The Competition and Markets Authority (CMA) was optimistic in its recent draft market report about the potential for smart meters to benefit customers, and especially those on pre-payment meters, as existing meters did little to inform customers about usage and costs, and had no links with information about how to engage with the market or save costs.
“This is one area where smart meters could really help yet [the industry] are still installing dumb meters”, at a rate of 300,000 pre-payment meters every year. “I can’t see why there shouldn’t be a rule saying install smart meters for pre-payment customers,” said Roger Witcomb, chair of the CMA Investigation Panel.
But the CMA found that although smart metering will allow the industry to provide accurate bills, at last, it will not yet be able to deliver the other planned benefits – such as lower bills for off-peak use – because major changes are required in the way energy companies pay their own bills for the power they supply.
All about the profiles
Suppliers buy power to sell on to domestic customers and those bills are settled in a system administered by industry body Elexon. But that process does not encompass customers’ real-time use. Instead, domestic customers are assumed to fall into one of a handful of “customer profiles” that make assumptions on when their use is high or low and whether that use falls into periods when energy is at peak price. Energy suppliers and generators settle their bills on those profiles.
That works well enough when domestic customer bills are settled on annual or even monthly meter reads. But it presents a problem when offering off-peak and peak prices to customers. Although, if you have a smart meter, your supplier will know when to charge you more or less, that information – and the charging regime – can’t be passed up the chain. The CMA says that means “suppliers are not incentivised to encourage their customers to change their consumption patterns, as the supplier will be charged in accordance with the customer’s profile”.
It could put at risk potential savings of £900 million per year from shifting usage out of peak hours.
This problem is well known. The industry has been required to install smart-ish meters (advanced meters) for all business customers for the past few years and with most customers converted, energy companies must move from profile-based settlement to settling on the basis of half-hourly meter reads.
The industry shorthand for this change is P272 and it will be a dramatic change requiring both new hardware and software – such as new billing systems – and a new customer relationship. It is starting with larger business customers who can, perhaps, do most with information about when they are paying the highest prices.
So far, the development of the P272 change – which started in 2013 – has been a comedy of errors. Speaking at Cornwall Energy’s recent customer conference, David Crossman, supplier management director at Haven Energy, said: “It is quite astonishing what a mess we as an industry have made of this and how little thinking we did.”
Among the issues that the industry had to go back and address while P272 was being discussed were how to incorporate network costs, how to manage the situation if customers started half-hourly charging during a year’s contract, avoiding double charging, and how to manage the necessary data reporting. That required a series of other change processes. P272 is now expected to be a gradual process that will happen as business customers renew their contracts between now and 2016.
The next step will be to follow a similar process to P272 for the smallest business customers, who should have advanced meters. It is not clear whether industry IT and billing systems are ready to make that switch, although many have been updating legacy systems with this in mind.
Not in prospect for consumers
The CMA pointed out that the change will not be complete until at least 2016, more than three years after it began. It has not yet really started the industry change processes that would be necessary to move 30 million domestic customers from profile to real-time half-hourly settlement – even though the smart meter rollout is due for completion by 2020.
In part that is deliberate. The industry took a decision not to use half-hourly settlement for domestic customers. It was assumed that energy companies, and perhaps new aggregators, would offer time of use pricing to customers because they had visibility of overall (although not individual) peak savings. But that presents two problems: it means customers do not have the option of using real time of use tariffs with real data (and working through a specialist company); and it means that energy companies who offer time of use tariffs take on the risk that comes with the lack of visibility – and add a premium into the price charged to customers accordingly.
It also means consumers can’t take advantage of very large peak and off-peak differences in the price of using the network (representing around a third of the bill).
The CMA concludes that “the absence of a plan for moving to half-hourly settlement for domestic customers has an adverse effect on competition”. It wants a binding plan to introduce real half-hourly consumption data in billing domestic energy meters – at least by 2020, when smart meters are rolled out, and potentially before that so early adopters can start to benefit.
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