considering performance against targets to take account of suppliers’ investment in the innovation and consumer engagement that encourages consumer behaviour change”.
The PAC said the geographic disparities in installation rates are “often, but not always” due to the limitations of the technology for communicating between smart meters, the central network and in-home displays. DESNZ said the low installation rates in London may be the result of the challenges of installing smart meters in flats, where it is more difficult to place smart meters in range of in-home displays, as well as the higher cost and lower availability of installers.
The committee urged DESNZ to improve its “limited” understanding of this issue and explain what it is doing to increase uptake in areas that are lagging behind. It said the department should also set out what it will do to support households that are unable to install smart meters, which currently include the 0.75% homes that sit outside of the Data and Communication Company’s wide area network in so-called “not-spots.”
The PAC said it is concerned that smart meters are not achieving the supposed benefits in terms of energy savings, and are often more beneficial to wealthier consumers, who can more easily replace their old appliances if their meter reveals they have high running costs. It said some time-of-use tariffs that enable consumers to save money by shifting their consumption to off-peak periods have been withdrawn due to the current market conditions.
The committee noted that the government’s most recent estimates of savings are based on data collected from meters installed between 2015 and 2018 and consumption data going up to 2019. It said DESNZ must update its evidence base and look at how to maximise the benefits for all consumers, particularly those who do not already have a smart meter. It said the government should work with Smart Energy GB to review its engagement strategy to ensure it creates the demand necessary to complete the rollout, including how it can sell the benefits of smart meters to consumers.
Regarding the large number of smart meters that are currently non-functional or may be in the future, the PAC said the government and Ofgem should explain what they will do to ensure suppliers place more importance on replacing smart meters and in-home displays that are not working properly. It said they should also set out a timetable for replacing the communications element of smart meters that will otherwise lose functionality when the 2G and 3G networks are switched off, as well as measures to future-proof new smart meters so they are not affected by this issue.
Lastly, the committee said DESNZ should report back the costs and benefits of the programme to Parliament on annual basis and set out how this information will inform decisions on its future, including when it will finally be brought to a close.
The committee’s chair, Meg Hillier, said: “The rollout of smart meters was first conceived in 2008, with a planned completion date of 2019. Some 15 years later and four years after that missed target, and its vision of access and support for every household to control their energy efficiency remains a distant one. There are functionality issues with many, millions will have to be replaced when they become obsolete, and the evidence is unclear whether their benefits are even working as advertised.
“On top of this, smart meters have serious reputational obstacles to overcome with the public. In particular, our inquiry has found that consumers’ enthusiasm for adopting one has been understandably harmed by recent shocking reports of forced installations. The government must now get onto the front foot and explain how it is going to sell this troubled programme to the public – and how it will successfully deliver during a cost of living crisis for those it ought to benefit the most.”