The focal point of a revolution that could shake-up the UK utility industry to the greatest extent since privatisation will be a box or smart meter. It’s certainly what the government is hoping for once the rollout is complete, by 2020, and it will be backed by measures to force big six integrated energy companies to sell some of their generation output to competitors.
Smart meters will wirelessly transmit data about customers’ usage to suppliers, changing the way energy is billed. They will also provide a torrent of data for analysis and enable more sophisticated pricing.
To be effective, the industry will have to spend many hundreds of millions of pounds on new IT to handle all this new data. And the rollout itself will not be cheap. The Department of Energy and Climate Change estimates that it will cost £11.3 billion, even though it should save £18.6 billion by 2030 through better efficiency.
This revolution is happening at a time when utility bills are rising inexorably and when complicated tariffs are alienating much of the industry from its customer base. In a survey, IT services company Avanade reported that 70 per cent of respondents said they were unhappy with the cost of their energy, 58 per cent were unhappy or indifferent about the level of service given by providers, and only 12 per cent said they felt loyal towards their energy provider.
“January saw smaller energy providers, along with retail brands such as Marks & Spencer and Sainsbury’s, heading up the Which? satisfaction league table for energy, and complaints to the big six were over four million,” says Nick Wellington, strategic commercial and communications director with Navetas Energy Management. He warns that if the incumbents do not put customers at the heart of their proposition, they will lose market share forever.
Mark England, chief executive of smart meter supplier Sentec, believes that using smart meters to guide consumers towards the most competitive utility will create transparency, which is critical to restoring customer trust. “Energy usage data must be presented to the customer in a format that allows them to easily compare their tariff with other options, via a third-party price comparison site, for example,” he says.
Much of the sector’s image problem is down to poor communication with the public, and the fact that companies have not done enough to explain why bills are so high. Too many people are ignorant of the time lags between wholesale and retail prices, and movements in global energy prices, or the government’s imposition on the industry of ambitious and expensive green energy obligations. However, coupled with better communications, smart meters could help resurrect the image of the industry. So should innovations by new entrants.
“Smart meters allow consumers to become more engaged, to change their habits and reduce costs,” says Paul Massara, chief commercial officer with RWE Npower. They will able to see in real time which appliances are using the most energy, which will make the energy ratings on appliances a lot more relevant. Enabling consumers to better understand and control their energy use could see consumption reduced by 5-10 per cent, according to industry estimates.
“In the future you could even have apps for smart phones that will allow you to remotely control household appliances,” says Tamim Saleh, a partner with Boston Consulting Group. He sees the whole concept of smart meters dovetailing with the idea of the smart home of the future.
“At the moment, consumers don’t feel empowered, they just feel like price takers,” says Ian McCaig, chief executive of First Utility. The independent utility recently partnered with US software group Opower, which via an online portal offers users tools to save energy and allows them to compare their usage with others with similar profiles. “These tools provide really insightful data and analytics tailored to the customer and give specific recommendations on how to save energy,” says McCaig
Certainly, there is the prospect that suppliers will be able to offer a range of tariffs for different times of the day – governed by periods of low and peak usage. This could reduce demand at peak times by encouraging users to shift some of their consumption to low demand periods.
Smart meters are also a crucial component of smart grid, which offers the prospect of being able to better manage and distribute output from renewable energy and to better match energy supply and demand generally.
Many in the industry forecast that energy will be bundled with other services by outside companies, and that these will be companies that already have a relationship with consumers. Customer-centric organisations such as telecoms providers, retailers and even satellite television broadcasters are all in the frame. Some have already made tentative moves, with Sainsbury’s and Marks & Spencer offering white-labelled products from Centrica and SSE, respectively.
The Co-op, which plays on being fairer and simpler, has acquired 20,000 energy customers since its launch in May 2011. The member-owned group buys power from a small, select group of suppliers and tries to source as much green energy as reasonably possible.
“We use a very simple tariff structure with no exit penalties, and although we’re not the cheapest, we do aim to be consistently among the most competitive,” says Nigel Mason, business development manager with Co-op Energy. However, the Co-op is not rushing into the smart metering revolution. “Studies have shown that their impact is very limited, so we’re not going to be a first adopter,” says Mason.
Most in the industry do not share Mason’s hesitancy, but there are reasons why smart meters and reforms to the utility industry could disappoint. According to RWE Npower’s Massara, government initiatives to curtail doorstop selling and simplify bills are already reducing customer churn, and smart meters could accelerate this trend. “More visible prices will lead to a convergence of prices and less switching is making it harder for new entrants,” he warns. He also points out that industry profit margins of just 5-6 per cent could prove too low to be of interest to many potential entrants.
“There’s a branding issue to consider as well,” says Julian Critchlow, partner with consultancy Bain & Co. “You have to think about how dealing with things like bad debt might impact the company’s image and the relationship it has with its customers.”
Also, if the big companies split their various business areas into different segments – such as generation, distribution and retailing – it threatens the prospect of industry boom and bust cycles.
“You could get cycles of over or underinvestment in power capacity, for example, which could exacerbate prices,” says Bain & Co’s Critchlow. Each part would have to make returns in its own right, while with the current dominant integrated model, losses can absorbed within the organisation.
Another question is whether consumers will make full use of smart meters anyway. “Research has shown that 70 per cent of people are only engaged for a month and then lose interest,” says Massara. Some think that one way to go is to include them in a ‘smart home’ package, where devices are on a network and can interact with each other when necessary and be remotely controlled.”
There’s even some scepticism over bundled services. “The product cross-selling approach has been done before, such as when Centrica owned Goldfish credit cards and the AA, which it eventually sold to focus on its core – energy,” says Martin Wells, a vice president with consultancy Capgemini. Centrica now largely focuses on selling value-added services around energy, such as boiler maintenance and installing solar panels.
At a structural level, First Utility’s McCaig is concerned that not enough is being done to free-up power generation. “Buying one day ahead is not that useful to us. What we need is something longer term, like three to six months,” he says. He thinks the lack of a long-term electricity market is an impediment to more competition.
Justin Pugsley is a freelance journalist
This article first appeared in Utility Week’s print edition of 24 February 2012.
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