Centrica : How the price cap could derail the smart meter roll-out

The Government has set an ambitious target to offer every UK home a smart meter by 2020. But its plans to introduce a price cap on household energy bills could have serious implications for that programme.

If the cap is not introduced in a well thought out way, there might not be enough money to fund the rest of the smart meter roll-out. The Government should also address inefficiencies in the smart meter programme to make it more cost effective.

Smart meters benefit customers

Smart meters are the next generation of gas and electricity meters. They take digital readings and automatically send these to customers' energy suppliers.

The UK Government has mandated the smart meter roll-out. It is a major multi-year infrastructure programme, started in 2009. The Government has recently reinforced its objective to offer all households a smart meter by 2020. Centrica is leading the way in the roll-out. We have installed over 4.5 million smart meters - equivalent to all other suppliers combined.

Smart meters bring benefits to customers. Automatic digital readings mean that customers receive accurate bills and don't need to supply meter readings the old-fashioned way. Smart meters let customers see how much energy they are using in real time, and therefore take control of how much money they are spending on energy.

However, the smart meter roll-out is costly to implement. The Government estimates that it will cost energy suppliers £11 billion. In the long-run, smart meters should save customers money as
they take control of their energy spend. But, next year, the investment in smart meters will cost the equivalent of almost £40 on the bill of each Centrica customer.

The retail energy price cap could seriously impact the smart meter roll-out

How the price cap is constructed is really important because of the impact it could have on the smart meter roll-out. In a worst-case scenario, it could seriously slow or even halt progress. If an allowance is set under the cap which reflects the true amount that energy suppliers like Centrica have to spend on the roll-out, then they will be able to carry on implementing the programme as intended. However, if a cost allowance under the cap is less than that amount, suppliers may be unable to make progress with the roll-out. Unfortunately, a negative precedent has been set with the recently introduced pre-payment meter price cap. This allows just £1.50 per customer to pay for the smart meter roll-out, substantially underestimating the true cost. It is important to remember that restricting the allowance for the smart meter programme will have a relatively high impact on the number of meters installed, owing to the large fixed costs of the programme.

There are other complicating factors which could mean that the price cap impedes the smart meter roll-out. Energy suppliers have made very different investments in the smart meter programme to date and are financing the programme in different ways. Determining a meaningful benchmark for an 'efficient operator' will therefore be highly complex, with a risk of unintended consequences.

Moreover, the price cap could undermine other intended benefits of smart meters. The business case for smart metering in the UK is based on the fact that it's a great enabling technology for the economy.

Its benefits go far beyond the immediate customer advantages of automated digital meter readings and help in reducing consumption. Smart meters also make switching much easier and quicker, and stimulate innovation for the good of customers and the whole energy system.

But if the price cap dampens switching rates (as has happened in the pre-payment market), causes customers to disengage from their energy usage, or stifles innovation in the retail energy sector, then it puts the wider benefits at risk.

The Government should address inefficiencies in the smart programme

Inefficient costs are locked into the smart programme as currently designed. This will make it harder for suppliers to adapt to any changes in the cost allocated by the regulator for smart metering.

The programme was set up almost a decade ago and technology specifications are rigid. If suppliers were allowed to use a wider range of technology and respond to the rapidly-changing environment, then they could take advantage of recent developments, such as the widespread adoption of smart phones, and reduce costs.

The smart metering programme is designed as 'opt-in'. This builds in higher costs to convert customers onto smart meters, and leads to a slower rate of uptake. If the Government wants to make the programme more cost efficient under a price cap and increase the adoption of smart meters, then the 'opt-in' design should be reviewed.

In addition, the 2020 compliance deadline for the roll-out incentivises companies to hold back from making a material investment in installing smart meters for their own customers, in the hope of acquiring other customers close to the deadline who already have a smart meter in place. This doesn't help the overall roll-out of smart meters in the UK, and means that costs are borne unevenly across customers.