Government moves to mandate SMETS2 installations, but at what cost?

There is little more than a month to go until 15 March, after which date first generation smart meters (SMETS1) installed for prepayment purposes or by suppliers with derogations will not count towards smart meter roll out targets.

However, there is now another deadline looming, with BEIS consulting on its intentions to activate the New and Replacement Obligation (NRO) on 31 March. This will effectively require suppliers to take all reasonable steps to install a SMETS2 meter when a replacement meter is required, or where a meter is installed for the first time. The “all reasonable steps” element also allows consumers to refuse to have a smart meter and permits the installation of non-SMETS2 meters in emergency circumstances, such as where health and safety is compromised. Exceptions to the NRO also exist where current transformer meters are already installed, or where a non-domestic, non-microbusiness customer has chosen to have an advanced meter.

The NRO is intended to ensure that up to date smart meters are installed wherever possible. The goal is also to ensure that customers receive the benefits of smart metering and to avoid increased costs to industry and negative impacts on consumers if a traditional meter then has to be replaced with a smart meter within a short period of time.

The NRO has long been in the energy supply licences but requires Secretary of State activation before coming into effect. In 2015 BEIS took the decision to activate the obligation in mid-2018, and last year revised the timing to not be before 2019. Despite this, the proposal to switch on the obligation at the end of March comes at short notice, with less than a month to respond and just over a month from the consultation close date before the obligation is activated. These timescales will present a challenge for suppliers to use up their existing SMETS1 and traditional meter stocks before the proposed activation date.

While the SMETS1 end date means that first generation meters will no longer count towards roll out targets, the NRO is a harder hitting deadline, after which not taking all reasonable steps to install a SMETS2 meter will put suppliers in breach of their licence.

However, the requirement is one that the industry will find it difficult to comply with as there are a number of barriers to installing a fully functional SMETS2 solution. In particular, there are still difficulties with getting hold of the meters, there are communications problems in the North of England and Scotland, and prepayment metering using SMETS2 is not yet ready for high volume installation. If suppliers are constrained to install SMETS2 meters that simply do not function as intended then there is an argument that installing a SMETS1 meter would result in less detriment to the customer, particularly as the meters should eventually be able to be enrolled in the DCC and offer similar levels of functionality as SMETS2 meters. It would be hard for Ofgem to justify enforcement action in such situations, especially given its move to a more principles-based approach to regulation in which the onus is on suppliers to understand and deliver positive outcomes to customers.

We anticipate that some suppliers will make the arguments for a more market-driven approach, allowing the rising costs of SMETS1 and traditional meters to drive the move towards the cheaper SMETS2 meters. When the objective of the programme is to equip all domestic and small business customers with smart meters, some participants will argue that it is odd for the government to maintain the upcoming SMETS1 end date and effectively prohibit further installations when we still don’t have a comprehensive SMETS2 solution available at scale. BEIS could have rescheduled the end date and NRO activation until the SMETS2 solution is fully viable. All SMETS1 devices that could not be enrolled in the DCC would have to be replaced before the final roll out deadline. This alternative approach would have allowed suppliers to make decisions over the most appropriate meters for their customers at the time, taking into account operational issues on a case by case basis.

The consultation on the NRO proposals closes next Tuesday, and it will be interesting to see how BEIS responds to what we expect to be considerable pushback from industry.

We can help you keep track of all these developments via our Smart Meter Regulation Service. To find out more please contact Rowan Hazell at r.hazell@cornwall-insight.com or call 01603 542128.

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