The UK energy network is in desperate need of modernisation if we're going to meet stringent climate change targets. So what's the hold up?
Joel Hagan is explaining how he managed to persuade the electricity company Scottish & Southern to invest in a product that will encourage its customers to consume less energy. On the table in front of us is an energy sensor, which consumers clip on to their electricity meter, and a funky looking display box, not much bigger than a blackberry phone, intermittently blinking data. To the consumer, this is a device that offers the chance to see how much energy their home is using. "It's designed to create behaviour change," says Hagan. To a power company, it sounds like an anti-business model. Less energy sold means less revenue, whichever way you look at it.
"It's not just bald information, but numbers that can make a difference," adds Hagan. Unless you live in an energy-efficient eco-home, these are numbers that are likely to shock you into turning off as many appliances as possible. So why has Scottish & Southern Energy (SSE) not only bought hundreds of thousands of these sensors, but also taken a stake in Onzo, the company that makes them? Selling Onzo to power companies was a challenge, admits Hagan, the company's CEO. "Being critical of a capability gap in another organisation—and being a little whippersnapper upstart. That's a cheeky position to be in," he says.
SSE paid £1m for a 24.5 per cent stake in Onzo in March last year. Colin Sempill, Director of Organisational Development at SSE says the investment demonstrates the company's commitment to handing over control of energy consumption to the consumer. "Our customers want it and somebody's going to give it to them anyway, so why can't we," he says. Is Sempill not concerned that giving control to the consumer will lead to lower revenues? "The chairman asked me the same question last night," he says. "It is about getting closer to the customer, giving them good service. You might lose a bit on the energy side but you'll build a better relationship with that customer and you'll keep them longer."
Reducing household energy consumption, which accounts for 27 per cent of all UK carbon emissions, is central to government "efforts to mitigate climate change", according to a Whitehall report released earlier this month. To meet its carbon targets, the government wants to reduce household energy consumption by over a third by 2020, compared to 2001 levels. While energy use in the home has declined over the past three years, it was still eight percent higher in 2007 than it was in 1990. There is plenty of work still to do.
The use of display boxes and sensors in the home, such as the one produced by Onzo (and its rivals, DIY Kyoto, wattvision and Current Cost) are effectively only the first stage in a concerted effort towards "smarter", more efficient energy use. Last year, Gordon Brown pledged to roll out so-called "smart meters" in every home, which permit more accurate, real-time, monitoring of energy usage, allowing power companies to only bill their customers for the energy they've used and customers, in theory, to save up to 20 per cent on their energy bills. But that was last year. As the environmental clock ticks, the industry is still waiting for the details.
Smart meters are an essential component of the "smart grid", a plan to incorporate a rash of new technologies to regulate the supply of electricity based on its availability. Proponents of a smart grid say it would likely result in decreased electricity use, a vital step if the world population rises as quickly as scientists predict. "The energy gap has already emerged in the States," says Hagan. The gap-between demand and supply-could be partially closed by smart grid technology.
Eventually, a modernised electricity network, or smart grid, could regulate the supply of energy automatically, by using sensors installed in household appliances. At times when power was plentiful and therefore at its cheapest, household appliances, such as washing machines, could "choose" to operate themselves: a futuristic, Orwellian solution to the growing energy gap.
In the US, trials are already in place to test this type of technology. GE has several smart grid projects underway in the US, including the installation of 3.3 million smart meters in California and a partnership with American Electric Power involving up to five million smart meters. The company is also providing support for EDF Energy's new power distribution network in London. Smart grid trials are also taking place in Amsterdam and Malta.
But even if a smart grid is never fully realised in the UK, smart meters are a vital step towards plugging renewable energy sources into the power grid. "Smart meters are an enabling technology for supporting renewable energy input," says Hermione Crease, marketing manager at energy management company Sentec. And that means all types of renewable energy, from "major scale solar farms" to much smaller home energy sources, such as solar panels and roof turbines. "Attaching some value to that power when it's put back into the grid and allowing the energy company to understand how much power is being produced - that can't be done without a smart meter," says Crease.
As far as the government is concerned, the responsibility of rolling out the required network of smart meters lies with the energy suppliers. In a recent report, it confirmed that installation of "energy efficiency measures" would be instigated through "obligations on energy suppliers." But as Crease confirms, smart meters in every home would mean a "massive investment." According to Claire Gibson at the Retail Energy Association (REA) its members, who include suppliers such as Scottish Power, EDF and British Gas, would be prepared "to shoulder the upfront capital investment", but the industry is awaiting "guidance from the government" about what technology to use and precisely how the roll-out will be managed.
Not all the energy companies are sold on the idea of smart meters. As Crease says, "some of the energy retailers don't have distribution ownership, so they don't see the operational benefit from smart metering." But some, including E.ON and SSE, have already begun trials to test out the technology. They are awaiting a mandate from the government that would allow them to club together to buy the necessary equipment to roll out the network nationwide. Without this mandate, says Gibson, they would be in breach of competition law.
But that isn't the only condition. According to Sempill, "it's a massive risk to put these meters in the wall if a customer could just move supplier the next week." Any government mandate would have to protect the supplier's capital investment, he says.
Chris Goodall, an entrepreneur, author and climate change expert, believes this is a major sticking point. "The problem is that none of the companies wants to be the one that pays the £300 plus cost of installing my meter. I am an SSE customer today, but I might move to Good Energy or Centrica tomorrow. Why should SSE pay [to install my smart meter]?"
Goodall sees smart meters as potentially more valuable to the supplier than the consumer. "First, they will replace meter reading, which is expensive and introduces all sorts of problems over billing. Second," he says, "they will allow variable pricing." Which means that when electricity is cheap, "the utility can charge you less. And, of course, vice versa." Third, he says, smart meters can manage demand. If there isn't enough capacity, they can "forcibly scale back" demand. For example, "they might restrict all households to two kilowatts. Something similar happens in Italy, which lives on the edge of grid breakdown all the time."
Back in January, David Cameron announced that he was already in talks with the National Grid, which owns the distribution system for the bulk of the UK's energy requirements, to catalyse investment in a smart grid with a £1bn government grant to help roll out smart meters. The government has its own timetable, and it is thought that Malcolm Wicks, the Energy minister at the Department for Business, Enterprise and Regulatory Reform, will reveal a new mandate by the end of this month. To put a smart meter into every UK home will cost around £5bn and take up to 10 years.
Smart meters alone don't necessarily lead to reductions in energy usage. As Crease says, studies suggest that smart meters can reduce consumption by between 5 and 20 per cent "if backed by sensible advice, and ideally, financial incentives from the utility companies. It's a bit more complex than saying that smart meters will automatically reduce consumption. But you could say that without information, people certainly won't reduce their consumption. Smart meters give them a fighting chance of doing so."
Hagan says that "as currently specified", smart meters have more supplier benefits than consumer benefits. "It's a more efficient billing process," he says. "I'm not sure how much benefit the consumer is getting. If I was the government I'm not sure I'd want to subsidise a system that simply enabled the utilities to make more money. Consumers need to know how much energy they are using and what that's like compared to other people: information that helps consumers help themselves-and help save the planet."
Rolling out smart meters into 26 million UK homes, and removing the incumbent electricity meters, is a huge and complex task. Still to be decided is whether the country will be divided into several geographical regions, each up for competitive bidding, a structure the energy companies favour, or whether smart meters will be rolled out in a fully competitive market, which Ofgem favours.
The government originally intended to announce its decision in May last year. This was pushed back to November. And then to March. We're still waiting. According to the government's chief scientific adviser Professor John Beddington, global demand for energy could jump 50 per cent by 2030. As the energy gap grows, the demand for resources will "create a crisis with dire consequences". There isn't a second more to waste.
Posted 26 March 2009 : Director.co.uk
