CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1617-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

SMART METER ROLL-OUT

MONDAY 31 OCTOBER 2011

CHRISTINE FARNISH, VINCENT DE RIVAZ and RICHARD LLOYD

MOIRA WALLACE and DARON WALKER

Evidence heard in Public

Questions 1 - 177

USE OF THE TRANSCRIPT

1.    

This a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Monday 31 October 2011

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Jackie Doyle-Price

Matthew Hancock

Chris Heaton-Harris

Meg Hillier

Joseph Johnson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Ian Swales

James Wharton

Amyas Morse, Comptroller and Auditor General, Jill Goldsmith, Director, NAO, Gabrielle Cohen, Assistant Auditor General, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Preparations for the roll-out of smart meters (HC 1091)

Examination of Witnesses

Witnesses: Christine Farnish, Chair, Consumer Focus, Vincent de Rivaz, Chief Executive Officer, EDF Energy, and Richard Lloyd, Director of Consumer Action, Which?, gave evidence.

Q1 Chair: Welcome, everybody. Some visitors from the Ghanaian Parliament may be joining us later.

Thank you to the three witnesses for giving us the early session. The information you give us is totally non-confrontational. It helps to inform our questioning of the accounting officers at a later stage. It is interesting to see the energy company squeezed in between two consumer organisations.

The opening question to all of you is: what is the benefit to the consumer and to the energy companies, from your perspectives? Would you like to start, Christine?

Christine Farnish: We see a number of potential benefits-

Q2 Chair: Or disbenefits.

Christine Farnish: Perhaps I will start with the benefits. They are potential benefits, because they require certain things to happen to be achieved. One of the key benefits, if we get this right, is for consumers to be able to control their energy consumption and be certain about the costs that they will pay for energy. The legacy, traditional way of billing for energy, as you know, is retrospective and often leads to inaccurate, estimated bills, bills that are missed and nasty surprises, because billing systems are not the most modern and sophisticated in the world.

If we get the roll-out right, consumers will be able not only to see how much cost they are clocking up every day in their own homes, but know what they are going to pay at the end of the billing period. They will also have signals on how to reduce those costs and, hopefully, simple tariffs they can switch to, or suppliers they can switch to. That is, if we get it right. We see some very big risks in the way in which this huge, sophisticated, complex programme is rolled out over the next eight to nine years. It is really important that the UK squeezes out the greatest possible benefits for consumers; otherwise, it ain’t going to be worth doing.

Q3 Chair: What are the risks, if you could tell us quickly and succinctly?

Christine Farnish: The risks would be missed opportunities for consumers to save money; unfair costs and disproportionate costs being passed on to consumers, because they will be the ones who end up funding all the development; vulnerable and low-income consumers who depend on energy to live their lives having to pay disproportionately more. Those are just a few.

Q4 Chair: Mr de Rivaz, your perspective as a supplier.

Vincent de Rivaz: Thank you for inviting me. I don’t feel squeezed at all. I am pleased to be with customer champions. We are all customer champions, so it is good to work together. If we can work more together to rebuild the trust in our industry it will be good for everybody.

I concur with what has just been said, but I want to give a wider perspective on this big issue. We are talking about a £12 billion programme; installing 50 million meters over a five-year period will, according to current assumptions, cost that amount. To give a sense of the scale of the changes compared to today, the number of meter installations per year will be multiplied by five; the average number of installations per day will be multiplied by four.

Q5 Nick Smith: Sorry, what will be multiplied by four?

Vincent de Rivaz: The number of installations per day will be multiplied by four. The number of installers needed will be multiplied by six; the time to install the meters will be multiplied by two to four. The obsolescence of the new meters will be to the tune of 10 years, while today it is 25 to 30 years. We should not underestimate the sheer scale of the challenge for UK plc. We have got to get it right-£12 billion. There is a huge implementation risk in the project, if we want it to provide the expected benefits.

Q6 Chair: Where does that lead you? Where is the benefit to you? If there is a risk, are we going too fast?

Vincent de Rivaz: That is a key point. We have to have project management that gives the design authority the time to design what is needed. We should certainly not start before the DCC is in place. We should certainly not cut corners in this big project, because at the end of the day we could have the opposite of what we expect, which is engaged customers, and we do not want to disengage them. We want to use this huge project to rebuild trust in our industry, in Government, in all the parties involved. That is, for me, the most important thing. In the past 20 years, this industry has been de-integrated.

Q7 Chair: Has been?

Vincent de Rivaz: De-integrated. It was all one business: networks, suppliers, generators. For all sorts of reasons, it has been de-integrated. In a sense, when we talk about smart meters, we talk about smart grids, and smart grids are all about smart producers, smart suppliers, smart distributors and smart customers. The smart meters are just a tool to achieve that goal. We have to recognise that it is a huge and complex challenge to move from something that has been de-integrated to something that is much more integrated.

You can see that we know that our customers-you will probably not say the opposite-are complaining a lot at the moment about the complexity of our industry and the complexity of the tariffs. In a sense, smart meters are about having more sophisticated tariffs. That is the second paradox that we need to achieve. For me, the last paradox is that we have a mandatory programme, decided by the Government, that, instead of being in the regulated part of the business-the networks-has been put in the competitive part of the business, the suppliers. It is a supplier-led project.

We have those three paradoxes-from de-integration to integration, from complexity to simplicity, and being mandatory in the competitive market-and it is our duty, all of us, to help the Government to get it right and to support the Government in the very robust project management of this huge programme.

Q8 Chair: The benefit to you, if I can put it crudely-I will come on to Mr Lloyd-is that it cuts your costs. You do not have to send people round to read the meter, so there is a massive cut in costs; it allows you much more information, so you increase your sales; and it allows you to cut off people without anyone necessarily interfering.

Vincent de Rivaz: It starts by increasing the costs.

Q9 Chair: Except that you pass that on to the consumers.

Vincent de Rivaz: That will be the challenge-how to avoid the roll-out of smart meters ending in an increase in bills. It is designed to decrease the bills by decreasing the-

Q10 Chair: The evidence so far is that you are rather good at passing on increases in costs to the consumers, and rather bad at passing on decreases in costs to the consumers.

Vincent de Rivaz: I am very comfortable with that. My company has been the last to increase its tariff, and it has done so by the lowest increase. We are the cheapest in the industry.

Q11 Chair: And the first to decrease the value?

Vincent de Rivaz: Two winters in a row, we have had a winter price freeze.

Q12 Chair: Most of the stuff that we see, to which we will come in a minute, shows that, on the whole, the energy companies have been fast to increase their prices when energy costs have increased, and very slow to decrease them. There is not a great deal of confidence in the world of the consumer that you have the consumer’s interests at heart. It seems to me that the reason why the energy companies are interested-correct me if I am wrong-is that smart meters cut your costs by allowing you a new relationship with your consumers, so that you can flog them more, and by allowing you greater flexibility in switching off if people do not pay. There are concerns there about poor people. You do not agree-or do you?

Vincent de Rivaz: I agree that we have been slower to decrease our tariffs than to increase them.

Q13 Chair: The benefits to you as a supplier are that smart meters cut your costs, allow you a new relationship so that you can sell more products-and different products-to your consumers, and give you greater freedom to cut off people if they do not pay.

Vincent de Rivaz: It has to be a win-win. If not, it will not happen.

Q14 Chair: How do you answer that assertion?

Vincent de Rivaz: Reducing costs will start by increasing costs. That is the basic point. We need to be cautious and conscious of that. Why are we doing it? Because we think that we are in a world of engaging the customers to make them more in charge of their energy bills. In a sense, we are in the business of delivering power to the consumers, and I think we should also be in the business of empowering the customers.

Having said that, the goals-energy saving, CO2 reduction, etc.-are right. We need to get it right. The £12-billion investment is the equivalent of two nuclear power plants. It is one of the largest infrastructure project investments in this country. It is not about spin, and it is not about making us happy because we have good ideas; it is about making it efficient and affordable. We need to learn from the experience of others. They are experienced in Australia-we know them well-and they are experienced in California, the Netherlands and France. It is very important that we learn about the others.

My proposal is that, when DCC is in place, and before the roll-out of all the 50 million meters we want to change, we have large-scale pilot projects, to give us the chance to listen to the customers, because clearly it is a policy choice, and it could become a political issue. I think it is right that DECC is in charge and is accountable, because it is a big political issue, beyond being a policy issue. Let us have the modesty to have these large-scale trials-maybe in six regions-before pressing the button to complete roll-out, as well as listening to the customers. The engagement of the customers is critical. If we do not have them, it will fail.

Richard Lloyd: I am in the unusual position of agreeing with Vincent that engagement is absolutely critical to this. I agree with Christine on the potential benefits to consumers. It seems to us that the benefits to the suppliers are much clearer and more realisable. The benefits to consumers will depend on their engagement, and the degree to which this will succeed will depend on consumers letting suppliers in through the front door and trusting that the suppliers will give them something that will help them to save energy.

We have asked consumers what they think about smart metering, and only one in 10 said that they saw smart meters as a means of reducing their energy consumption. Mostly, people are seeing this as something that will help them with more accurate billing, rather than reducing their costs. If you look at where consumers are today, they do not trust the energy suppliers, who are the very people who have to get through the front door and install. Consumers are not convinced that opportunity will not be used to sell products. This is an industry with a history of mis-selling, in particular on the doorstep.

The degree of disengagement is such that it is a big leap of faith to assume that people, as consumers, will realise the benefits from the technology going in. It is pretty unrealistic, given where consumers are right now and their degree of disengagement with the industry and their lack of trust in it, that those assumptions will turn out to be true. Affordability for consumers is the primary concern here. When people know-as they have found out in Australia, where I have been working recently-that they are paying for these devices and cannot see, or are not educated into seeing, that they are saving energy as a result of having the devices in their homes, people will get very angry indeed and will start refusing to let people through the door even more.

There is a huge risk here. The consumer engagement part of this programme is nowhere near ready. The Central Office of Information has been commissioned to work that up, and it is being abolished, so there is another risk. It is unclear to us at Which? right now whether this programme will deliver, in an affordable way, the kinds of benefits that have been assumed.

Q15 Chair: What would you do now to protect consumers?

Richard Lloyd: We must see much more emphasis on protecting consumers. For example, we have been asking all the suppliers to sign up to a promise not to sell when they are installing. Let us get some trust back into this relationship on a voluntary basis. We need to see the consumer engagement programme. What will that mean? Will it be effective enough? Will it genuinely change consumer behaviour? Through that, we can have some realism about the benefits to consumers. Will this go at the right speed? Is this going too far, too fast, considering that we are planning to go further than the European Union Directives? Will the energy companies co-ordinate their approach to this, or will it happen in a haphazard way that will further fuel mistrust and confusion? There is a lot about the practicalities and the consumer-facing side of this that we are talking to DECC about practically hourly. It is a bit late in the day, because we are close to this programme being started. The voluntary roll-out is already going on with British Gas and others as we speak.

Q16 Austin Mitchell: That is a huge worry, because it is such a big programme. It has all the capacity for going wrong that computing for health had. On this kind of scale, it can be very expensive. Let me ask about the way that it could go wrong, because the test work done seems to have been done on volunteers. In other words, there are people coming forward and saying, "I’ll accept a smart meter. I’d love one." Those are likely to be earnest, middle-class types-the kind of people who take Which? and join the Consumers Association-yet your own note says that the installers found unexpected difficulties that will increase the costs. For example, there was the person who had installed a meter in his shower for some reason. I thought that was quite good. I do not know whether he was tempted to turn it on when the meter reader comes round. There are others, however, for whom the meter is an integral part of the kitchen furniture, and they have to knock stuff down to get a new meter in. Is it your impression that, because the costs proved to be higher in middle-class cases keen to have the new meter, the costs will be much higher when it comes to the general population?

Richard Lloyd: You are right that there are Which? members who have actively engaged with this, and who have talked to us about their experience. They have quite liked having the smart meter and have used it, but they have used it not to reduce their consumption, but to get more accurate bills. That is the primary thing that people have told us.

Q17 Austin Mitchell: They are the kind of people who would like to be able reduce their bills.

Richard Lloyd: Which? is for all consumers, and a whole range of people are part of us, but you are quite right that these are savvy consumers who care deeply about their energy consumption.

I think the big problem with this is the assumption that competition in the energy industry will somehow keep costs under control. We have a regulator that says that we need a whole range of reforms to the energy supply industry, because it is not competitive. If, say, installers are repeatedly unable to gain access to a property, or find many more meters in showers, or if there is a whole other range of scenarios in which they have to keep going back to properties time after time-in part because people may, when word about this goes round, say, "Look, you’re not coming in. Last time you came in, you sold me a tariff that was terrible"-that is how the costs can escalate. Relying on competitive forces in this market, which the regulator itself says is not competitive, to keep those costs under control is pretty naive.

Austin Mitchell: So the costs will be higher, and the benefits less-

Chair: Austin.

Austin Mitchell: Can I just ask-

Chair: No, and I will tell you why. We are going to move to the issue of the proper accounting officer, and I have a list of six people. If everybody keeps it really short and sharp, we can move on to the accounting officers for this and question them.

Q18 Meg Hillier: Mr de Rivaz touched on the issue of the speed of installation, and I have heard from other sources that there is a minimum estimate of about 12 being installed a day, per fitter. I wonder whether there are any estimates that you have heard of that you can talk about, and whether you feel that that is over-ambitious. The deadline is getting closer, so it is as if we are adding more installations a day. Perhaps I am misreading it.

The other thing that has not been touched on massively is the issue of privacy, information, and where the information flow goes. The meter goes in, and it benefits the energy company and potentially the consumer, but can you turn the tap on or off, in terms of where that information about your use goes?

Chair: Who are you asking that of?

Meg Hillier: Vincent de Rivas sort of answered that already, but I wondered whether any of the others wanted to comment.

Christine Farnish: I am very happy to chip in here. We think a maximum of somewhere between six and eight installations is the most that anyone should realistically aim for if we do not want to build up a host of problems that will cost even more money to put right; 12 is definitely over-ambitious if you want quality installations.

On privacy, there are some serious concerns about the use of customer information in this programme. We believe that customers should have control and choice over the way in which their own personal data are used.

Q19 Chair: What does that mean?

Christine Farnish: That means a very, very strict code of practice and rules that the suppliers should have to abide by, which are enforced by the regulator, as to what is legitimate in terms of the use of consumers’ information. If you think about the model here, we have a model of suppliers being asked to roll this initiative out, rather than any other part of the energy industry, which leads to some quite interesting conflicts of interest in certain areas. Obviously, suppliers want to sell more energy, attract new customers and keep the customers that they have, and they want to sell more products to the ones they have and pass costs on to their customers. We are not entirely convinced that that is the optimum model for roll-out.

We think that there should be reflection, in the light of the learning that there has been from the work done so far in this very complex programme, where technology is moving very fast and where there is a huge number of unknowns in terms of how consumers are going to respond, so there is time for more consumer research and evaluation of the real benefits, and of how to achieve consumer benefits and keep costs down.

Vincent de Rivaz: I agree that this big £12 billion programme relies entirely on the engagement of the customers. If we are not spending enough time on listening to them and checking with them how engaged they are, we will miss the point; I repeat that strongly. That is why I make the proposal that before there is a complete roll-out, there are some pilot zones-large cities or a mix of large cities and rural areas-where we can really test, real scale, how it works, because the trials made have not been really conclusive about customer engagement. They have been interesting for technical points, about the connections, but not really for big issues of customer engagement.

On what has been said about installers, according to the DECC impact assessment, the average number of installations per installer will be five-it is even lower. It will probably take between one and two hours, whereas today it is just 30 minutes. We need to take into account the very important point of safety. Electrical meters and gas meters can both be potentially dangerous if the safety priority is not present. It is not about rushing to make these changes; it is about doing them well.

On your programme about not selling but just installing, I understand and I fully support the sense of this move. At the same time, I would not expect installers to spend two hours or three hours in a house and be purely silent.

Q20 Mr Bacon: Are they going to sell them a greenhouse or something?

Vincent de Rivaz: If we are talking about engagement of the customers, and you have installers bringing in a meter, saying, "I’m sorry, I cannot say anything to you," there is a problem about engagement.

Richard Lloyd: No, we are not saying that; we are saying that you should be there educating, helping people to understand what the device will do, not trying to sell them insulation and other products that they may not need.

Chair: I call that soft selling.

Q21 Nick Smith: Mr de Rivaz, you have painted a very cautious picture this afternoon. You have talked about the scale of this initiative, the complexity of it and the need for collaboration, not competition, in a varied marketplace. Basically, you have said, "Stop this train-I want to get off, unless there is large-scale piloting."

Vincent de Rivaz: No. I am used to large-scale projects; I have made a reference about nuclear. A £12 billion investment project is not something I am uncomfortable with. I am just saying that, when you have such big numbers with such potential political impact, because of customers’ reactions, we need to be well organised.

To be honest, I think DECC is doing a good job at the moment. That has not always been the case. I have been in this industry for 10 years, and I have been hearing about smart meters for 10 years-2002 was the first time, and we are in 2012 more or less. Probably, in all those years, we have lost a bit of time, in talking and talking without having a real implementation programme. Since last year, DECC has put in place an organisation which I think is fit for purpose. So I am not at all suggesting that we stop; I am just underlying the importance of not cutting corners, jumping guns or underestimating difficulties.

We have to talk about privacy. In our modern world, there is the question of privacy; I do not need to say it in this place, after what has happened in the newspaper industry. I do not want us, the suppliers-the energy companies-one day to be accused of breaching the privacy of our customers. We need to have strict rules and we need to be conscious that those rules may limit some of our expectations-we cannot have everything at the same time. Our customers are asking for more simplicity. We need to be sure that the system that we are developing will not bring more complexity. That’s all I’m saying.

Q22 Nick Smith: Do you think that the proposal will be a success without large-scale piloting and trials?

Vincent de Rivaz: There is a plan to have the DCC, which is a communication centre, in place. By the way, there is more than £3 billion in this. That is just the tool to organise the communication between the systems. Three billion pounds is a quarter of the total investment of £12 billion. It would be folly to start the roll-out without that in place. For the roll-out to start, I suggest that we have a phase of large-scale pilot projects before the final roll-out.

Chair: British Gas wouldn’t necessarily agree.

Q23 Chris Heaton-Harris: Monsieur de Rivaz, thank you for coming. I am an EDF customer and generally very happy, but I appreciate the pressure for simplified bills, because at the moment, mine might as well just be in French.

I have one point, for clarification more than anything else. You said in your opening remarks that the new smart meters would have a life expectancy of 10 years. If we slow down the project’s roll-out to the pace at which the meters can be fitted, it will take about 10 years. Is this more of a job creation scheme? Are we painting the Forth bridge, or are there proper benefits for consumers? Are those figures correct?

Vincent de Rivaz: This question of affordability and a business case has to be absolutely part of the process. I am not in a position today to sign anything off and say that we have an absolutely compelling business case. I am not saying that we will not have it; the proof still has to be given.

Yes, it is a new technology-it is about the digital world-and it is fair that meters move from old technology to the new one. However, new technology, by definition, is more frequently obsolete. I am talking about 10 years, and maybe it will be a bit longer, but not necessarily a lot longer. If we talk about £12 billion and we have to do it every 10 years, you can see the issues here. Let us take a deep breath. DECC is certainly listening to that. As an organisation, it is now much better than it used to be and much more efficient in its project management, organisation, design authority and all the rest to address these issues.

We have talked about safety, affordability, privacy and simplicity. The impact on CO2 emissions is also important. At the end of the day, the acid test for me in everything that we do is to ask, "Will it increase the trust that our industry is desperately lacking?"

Chair: I will keep you moving because I am conscious of the time.

Q24 Joseph Johnson: Monsieur de Rivaz, you operate across Europe. Is any other EU country going as far and as fast as the UK in implementing the EU directive?

Vincent de Rivaz: I think it will be interesting for your Committee, if you are ready, to organise visits to other countries with help from DECC, for instance France, which has made a different choice with a similar objective, to compare different cases. In France, there was a distributor-DNO-levy, which we had hopes for, but was unsuccessful, I have to say. So now we are where we are. The Government have chosen a supplier-led system. However, let us see how the experience of other countries can help, because at the moment, the cost of the system in France is significantly lower than the cost in Britain. We need to be sure that for UK plc, we will be better off at the end of it. It is a different approach-perhaps less ambitious, but also less costly.

Q25 Joseph Johnson: So no other country is going as rapidly as we are in implementing the directive, just to get to the nub of the matter?

Vincent de Rivaz: I hesitate to say that we are going fast, because, as I told you, we started to discuss that 10 years ago-the question is now. The go-live of DECC in 2014 is probably optimistic.

Chair: Optimistic?

Vincent de Rivaz: Optimistic.

Richard Lloyd: May I add that it is instructive to look at the case of Australia, which has been trying very ambitious roll-out, particularly in Victoria, where it has been mandatory. The scheme became a huge election issue there because consumers were saying, "What’s this box that’s appeared on my property? I’m paying for it. I’m now getting bills with time-of-use tariffs that actually don’t work for me, particularly if I’m at home during the day. My costs have gone up; I can’t see benefits." It has become a political issue to the extent that the state government has commissioned yet another cost-benefit analysis to see whether it should proceed. So where the scheme has progressed at an ambitious pace and on a mandatory basis, it has run into significant problems.

Q26 Joseph Johnson: Thank you. Again, to Monsieur de Rivaz and the two other panellists: can you think of better ways of spending £12 billion with the end objective of reducing energy bills?

Vincent de Rivaz: It is not either/or. We must invest in generation capacity and we do it, as you know-£12 billion is the order of magnitude of two nuclear power plants in terms of cost. Smart meters are a needed evolution of our industry.

Q27 Chair: Needed by whom? You.

Vincent de Rivaz: Needed by all of us. We have not been leading it; it is mandatory-all-out. We do what we are asked to do.

Q28 Joseph Johnson: But can you think of other projects with a higher benefit-to-cost ratio than smart metering?

Vincent de Rivaz: At the moment, it is too early to say what the benefits will be. There are assumptions-DECC is making assumptions about the impact on the residential dual fuel bill, saying the scheme will start by costing something and at other times will be highly beneficial. There is no reason to doubt the DECC assumptions-it is providing, through robust processes, interesting numbers.

But for me, we have not reached the point at which we have a clear definition of the specification of the DCC and a clear timetable for implementation, including the pilot project. It is too early to say what the benefits will be and to compare systems. But we need both generation and other investment-and empowerment of customers is a battle we need to win.

Christine Farnish: It is questionable whether £12 billion spent on this initiative is better value for money from a consumer’s perspective than investing in energy efficiency in the UK’s housing stock, which, compared with most European countries-indeed, with just about every other developed country round the world-is a huge problem. That said, we need to move to smart technology, but only if we do so in the most cost-effective way, which requires better management and co-ordination, and only if the programme really is driven from consumer interest, so that consumers get the benefits. We think that approach needs a rather different mindset, and stronger control and overall co-ordination than we have seen so far.

Q29 Matthew Hancock: What do you all think of the cost difference between trying to roll out the scheme to a mandated 80%, as per the directive, and trying to hit every single household in the UK. Sorry, hit is pejorative, I mean-

Richard Lloyd: Reach.

Q30 Matthew Hancock: Yes, reach every household. Many people say that getting to the hardest to reach involves a much greater marginal cost. The hardest to reach may be people who think that they will not benefit, so they may not be only those measured on a scale of income or on a poverty indicator. What would be the relative cost of 80% and 100% roll-outs?

Richard Lloyd: I do not have that number, but it is the right question to be asking. There is probably a very good reason why no one else in Europe is trying to achieve the kind of penetration that we are. The assumptions about the cost of installing a smart meter per household in some cases will be dramatically higher. I am thinking about tower blocks and more remote areas where communications problems will be harder. It is self-evident that for some parts of the country where people’s meters are reaching the end of their natural life and where there is more engagement and interest in this, costs will be lower. However, I think reaching that 97% will be extraordinarily expensive. That is probably a question that you should put to DECC later.

Christine Farnish: Clearly some segments of the community and some geographical areas can probably get this technology installed relatively cost effectively, if it is done in a properly planned and co-ordinated way. But getting the last 20% could be far more expensive. There is usually a tail at the end of every distribution curve, as we know. There is nothing magic about the 2019 date. It is a target and it is aspirational. So, to my mind, if the cost-benefit shows that those costs go up significantly to get the last tail, we should wait until it is cheaper to do it. We should also think about tying in with other areas, for example water meters. There is some talk of intelligent water meters and the whole notion of having intelligent systems using radio wavelengths in homes. They could be multi-purpose. I do not think we have looked widely enough at the wider cost-benefit of progressing some of this across our entire housing stock and across all consumers yet. We should perhaps think more widely about a bigger package of benefits for a fixed cost.

Vincent de Rivaz: I can understand the benefit of having smart meters for water, but if we try to do everything at the same time we may be led more by complexity than simplicity. It is an interesting point. I am not sure about this.

Q31 Chair: From the consumer point of view, if in five years’ time we come along and say we want a water meter in everybody’s house, it is a double cost to the consumer and a problem. So there is something in that, is there not?

Vincent de Rivaz: Yes, but we have decided to have a supplier-led roll-out. It is the people in charge of supplying gas and electricity who are delivering gas and electricity meters. It is difficult for them at the same time to do anything about water meters, which have a different technology. The connection to the pipes is not the same. So we should not seek to be a master of all trades. If we are Jack of too many, we are master of none.

Q32 Matthew Hancock: And what about the 80% point?

Vincent de Rivaz: It is part of the feasibility study that has to be looked at. More can be less. That is a very sensible point.

Q33 Fiona Mactaggart: Who at the moment spends most per therm of energy? Is it people who are wealthy or people who are poor?

Christine Farnish: It tends to be people who are poor and on pre-payment meters.

Q34 Fiona Mactaggart: Would the smart metering programme do anything to help them?

Christine Farnish: Potentially it could because you could move to a better tariff structure that did not have that additional up-front cost built in because cash has to be collected. It is linked to whether people will still pay in cash or through some other mechanism for their energy.

Q35 Fiona Mactaggart: Are you saying that smart meters will stop people being able to pay in cash?

Christine Farnish: I think it depends on how the whole system is rolled out. One of our concerns is that there has not yet been any thorough analysis of the benefits for relatively vulnerable and low-income consumers in this whole programme. We think that is an urgent piece of work that needs to be done. We think that theoretically there should be some benefits there, but they have not been articulated.

Q36 Fiona Mactaggart: I am sorry: I have read the papers, but I am new to this Committee. One of the things that I do not know is how this will show in people’s bills, Mr de Rivaz. You get a smart meter, but it is not paid for by the taxpayer as taxpayer; it is paid for by the taxpayer as consumer. When and how does it get paid? Do you suddenly have a really big bill?

Vincent de Rivaz: The DECC assumption is that we will start with an increase of £6 on the average bill by 2015.

Q37 Mr Bacon: Six pounds per-?

Vincent de Rivaz: Per annual bill.

Q38 Mr Bacon: Per quarter?

Vincent de Rivaz: No, no, it is-

Q39 Fiona Mactaggart: But the figure is not capped. It is not included in the decc cap.

Vincent de Rivaz: I am giving you the numbers from DECC.

Q40 Mr Bacon: I just want to be clear; do you mean £6 per year?

Vincent de Rivaz: Yes.

Chair: Per year?

Vincent de Rivaz: Yes.

Christine Farnish: But it will not be transparent on the bills.

Vincent de Rivaz: At the moment, not all the details are given to consumers on the bills.

Fiona Mactaggart: French bills.

Vincent de Rivaz: We should discuss the underlying costs-joules, environmental cost, monetary programmes, energy costs. That is probably something we should do. The DECC estimate is that from 2017 onwards, the net impact will start to be positive. By the DECC estimate, by 2030 average bill savings will be as large as £42 per household. Those are the assumptions.

Richard Lloyd: I think you have raised a really important point about poorer households paying more, which is the case now. A potential benefit of smart metering is that a whole new range of tariffs-time-of-use tariffs-can be available. That is the more sophisticated equivalent of Economy 7. We know that poorer households are even less engaged with their energy supplier than the rest of the population and, as Vincent has said, this potentially brings a whole new layer of complexity that seems to us more likely to mean that poorer households are even less engaged, and therefore less likely to benefit from the new time-of-use tariffs than others. There is a real risk that those least able to afford their energy are least helped by the smart meter roll-out.

Chair: Jackie, finally.

Q41 Jackie Doyle-Price: I want to pick up Christine’s response to Jo’s question and the idea that we are talking about £12 billion of investment. If we look at figure 7 on page 27 of the Report, we can see that the benefit to users is only £6 billion and the energy-saving component for households is only £4.5 billion. You have mentioned the need to upgrade houses, which would be a more effective tool, but do you have any estimates of the kind of investment needed to get that kind of energy saving?

Christine Farnish: I do not, but I could write to you with that information if it would be helpful.

Jackie Doyle-Price: I think it would be.

Christine Farnish: I would not like to leave the impression that it should be one or the other. They both need to be done, but clearly consumers have to benefit from this sort of national investment.

Q42 Jackie Doyle-Price: Are there any other tools that you think would be useful in encouraging better energy saving among households?

Christine Farnish: One thing we do know, and it is a point that has already been touched on, is that consumers need simpler information, simpler bills-bills and charges that they can understand expressed in terms that they can understand-so that they can make comparisons between one supplier and another. They need fair and affordable access to energy. Those things are absolutely fundamental needs of consumers, and they are not going to go away. It does not matter how much education we try to do, those are the basic requirements in the new world as well as now. We are a long way from being able to satisfy those requirements today. We have to design this new technology in a way that satisfies them better tomorrow, and I think that that is the big challenge for getting this programme to work.

Chair: Richard and then James-very quickly.

Q43 Mr Bacon: Mr Lloyd, I want to re-visit your last answer. You said that there is a real risk that those who are least able to pay for their energy will benefit least from the installation of smart meters. Could you put that even more strongly? I am not trying to lead you, although it might sound like it. I just want to know your opinion. Is it actually the case that the way this is designed makes what you just said not so much a risk as a fact? That will be the eventuality. Because of how this is designed, those who are least able to pay at the moment will be, as a fact, those who benefit least from the installation of smart metering. Is that a yes or a no?

Richard Lloyd: It is a yes. That has been the experience in Australia where time-of-use tariffs have been introduced. For example, it is more expensive in New South Wales to use electricity during the day. People who are at home and who use more electricity during the day are not able to benefit.

Q44 Mr Bacon: So when you said "risk", you were just being polite.

Richard Lloyd: I’m afraid I was, yes.

Q45 James Wharton: Very quickly, Mr de Rivaz, if I were running EDF and installing smart meters when the roll-out comes, I would be looking at what I could do to bring benefit to my company, either from investing in the companies that make the smart meters or from investing in a subsidiary company that is going to install them and take a profit. Will EDF make any profit from the installation or manufacture either directly or through any subsidiaries from the roll-out of smart meters?

Vincent de Rivaz: Not from manufacturing. We have no interest in any manufacturing industry. By the way, the rhythm of the roll-out begs the question whether the supplier of the equipment is ready to cope. If the curve is too steep, the price will go up, so there is also an optimum to be funded. There is a basic answer to your question. We are in a business, obviously, where we need to make a profit and to invest in what is needed for the country. But I think also that there is no lasting solution in the energy industry that is good at the same time for consumers, investors and policy makers.

The energy business is a special case, because we are not providing commodities like others-electricity and gas are vital for people-where you can afford to have solutions that would be too favourable for investors, consumers or policy makers. I can give you an example of that. If EDF Energy has been able to increase the electricity price this year by only 4.5%, which is lower than inflation, it is because I made the conscious choice to have a fair balance between shareholders’ and consumers’ expectations. It is also because we are an integrated business. We have had a good year in our generation and, crucially, in our nuclear generation, and I thought it was fair that the customers on the other side of the business would benefit from it. So that is the type of business we are in.

Q46 James Wharton: I do not dispute any of that. Will you just give me a straight yes or no answer? Will EDF, either directly or through any subsidiary companies, make a profit from the actual installation of smart meters? In your projections, do you anticipate that you will make a profit? I am not saying whether you should or you should not.

Vincent de Rivaz: If we are installers, we are going to have a minimum benefit from any activity, including installation.

Chair: Thank you. I am sorry to rush you, but we have the main session with the accounting officers. I am grateful; that was a very informative contribution from you all, so thank you very much indeed.

Examination of Witnesses

Witnesses: Moira Wallace, Permanent Secretary, Department of Energy and Climate Change, and Daron Walker, Director, Fuel Poverty and Smart Meters, gave evidence.

Q47 Chair: On the letter from British Gas, I thought we had all got it. It gives a slightly different viewpoint on the issue.

I am going to start with a series of questions to which I would like short answers, if possible. The programme is funded by industry and consumers, so who is accountable for delivering it on time, within budget and for realising the consumer benefits? Moira, do you want to take that? Let us get the accountabilities right before we go into the issues.

Moira Wallace: Obviously we have to work in partnership with others, but we take the accountability.

Q48 Chair: So you are accountable for delivering this on time and within budget and for realising the consumer benefits? Who is responsible for specifying the data communication service?

Moira Wallace: We are. Again, we are working with experts in industry to get their input, but we are taking the responsibility as a Government.

Q49 Chair: Who is responsible for the functionality of the smart meters?

Moira Wallace: Same answer.

Q50 Chair: What lessons had you learned from the failures of other big IT projects before you embarked on this one?

Moira Wallace: We are trying to learn all the lessons, obviously, and we appreciate all the help that we get from people to do that. We are trying to make sure that we have appropriate time for consultation. You will see that we have done a lot of consultation on technical details, we are working with industry groups and we are trying to make sure that, wherever possible, we use technology that is already working and simple-we are not custom designing, where we do not need to.

Q51 Chair: All right-[Interruption.] But you can see that there is quite a lot of scepticism around the table, as you will have gathered from the previous questioner.

Moira Wallace: Yes, I can.

Q52 Chair: At what points will you be reviewing the programme to make sure that it continues to represent value for money for consumers?

Moira Wallace: We will review it very frequently. We update the impact assessment-the cost-benefit analysis-every time something significant changes, but there are two big reviews that I draw your attention to. First, next year we will be doing the procurement for the data and communications services that will link smart meters in your home up to national systems; we will be reviewing that before we make final decisions on what is quite a big licence award and procurement. Secondly, there will be a review in 2013, by which time we will have quite a lot more evidence from this foundation stage, as we call it.

Q53 Chair: Could you pull the plug?

Moira Wallace: I suppose we could, yes.

Q54 Chair: When?

Moira Wallace: We could pull it then; we could pull it now. We are not planning to at the moment, but we have built-in reviews.

Q55 Chair: Okay. What did you change after the general election? The report says you changed some things. What changed? Because this is a programme started under the previous Government, what changed after the general election?

Moira Wallace: Okay, well a number of changes were made, partly in response to the programme development done under the previous Government. We changed the timetables and accelerated the roll-out, from 2020 to 2019-that is the end of the general roll-out-and we also made a very significant decision, which was to bring the programme in-house into DECC, because previously it had been led out of Ofgem, the regulator. We decided after a lot of thought and work with the regulator to bring the programme into DECC and to hire a multidisciplinary team in DECC, because we saw the decisions as being ones of public policy, as your discussion has already revealed.

Q56 Chair: But your main advice comes from the energy companies, all of which have a commercial interest.

Moira Wallace: No, we get advice from a whole set of interests, including from consumer bodies, which we are involving very directly for all the reasons that have become obvious, and from security bodies. Of course energy is involved, but consumer bodies and, indeed, the public are involved, too.

Q57 Chair: Are you pretty confident in the advice? You have spent a lot of money on consultants. I am not sure in whose interests they are, but millions have gone on consultants-I can’t remember the figure, but it is somewhere. Are you confident that you are looking at the consumer interest, or is it the energy company interest?

Moira Wallace: We are very clear that this has to be a programme that delivers for consumers. You have heard lots of reasons why-it won’t work if consumers are distrustful, so it has to work for consumers-but of course we are taking advice from the energy industry, whose systems will have to adapt. They run their own billing systems, and we need to make sure that they test and prepare them and that they work for them. They employ the installers, so we need to have their buy-in and their expertise.

You talk about consultants, but I want to say that we are using external expertise and not advisory consultants to come in and substitute for our policy thinking. Actually, there are a lot of skills that we will need once for a short period during the life of the programme, so where it is more cost-effective to do so, we are getting those skills from outside.

Q58 Chair: One final question, and then I will go to Jo. The whole programme seems to be premised on the fact that consumers will benefit because there is competition between suppliers-that seems to be the premise underpinning your policy thinking. Yet all the evidence, such as the latest report from Ofgem-the March report that it is working on-says that competition is being stifled. None of us can understand our bills; even if you try to find a better supplier, it is jolly difficult to find your way through it. There is supplier behaviour, lack of transparency and all that stuff, so what on earth gives you the confidence that there is real competition between the six big suppliers that will drive consumer benefits through the introduction of smart meters?

Moira Wallace: There are several bits to that. First, we are not at all complacent about competition in the supply market, and we are encouraging Ofgem to do more things to encourage competition and to reduce the barriers to new entrants. We are also encouraging the public to switch, because the best way to drive competition is for people to move on if they do not like what they are getting. So, there is quite a lot that we are doing to try to keep that market competitive, but we are not complacent.

However, what is the alternative? The alternative would be to have this rolled out by the network distributions. Nobody knows who runs their network. You wouldn’t recognise the names of the companies, and you have no choice about it. If you had it done through the networks, it would be done by monopoly. If you didn’t like it-if they were bad at it-you would not be able to switch.

There is already some evidence of different companies-I think you have it before you-seeking to differentiate their offer to the customer on the basis of smart meters, giving people a smart meter early and giving them more information about their bill before it lands on the mat. I am not complacent, but I do think suppliers are the right people to do this, because they are the people you deal with as a customer, and they are the people you can fire if you don’t like it.

Q59 Chair: I want to press you on that, and then I will go to Jo. You haven’t really answered the question. The point is that Ofgem’s March report found that there wasn’t competition. That is all the evidence at the moment: it demonstrates that, although there are six big ones, competition is stifled. I think those are the words used.

Look at price changes. I said when they gave evidence that prices go up rapidly, maybe a week or a couple of weeks in between. They all raise their prices pretty swiftly when energy goes up, but they are much slower about reducing prices when energy costs go down. Yet you have premised this all, from the consumer point of view, on the fact that there is competition. Of course, I accept that you are doing everything-you are not complacent, and you are encouraging competition. However, the fact is that there isn’t any competition, so the premise on which you have based your analysis seems questionable to me.

Moira Wallace: We are not complacent, but there is competition and a lot of people benefit from it. Some 60% of people have switched supplier, but 40% have never switched supplier. A lot of people benefit from competition, and one of our challenges is to ensure that more people do and that it is easier for them to do so. Smart meters could actually help with that and help people fire their energy company sooner if they are not happy.

The only alternative would have been to have put this with the network businesses, which you cannot fire if you don’t like them because they are a monopoly. We have put it where there is most competition. We do all kinds of things, and so does Ofgem, to try to encourage more competition and reduce barriers to entry, because it is very important for all the reasons you give.

Q60 Joseph Johnson: Would you agree that a Government programme that is mandatory is effectively a tax on gas and electricity users?

Moira Wallace: I would not try to be the person who classifies taxes, because we have the Office for National Statistics to do that. I don’t think it has taken the view that this is a tax. It does look at a lot of our programmes to try to establish that. We are mandating it, though, because we believe there is a strong benefits case to do that.

Q61 Joseph Johnson: What efforts have you made to reduce the cost to the consumer of implementing the directive? I refer you to the evidence of Mr de Rivaz, who said we could learn a lot from the way that France is doing it. In particular, I think he said it is at half the cost of what the UK is doing.

Moira Wallace: In France they are only doing electricity; they are not doing gas. So it is half the cost and half the coverage. I think I am right about that.

Daron Walker: Absolutely right.

Q62 Joseph Johnson: Have we made any effort to benchmark across the EU as to how other countries are planning to implement this directive?

Daron Walker: The first thing to say is that the programme will comply with the EU directive, but the design that we have taken is not driven by the directive. We have designed the programme because we believe that it has a strong business case. The business case is £7 billion net present value benefit. That is the first point.

We are learning from other member states and other countries around the world, and we will continue to do so. To go to the specific example of France and the costs there, it is very early days. They have not published an impact assessment. They are rolling out electricity only. Our conversations since the publication of their press notices have shown that they have not included optimism bias or financing costs. So it is still quite an early stage at which to assess the true cost of that potential roll-out.

Q63 Joseph Johnson: May I just push you on the £7 billion net present value of the benefit? Page 6 of the NAO Report says that the range of error for initial estimates of large projects with a big ICT component is, I think, something between 10% and 200%. We are starting off here with two very big numbers, and the £7 billion net present value figure is really the difference between two quite substantial numbers, so were the cost side of that equation to increase by anything between 10% and 20%, there will be no £7 billion net present value figure. How confident are you of the £12 billion initial cost figure?

Moira Wallace: As you go through these programmes, it is good practice, when you are very unsure about things, to include a large optimism bias and a large range of error, and, as you become surer and get more information, to reduce it. Over the history of this programme, we have become surer, and we have actually gone out and looked at the things that people will be buying and installing. There is no doubt about their cost, because they are available, and you can almost buy them off the shelf. We have not said, "Ooh, we might pay 200% more for this." So we have tried to use actual information.

In terms of the actual £11 billion, £2 billion of that is an allowance for a cost escalation, so there is quite a margin in there. Of course, all sides of this calculation could change, but £2 billion of it is allowed for cost escalation and then there is a very substantial cushion of customer benefits.

I want to say that we have been sitting there listening to the evidence from your first group of witnesses, and it is absolutely key that customers understand this, that they welcome it, and that they see how this can help them. But actually this can really help them if the alternative is that we are using meters from the 1970s that actually give you no idea at all of when and how you can save most energy or what your bill is going to be. I do not think that that is a very pro-customer proposition.

Chair: I have a whole lot of people: I will call Ian, Austin, Matt, James, Meg and then Nick.

Q64 Ian Swales: I would like to build on what you have just been saying. If you take figure 8 and you are talking about the total cost of installation as £11.3 billion, and then you look at figure 7 and you see the list of benefits that the Department have claimed, I would like you to talk through who you think pays the £11 billion and then who receives the £18 billion, because there seems to be mismatch between the consumer paying and some of the key beneficiaries, who are actually the suppliers and the network. How do you see it all working?

Daron Walker: On the profile of how benefits are spread over time, we heard earlier from EDF that, initially, the costs on each household bill will go up. The highest net figure is £6 per annum per household, but, over time, as the meters are rolled out and installed, the costs will decrease, because the meters will be installed, and the benefits will then flow through to consumers. We envisage that bills will go up initially, but, over time, as the benefits come through from the suppliers’ side, but also as consumers start to engage with the in-home display and start making their own savings on energy, you will see a reduction in bills. We estimate that to be around £20 in 2020, rising to over £40 per household, on average, by 2030.

Q65 Ian Swales: For those who go on this early, all they are going to see is pain. That is basically what you are saying.

Daron Walker: People who get on early will straight away be able to interact with their in-home display and have better information about their bills and respond to that information and make changes.

Q66 Ian Swales: But you are saying that, on average, their bills will go up.

Daron Walker: On average, across the whole of all households, they will go up.

Q67 Chair: Will the £6 up and the £20 down be visible to people? How will I see that as a consumer?

Moira Wallace: Actually, you will have more visibility about your bill than ever before, because you will be able to see it in your kitchen through your in-home display.

Chair: Yes, you will be able to see when you consume, but how will I know what I am paying extra?

Q68 Ian Swales: May I build on that? This is a massive act of faith, because we are talking about suppliers benefiting to the tune of £9 billion through this programme, and you are kind of assuming that that will somehow find its way back to consumers. We are also talking about networks-presumably the National Grid Company and so on. We are essentially talking about private companies here, so how are you going to ensure that the benefits that accrue to these private companies-generators, network operators, suppliers-actually do end up paying for this programme in the eyes and bills of consumers?

Moira Wallace: A number of comments have been made, and I will try to answer them all.

I do not expect the cost of smart meters to be identified separately on the bill. They are costs that suppliers will face, and the suppliers will try to recover them from all customers. The costs will be very small, and we estimate that they will be about £6 per annum per customer in the early years. We rely on competition-we have just been talking about that-and differentiation between suppliers, which we want to drive very hard. That is why we have put the smart meters in a competitive part of the market, rather than the regulated part of the market.

There are a range of benefits, starting with simply understanding what your bill is going to be. If you compare it with your bank account, we are all quite used to going up to a hole in the wall and working out what our current balance is; we cannot do that with energy, because the energy company does not have the information. Now we will have that information on a display in our house. It will have all sorts of very simple, very accessible ways of showing us when we are using an enormous amount of energy. They will probably turn red, so there will be a direct, do-something-now trigger to reduce energy.

Q69 Ian Swales: I do understand that. I am looking at the motivations here. Will there also be an in-built disincentive for energy companies to go quickly? Will the ones that go slower be better placed in this programme, because they will not have those extra costs and will be able to compete better than the ones that are going faster? Is that a possibility?

Moira Wallace: The costs and benefits go hand in hand. There are companies-I think you have had correspondence from one of them-that want to go very quickly, partly because they see it reducing their own costs for meter readers and call centres to deal with people saying, "My estimated bill is crazy." So they will save themselves money. It is, of course, costing them money to install early, but the costs and benefits will go hand in hand. Different people are taking different views. We are trying to ensure that, in this transition where different companies take different views, the consumer is protected and the one thing we do not lose is the ability to switch, the interoperability. We do not want people being told, "Oh no, you can’t switch to a better tariff because we are the only people who have this meter, and you can’t switch to someone else." That would be going backwards, which would be a big mistake.

Q70 Ian Swales: If some companies are so keen to go quickly because of the operational benefits, why will bills go up? If they see such an advantage for themselves, why do we think that consumers’ bills will go up?

Daron Walker: In effect, the devices you are putting into the home are more costly than the existing meters. So the companies will need to recover the costs of those higher-cost meters.

On the point about people going faster and people going slower, you have heard from British Gas, which sees this as a real centre of its consumer strategy. British Gas is looking to develop energy services, and it believes that this can sit at the heart of its consumer offer. British Gas believes that it will attract new consumers, which will, of course, drive competition and people switching.

Other companies have taken a slightly different view. EDF has taken a more cautious approach, and there are people in between. Part of the programme is about assessing the balance between the relevant positions and ensuring that we strike a sensible balance for the whole programme and for consumers.

Q71 Austin Mitchell: At the end of the day, after all that, what are you going to do to ensure that the benefits are passed on to the consumer? I see there are going to be real costs for the smart meter, but what is there to ensure that the benefits are passed on? Are you going to enforce prices?

Moira Wallace: There are two parts to that. The first is to ensure that we have the most competitive market that we can and to encourage-

Q72 Austin Mitchell: Yes, but that requires a consumer to shop around. What are you going to do?

Moira Wallace: We are going to encourage consumers to shop around. We have just had a big summit, which we organised with consumer groups, Ofgem and energy companies.

Q73 Austin Mitchell: Well, I have shopped around, and all I have done is been screwed up by various companies, which are predatory. What did you as a Department-

Mr Bacon: They saw you coming, Austin.

Moira Wallace: You have to shop around, and you have to keep shopping around. All the evidence is that it is the people who do not shop around who really get screwed, in your words, because they are the ones who are paying for the attractive deals that lure you in. So we do actually need to encourage more people to switch. That is the No. 1 thing we need to do.

In terms of smart meters, we need everybody to understand and we need to help people to use them and to see what they can offer. I was quite disheartened by some of the negative comments that were made in the first half, which is a reminder of how important it will be for all of us to get across that this is a way for the customer to take control.

Q74 Austin Mitchell: I’ve got a very aggressive wife, and, unless you’re going to do something, I think I’m going to be roughed up.

I just want to ask you a couple of simple questions. Who is going to make the meters? Are they made abroad and imported, or are they made in this country?

Moira Wallace: I do not think we have a meter manufacturer in this country.

Daron Walker: We basically have some factories in the UK that assemble parts. It is likely that some of the meters will be manufactured overseas.

Q75 Austin Mitchell: Are we doing all this for the benefit of foreign manufacturers of smart meters?

Daron Walker: There will be real benefits in the UK, both to consumers-

Q76 Mr Bacon: Whereabouts overseas? Are you talking about China or Germany?

Daron Walker: It will depend on how the energy companies procure the meters. They will shop to get the best deal, so that they can get the most cost-effective procurement. That is an important part of reducing costs in the system. At the moment, they have not made their decisions, but it is likely to be overseas.

Q77 Austin Mitchell: I would have thought that it would have made sense, in any sensible industrial strategy-not that this Government have one, because they probably do not-to have a credible agent, so that if you have a huge programme like this, the benefits go to British manufacturing and you attempt to channel benefits that way.

Moira Wallace: There will be benefits. I do not know that we can guarantee that they will be manufactured in this country. This is a very big engineering and infrastructure programme, because it involves replacing more than 50 million meters in 30 million households.

Q78 Austin Mitchell: They would not take that position in France. Can you tell me how many meter readers, such as lovely Rita the meter maid and all the ugly ones, will be made redundant by this?

Moira Wallace: I do not think that I can put a number on it, but in the long term there will be far fewer meter readers and in the short term there will be a lot more meter installers. There will be pluses and minuses.

Q79 Austin Mitchell: Paragraph 1.4 of the NAO Report states, "The Government’s timetable for suppliers is to start the mass roll-out of 53 million smart electricity and gas meters to 30 million homes and smaller non-domestic premises in 2014". In a letter, British Gas said, "British Gas, without a 2012 start, will be unable to complete its roll-out of 16 million meters by 2019." What are you going to do about that?

Moira Wallace: That letter is talking about something else. It is talking about agreeing some of the precursor specifications by 2012. Those are the technical specifications of the meter and the data and communications company that underpin it. We expect we will be pretty much on that timetable. British Gas is very keen to go fast and is an early adopter. It is already going fast. We are committed to the mass roll-out in 2014. The letter is not talking about a mass roll-out; it is talking about some of the technical specifications and getting them set in stone.

Q80 Matthew Hancock: I also have a very impressive wife. I just wanted to put that on the record. My question, like Austin’s, is completely unconnected to that fact.

Reading the NAO Report, the broad goals of smart meters are something that it broadly supports. Certainly your arguments in favour of it are strong. The questions that are coming, and will come, from the Committee are first about the roll-out of such a large project, especially given the history of large IT projects in the public sector. If the DCC spend is £3 billion, as one of the earlier witnesses said, that is a huge programme, which gets into the same area as some of the large unsuccessful IT projects. You will understand the high degree of scepticism around that.

Secondly, this is mandated to reach every household without large-scale pilots. May I press you on the question that I asked the previous three witnesses: what extra cost, per household, do you see for reaching all the households above the 80% threshold, where it is really a matter of strong support, rather than mandating? The difference between aiming at 80% and aiming at 97% or 100% is the gap between being able to go for most households, unless they object, and going for all households, even where there are difficulties and problems. What is the difference in cost between those two targets?

Daron Walker: I do not think that it is a simple equation, because of two things. First, we are clear that we want all to benefit. We are looking to have this as a truly national roll-out. Above 80%-

Q81 Matthew Hancock: Sorry, let me just pick you up on that. You are clear that you want all people to benefit. If people do not think that they will benefit, you still want them to benefit, even if they calculate that they will not benefit.

Daron Walker: Can I answer the first question, and then come back to that, if that is okay?

Q82 Chair: We have a bell, so can you answer very quickly? We will go, and then come back.

Daron Walker: One of the things that is clear is that while you still have 20% of households operating under a dumb system, you effectively have the cost of two systems in place. The equation is not simply that some of those will be more costly to reach. We have to assess the overall cost of running two systems in parallel. As we get to very high levels of penetration, the cost of running two systems will diminish, because you will mostly have a smart system. Can you remind me of the other question?

Q83 Matthew Hancock: The second question is tied to that. You were saying that you were mandating, if it helps people. It sounds rather paternalistic to say, "We have decided that we will help everybody."

Moira Wallace: Can I have a go at that? We are not mandating it for individuals. We are not going to come and say to anyone’s aggressive wife that we will get a warrant, burst into their home and fit a smart meter against their will. We want every supplier to offer this. It offers considerable benefits to the whole system and will reduce costs, which we think is an advantage. We want to offer it to everyone, but we will not push it in the final cases. On the question of what the costs and benefits will be on an 80% roll-out, we will come back to you on that.

Q84 Matthew Hancock: Well I would be grateful for that, as well as for an explanation of what other countries are doing under the EU directive. Given that it says 80%, they must have a reason for that. You have just stated a reason to be different, but are there any other countries that are going for as high a target as us?

Daron Walker: Italy has gone beyond 90% for rolling out electricity meters, for example.

Q85 Matthew Hancock: I will repeat the question. Have any countries gone as high as us? The difference between 90% and 97% is very significant.

Daron Walker: Others are still pursuing, over time, the higher numbers. Why do we not say, as Moira has suggested, that we will write to the Committee?

Chair: Within a week, otherwise it holds up our report. We must go and vote.

Sitting suspended for a Division in the House.

On resuming-

Q86 James Wharton: Looking at this scheme, one of my main concerns, which we touched on in our earlier evidence, is the different ways that energy companies might find to make a profit out of it, particularly by compartmentalising the different areas of their business. It always reminds me of the petrol stations and the oil companies. Whenever there is a big problem with fuel, big oil companies say that they do not make any money at the forecourt. They make all their money on the profit margin, because they supply their own forecourt, but because they compartmentalise it, they can make that argument.

I am looking at figure 9 on page 32, where it says that the indicative cost of an electricity smart meter is £104, about 70% of which is made up from the meter, the in-home display and the wide area network module. For me as a layman, that means that about 70% of that expected cost is basically "the box" and whatever goes with it. If an electricity supplier says, "We will put your bill up by £6 a year to meet the costs", and then manages to negotiate a better deal from a supplier on its meter, how will you ensure that the framework is such that those sort of benefits are passed on to consumers, and we do not see the companies making a profit by the back door? Effectively, we could see that £6, which is meant to cover the cost of the meters and their installation in real terms, being driven down, and the difference being retained by the installing companies. How will you try to avoid that?

Moira Wallace: Well, I am sure we will be monitoring this very closely and trying to work out what is happening to costs, but as to how we expect that to be controlled, my answer is the same: through competition. We want there to be as vigorous competition as possible. If we can see new market entrants, that will be great. We are trying to reduce the barriers to that. We are trying to encourage people to be tough on their energy suppliers if they do not like what they are getting. We are not about to introduce a regulation regime to replace competition. We think competition will be better than regulation, and we have to make competition work.

Q87 James Wharton: I understand the argument, and I am generally a fan of competition. The argument you have made previously is that one of the ways you will encourage competition is by simplifying the information that people have, so that they can make direct comparisons. If companies can compartmentalise their costs, that will make the information more difficult to decipher. Would you consider having a separate column on the electricity bill that said, "This is the cost of your meter, as it is being fed through on to your bill", or something that gives people the information to make that informed judgment? This goes against everything you have been saying. You have said that the simpler and more straightforward it is, the more competition there will be. If you allow these companies to install and to look at those costs potentially under a different heading, you make it more complicated, and they can hide costs in the bill.

Moira Wallace: We can think about it. There might be some pros and cons there.

Daron Walker: One of the things that consumers often complain about is the complexity of their bills, the amount of information they have and the difficulty of assessing all the different costs. This is one relatively small part of the costs of the whole system. Is this the specific cost that you would choose to put on your bill, over the other costs? It is around 1% of the cost of your bill. There is a debate going on about whether regulation will be better than competition. We believe that for the energy market, energy suppliers and consumers, competition is the right way forward. The key thing is to make sure that that works as effectively as possible. The reforms that Ofgem is proposing on simplifying tariffs, on tackling poor behaviour-all of those elements-are trying to drive better competition and better behaviour in the market. We think that is the best way of delivering benefit.

Q88 Chair: Nobody can deny the importance of competition, but you are doing it on a wing and a prayer. If you could prove that competition took place in the market, that would be one thing, but all the evidence so far suggests that this is not the competitive market. It also suggests that consumers are being screwed in the way that prices go up without justification. You are not in a competitive situation. It is no good just saying, "We believe in competition." Of course, we all believe in competition, but you are not delivering it. You have given us, the consumers, no certainty that competition will exist here to drive better consumer outcomes.

Moira Wallace: We all share the desire to see the best competition we can. One reason why prices have gone up is because gas prices have gone up. There are global developments here that we should not forget about.

Q89 Chair: Sorry to interrupt. Of course, there is some truth in that, but the evidence from Which? and all the consumer studies is that prices to consumers have gone up beyond energy prices, that they do not go down when energy prices go down, and that there seem to be cartel movements in the way prices are set. All the evidence is there to that effect. Are you denying that? Are you saying that what Which? says, or what every consumer body says, is wrong?

Moira Wallace: No. I think I am saying the same as you. People are obviously frustrated if they think that competition is less than perfect in any way, and we are not at all complacent about it.

Chair: "We are not complacent about it" is not good enough, Moira. At the moment there is no competition, and you are driving this policy based on a belief that there will be competition. It is not there.

Q90 Fiona Mactaggart: When did you last meet one of the attempted new entrants, outside the big suppliers?

Moira Wallace: I have not met them personally, but we had all the new entrants in to the Department to talk to them about what the things that could help them were.

Q91 Fiona Mactaggart: What did they say?

Moira Wallace: They said a variety of things. They said that the big thing they would like is what Ofgem is doing through what is called its liquidity reforms, which is to require the vertically integrated companies to sell more energy than they currently have to, so that the market is opened up to people who are smaller. They are also interested in cutting red tape. The other thing they want to know is that people are going to be responsive, and that we are going to encourage switching. Smart meters are part of that story. Simpler tariffs are the other thing, because tariffs are bamboozling. I accept your suggestion about having another thing on your bill, but bills are really poor, in terms of the information that they present. People need to be able to understand how things compare.

Q92 James Wharton: The concern that I have is that we are going to see a very presentable argument from suppliers, who will say that their profits through electricity supply are staying stable, for example, whereas in reality they start to make their profits from the installation. We have already taken evidence that indicates that they are looking to share some of the benefit of this programme, if it goes forward, which basically means that they want to make a profit out of it. They want to be paid for the extra work that they are doing. That is understandable.

What I would like reassurance on is that this is at the forefront of your mind, and that when you draw up these contracts, you will have provisions in them that mean that you are not tied down to whatever you think is going to be the case today. That way, if the situation changes-the meters will probably get cheaper as time goes on, and as people buy more-you can react to it and ensure that companies do not make excessive profits out of this Government scheme.

Moira Wallace: What I will say to you is that we are absolutely committed to delivering benefits for the customer. There are very sizable benefits to be had. That depends on constraining the costs, and on delivering the benefits. We will be all over this; we will be monitoring it, and monitoring the underlying costs. I take your suggestions about putting things on the bill, and about implicitly regulating. I do not know that we will go down that road; I very much doubt it. Your first question was: "Who is accountable for delivering this, including the benefits?" We are. There is a difference between very big numbers, and we will keep a handle on that.

Q93 Chair: But what will you do if it is not happening?

Moira Wallace: We will have to rethink. As for whether we are suddenly going to tear up the existing market structure, I do not think we are, but we are going to try to make sure that it is as competitive as possible.

Amyas Morse: Forgive me, Chair. This might have got lost between James’s question and your answer, Moira. Just to be clear, we are not talking about contracts, are we? You are actually going to be mandating a standard design. You are not going to have contracts with these companies.

Moira Wallace: With the energy supply companies, no, we are not.

Amyas Morse: For clarity’s sake, will the monitoring primarily be looking at the companies’ accounts to see how profitable they are? Is that mainly how it will be done? How will it be done?

Moira Wallace: What I am talking about is the monitoring of the roll-out, and of the technologies that are going in-how much they typically cost, and what the customer experience is. We and Ofgem do look at the companies’ accounts, but we are talking about the actual costs and benefits that are here-what we think people paid, and what we think customers’ benefits and other benefits are. The whole point of the way we are running this programme as a proper programme is to say, "What is it that you are trying to achieve and expect to happen, and are you on track?"

Q94 Chair: Monitoring price?

Moira Wallace: I am sure that we will, yes.

Chair: That seems pretty important.

Q95 Meg Hillier: I have some quick final questions. The 10-year life that Vincent de Rivaz talked about is much shorter than the life of the current meters. Does that worry you, and what is your plan for 10 years’ time, when all that is complete?

Daron Walker: The 10-year life that EDF referred to was for the phase 2 meters that are being rolled out in small numbers at the moment. The expectation-what we have set out in the impact assessment-is that the meters that will be part of the mandated roll-out will have 15 years of life, not 10.

Q96 Meg Hillier: We are going through this whole exercise, and 15 years later, there will be a lot of installers, because there will be a constant roll-over of installers being appointed to start again. It is like how the Forth bridge used to be, although that has been solved now.

Daron Walker: At the moment, the assets have a given life that is slightly longer than 15 years. It may well be that it is longer than 15 years for these assets, but at the moment, that seems to be the most sensible central assumption for the life of these assets.

Q97 Meg Hillier: That gives quite a lot of leeway to energy companies to either make a profit or come back and say, "You’ve got to go through all this again," and charge consumers more. You are saying that it is a guesstimate at this point.

Daron Walker: From talking to manufacturing and energy companies, 15 years seems to be the most likely asset life for these meters.

Q98 Meg Hillier: I think there is an opportunity for British manufacturing to get a better product out there. We had a letter from British Gas, which takes quite a different view from EDF on the roll-out. British Gas has been ahead of the game in getting out there. Is that perhaps partly because if it goes early, it can help shape the technical specification that you have not yet published? Do you think that that is possible?

Moira Wallace: I think that its going early is a big part of its commercial strategy. We are undoubtedly learning from early adopters, but we are developing the technical specification. All the energy companies are doing that, and British Gas is a part. However, I would not say that it was having undue influence over the process. It would be crazy to keep the process secret from the energy companies, because we would run the risk of being in the wrong position, and they would run the risk of installing lots of things that were of no use.

Q99 Meg Hillier: Clearly, DECC will be under some pressure, particularly from the big six, because they want to roll out their own models and to influence the technical specification. If you came up with a specification that was different from that of British Gas, it would have to start over again. There would be enormous pressure on you not to do that.

Moira Wallace: There would be. We have talked clearly and have been straight with those doing large-scale early adoptions. We have regulations in place to ensure that they do not compel people and make people unable to switch. However, we have also tried to be visible about the way our thinking is going on the technical specification, so a huge divergence between what someone is doing and where we are going is unlikely to arise. It is clear that the big six have slightly different views on the matter; they do not all agree with each other. We are also keeping a close eye on consumer interest. As has been mentioned, sometimes there are big differences between consumer interests and the big six’s interests.

Q100 Meg Hillier: Everyone here has talked about consumers and prices, but is tackling climate change not one of the main imperatives? Which is the more important?

Moira Wallace: One of the reasons why we are so keen on this is that it presses a lot of different buttons in terms of policies that we are trying to develop. It helps people to control their bills and reduce their emissions, and also helps us to build up smart infrastructure that we will need for the smart grid in the future, so that we do not need to generate as much for the supply that we need. There are many different reasons why we should do it.

Q101 Meg Hillier: There has been quite a lot of criticism about the cost-benefit analysis. Would you argue, from the DECC climate change point of view, and from the point of view of your team there, that there could be a higher priority-that climate change could trump the direct cost-benefits to the consumer, and that there is a generational benefit if we use this to help tackle climate change?

Moira Wallace: We think that all the reasons are important. Meeting our climate change targets is challenging, come what may. Before we came on stage, you were asking whether there were other ways to spend money to reduce people’s bills. Actually, you need to do lots of insulation, and you need to do this as well. You need to do quite a lot of things in parallel to meet our climate change targets.

Q102 Meg Hillier: But £12 billion is a lot of money to spend on an untested approach; there have not been area-wide pilots. To go to the question that was asked earlier-I suppose you have to say yes to this-have you looked at what that £12 billion could do if it was spent in other ways to reduce emissions?

Moira Wallace: We do not accept that it is untested now, or that it will be untested by the time we do mandated roll-out. There is already a huge amount of evidence-some from this country, some from other places-on a lot of early roll-out during the foundation stage. Once we have agreed the technical specification of the meters, there will be extensive trialling. If right now I were to sign in blood and say, "Come what may, there is going to be a mandated roll-out on 1 April 2014, and I won’t hear another word between now and then," that would be untested, but a lot of testing has gone on, and a lot more will come along.

Q103 Nick Smith: I want to push a bit further on that point. In principle, I see the value of the initiative. It could be fantastic, particularly if your points about competition are right, but one thing that troubles me is the assumptions about consumer behaviour. It feels to me as though you are rushing your fences a little. Why have you not done large-scale random trials on this already, to reduce the risk of what seems to be a very large-£12 billion-punt?

Moira Wallace: That is one of the points made about the evidence that we have. There was a very diverse set of trials, but they were not set up on a randomised control basis. Maybe we should think about doing that, but that does not disguise the fact that there is a huge weight of evidence about the potential savings from customer behaviour-evidence not just from here, but from many different countries internationally.

We can develop the evidence base further, but you have to make a decision on whether you are going to allow, mandate or ban smart meters. In fact, you have to have one of those three positions. We decided that the best one for customers, in our view and on the basis of the evidence, was to make sure that they were available to everybody and that we mandated to modernise our system. We will continue to work on the evidence, but you either have to ban them, allow them partially or mandate them. It has to be one of those three.

Q104 Chair: And what is your justification for mandating them?

Moira Wallace: We think that that gives the best cost-benefit, and ensures that everyone has the chance to benefit. If you have a very segregated system, which you talked about earlier, there is a set of people-all the people who are switching, all the people who are extremely savvy about this-who will opt into it and be on very clever time-of-use tariffs, and the differences between those who are very savvy about energy and those who are not will get wider. That is one reason behind our thinking that everyone should have one.

Q105 Nick Smith: Mr Walker, I want to tease out a further point. You talked about learning from overseas, but Mr Lloyd, one of our earlier witnesses, just came back from Australia and painted a problematic picture. He said that Australia’s decision had been reopened for consideration. What is your learning from Australia?

Daron Walker: There are a number of things that I would point to. One was that they did not have a particularly significant central programme overseeing the process. They relied on, for example, the technology risk sitting with the companies, which created its own issues. They also rolled out time-of-use tariffs very early in the process. We are seeking to learn from the experiences there. There are other examples. For instance, in the Netherlands, they did not take privacy seriously enough in the initial stages, which created a big backlash by consumers. The key is to learn all those lessons. The central programme that we are putting in place will look to address the shortcomings that we have observed elsewhere. That is my response.

Q106 James Wharton: There was some acknowledgement that different types of customers would gain different levels of benefit, for a variety of socio-economic reasons. In the early years, how closely will the Department monitor where the electricity companies install smart meters to ensure that they do not have the wrong impact? For example, if an electricity company installs smart meters where people will not get the maximum benefit, it will get all the advantages of going through the scheme, but electricity use will not drop as much as we would like it to drop in the early years, which will increase its profits. I am sure that our moral and good electricity supply companies would never do that, but what will the Department do to ensure that they do not and cannot?

Moira Wallace: One piece of evidence-gathering that we are doing in the next stage is this: we have funded dedicated research into low-income customers in the next roll-out-what impact it will have on them, and their particular issues in engaging with it. We will, I am sure, look at patterns of roll-out, but we are doing detailed qualitative research with low-income customers, who will be part of the next phase of trials, because we are interested in and concerned about this.

Q107 James Wharton: Briefly, is the priority to cut national electricity use or to save money for low-income customers, because the two may not run in parallel?

Moira Wallace: As I said in response to Meg Hillier, this programme meets a variety of goals: controlling bills, cutting carbon, energy security. I will take the question away and look at it but it is not our only policy to deal with the needs of low-income customers. We believe it can make a real contribution and we need to keep a special eye on how it impacts on them.

Q108 Joseph Johnson: Going back to Nick’s point about consumer behaviour, Ms Wallace, you said that there was a huge weight of evidence to support the suggestion that consumer behaviour would change. Paragraph 4.5 of the Report says that the evidence for consumer benefits is inconclusive. The NAO is fairly equivocal about the evidence. In particular, the point about perhaps benefiting from a mass randomised testing seems to have a lot of support from what it says here about the problems of "self-selection by participants and inconsistencies in the use of control groups". I wondered whether you wanted to say as confidently as you did that there is a huge weight of evidence in support of consumer behaviour.

Moira Wallace: I am not just referring to that study. This is something that many countries are engaged in and there is new evidence coming in all the time. There has just been a major international study.

Q109 Joseph Johnson: Since the NAO’s Report.

Moira Wallace: Yes, this month there has been a major international study, which has looked at something like half a million cases. As I say, it was compiled across many countries. It has generally found larger benefits. That does not make me think that instantly that would happen, just because somebody has published a new study about what happened in other countries. I do agree that we need to do more evidence gathering here. Actually, the evidence we have, through the EDRP project, which is what the NAO Report referred to, did give us some very important insights about how things might work in the UK market. It was not a randomised control trial, but it did tell us useful things about what might work, what did and what did not work. We have incorporated evidence from that, so we got quite a lot of value out of it.

Q110 Jackie Doyle-Price: I want to come back to the issue of the directive, which was presumably the impetus driving this forward at this time. The directive said to install to cover 80% of domestic electricity consumers, and to consider the cost and timetable for installing intelligent gas metering. How did you get from meeting the baseline of that directive to rolling out across the board in gas and electricity?

Daron Walker: We basically built up an evidence base for this programme over a number of years. That started in 2009 when we consulted on different delivery models for how we might roll out smart metering. Fundamentally, the business case and the analysis we did showed that, by doing the dual-fuel roll-out, we were going to deliver a bigger net benefit to society and consumers. We have gone through quite a rigorous process over the past three years to gather evidence, to develop our programme, and we are confident that we have delivered a model that will generate big benefits for society.

Q111 Jackie Doyle-Price: But delivering the smart gas meters is more expensive than electricity meters.

Daron Walker: The meters do cost more than electricity meters. There may be something in the Report about it, but we are clear that the benefit of rolling out together at the same time is a positive outcome for society. There are a lot of different ways to do it. Some other member states are rolling out electricity only. We are convinced that the case for rolling out dual-fuel meters is a strong one. That is why we are pursuing that model.

Q112 Jackie Doyle-Price: I am trying to compute this in my head. It seems to me that, if part of the agenda is to encourage energy saving, you can see with electricity meters that consumers will be able to react and alter their behaviour. However, surely use of gas is more demand inelastic than use of electricity.

Daron Walker: First, there is evidence that people respond to the information they are given in home display. If you think about the efficiencies you will drive if you end up having a smart electricity system, you will need to keep all of the associated costs of having a dumb system on the gas side. You will still need meter readers, and you will still need consumer helplines for all those elements of the system. So we are pretty clear that the synergies of doing them both together are strong, to make the case.

Q113 Jackie Doyle-Price: That is exactly it, isn’t it? If we look at figure 7 of this report, we can see that, yes, you have got a £12 billion investment but that the net gains here are actually to the suppliers, with the reduced impact of having meter readings and so on. On the actual benefit to consumers and users, for users it is £6 billion, but if you take that down to domestic consumers it is only £4.5 billion. This comes back to the point that Jo made earlier, that this is actually a tax on the consumer to pay for these smart meters.

Daron Walker: You are absolutely right that, initially, these benefits will be going to suppliers as they recover the costs of installing the system, but as and when the system is installed and all the meters are out there, they will then have a lower cost to serve consumers and those cost savings will be passed through to consumers-

Chair: How can you be sure?

Q114 Mr Bacon: You make that sound like a prophetic, biblical certainty. What makes you so certain?

Daron Walker: It comes back to the same point that we have been pursuing, that competition is more effective than regulation. Fundamentally, we believe that competition is the right way to ensure-

Q115 Chair: You believe it, but it is not the reality in this market.

Daron Walker: But then the choice is about whether you believe that regulation would be better than this. This is not really just about smart meters-

Q116 Mr Bacon: Hang on, this does not stop being a regulated industry. That is an extraordinary sentence, actually: competition is better than regulation. This is a regulated industry. Competition is better than regulation in the foreign exchange market, and you have perfect competition in the foreign exchange market. In the regulated utilities, you necessarily have a regulator; in this case it is called Ofgem, and the issue is not whether you regulate but how and to what extent you regulate in what is, essentially, an oligopolistic situation. Do you agree with that, because the person behind you is nodding-she obviously does?

Daron Walker: I agree that we have a regulated market, but we are discussing price regulation really. We believe that at the retail end competition will drive better cost-effective pricing for consumers-

Q117 Chair: Where is the evidence for that?

Moira Wallace: We have the lowest electricity and gas prices in Europe. So you can compare systems, and you do get different results out of this.

I know it is a while back, but may I come back on the point about gas?

Q118 Jackie Doyle-Price: Yes, please.

Moira Wallace: I can see that there is an argument developing about whether we have over-implemented a directive. One of the reasons we want to include smart meters for gas was not because we thought, "How can we implement this directive three times over?", but because gas is such a big part of people’s energy bills in this country. There are actually really big savings to be made by quite simple things-turning down your thermostat, turning it off when you go out for the day-and making that visible in pounds and pence, which is what smart meter in-home displays will do, could be very powerful. People can actually see the clock running and see what they spend.

Q119 Jackie Doyle-Price: But the reality is, the way to get down gas bills is not by having meters, it is by having investment in your housing stock so we are not heating the air above our houses.

Moira Wallace: We need to do both. A lot of people do not know how to operate their heating controls, or just don’t.

Q120 Jackie Doyle-Price: But who is to say that they will with smart meters? We all get our bills every quarter, we can all see what we are spending-

Moira Wallace: Yes. My gas meter is in the cellar, my electricity meter I have to stand on a chair to read and they are expressed in units that I can make no sense of, and I am the permanent secretary of the Department of Energy and Climate Change. The meter does not say to me, "Moira, you went out today, you should have switched your gas off, and by not doing so here’s how many pounds you have spent." I would find that useful.

Q121 Jackie Doyle-Price: Perhaps that is a lesson for you to think about the information-

Moira Wallace: It is, I shall reflect on it, but I am quite keen to share it with others.

Q122 Jackie Doyle-Price: I can see the advantages in the synergy of implementing both simultaneously, but particularly for suppliers, frankly, because they can then go in and in one fell swoop put the meters in. But it comes back to the point that figure 9 shows: the cost of electricity meters is £104 for installation and the cost of a gas one is £136, which means that the overall cost of this is £240 that will be passed on to the consumer. We look elsewhere in the report and it says that the average benefit over a year will be £23 per bill. Again, surely it comes back to this being a tax on the consumer, to meet this EU directive.

Moira Wallace: We think that there is a very strong benefits case for doing this, in helping people to control their bills, helping the nation to tackle climate change and-we have not talked about this much today-paving the way for smart grids, which will really help us manage the overall system better. So we think that this is very considerably in the consumer’s interest, and that is what all the cost and benefit calculations that we have done show, but it is obviously up to us to demonstrate that.

Q123 Mr Bacon: Can I just ask about the £6? Several people have said that the additional cost to the consumer will be £6-that is to say, £6 on top of the bill. That is correct, Mr Walker, isn’t it?

Daron Walker: That is the net impact.

Moira Wallace: In the early years.

Daron Walker: That is the net impact in the early years, because you have a combined effect of the customer-

Q124 Mr Bacon: Let’s just talk about the gross impact.

Daron Walker: The gross impact maxes out at £14 a year.

Q125 Mr Bacon: So £14 a year for getting one of these smart meters that does both. Yes? Fourteen-1-4?

Daron Walker: Yes.

Q126 Mr Bacon: And it cost you £240-£104 plus £136-and you are saying that the actual cost is £14 per year, so you are paying for it over 17 years. Yes?

Daron Walker: I am saying that that cost reaches a maximum of £14.

Q127 Mr Bacon: Hang on. The consumer is paying for this thing. It costs £240. Over how many years does the consumer pay? They do not get a bill that is suddenly £240 higher one year, do they? So they are paying for it over a number of years. Over how many years are they paying for it?

Daron Walker: It would be spread over the life of the asset.

Q128 Mr Bacon: Right-£240 divided by £14 gives you 17 years. You have just said these things last only 10 or maybe 15 years.

Daron Walker: Fifteen.

Q129 Mr Bacon: Fifteen years.

Daron Walker: We have profiled what the average impact on bills will be as the roll-out happens. On a net basis, that combines the savings that-

Q130 Mr Bacon: Instead of having the net basis, it would be better to have all the costs and all the benefits and then we can look at them.

Daron Walker: Well, we have both. I can give them-

Q131 Mr Bacon: I am always suspicious when I see large charts of benefits and I do not see lots of charts of costs. You are talking about £6 a year, which is a very good line. In fact, it is the sort of line that insurance companies intent on mis-selling might try to use. Plainly, it is not £6; it is £240. That is probably the first piece of information the consumer needs: "This is going to cost you £240. That is the gross cost, because there are benefits from it, and here are all the benefits you are going to get. The benefits are £23 and £40" rising to over £40 in 2030-I think that is what you said-"depending on how much you reduce your consumption."

By the way, I think your assumption is quite modest. A 2.8% reduction, for those who have these meters compared with those who do not, is a perfectly credible assumption to me. I just think the consumer needs all the facts. So far, the facts they are getting are that this is going to cost only up to £6 in any one year-that is what you are saying-but it is actually £240 in total. Why not start with that, and then tell them about the benefits.

Moira Wallace: We are getting some valuable free advice for our consumer engagement strategy.

Q132 Mr Bacon: I am very keen on giving free advice.

Moira Wallace: And we will value it and reflect on it.

Q133 Chair: What does that mean?

Moira Wallace: It has been incredibly striking hearing first-hand from you and from the earlier witnesses, and being reminded of, the many ways that people could see this as not being in their interests. There are many risks, of which we are terribly conscious, but there are also huge advantages. When you think about the fact that most people have no comprehensible way, as they are running up the biggest bill they face, of knowing how big it is or what they could do to reduce it, that is quite a big benefit that we have to get out there and sell. You have to help us, and we have to help you to do that.

Q134 Chair: But you could do it on existing bills. There is nothing, in regulation, to stop you making these ruddy energy companies produce comprehensible bills now-full stop. It does not depend on smart meters. We would all love it if you did that.

Moira Wallace: That will not tell you day by day, hour by hour.

Chair: No, but it would give you the start of something over which you could begin to get in the competition that you are so keen on. At the moment, all the Which? research demonstrates that when you switch suppliers, you are quite often being conned and you do not save money. At the moment, the whole thing is so opaque, even for the rather more informed audience you have in front of you.

Q135 Mr Bacon: It is probably because £6 is deeply misrepresenting it, rather than because I am correct and my numbers add up, but if it is £6, £6 times 53 million customers is £318 million. If that is spread over 10 years it is £3.1 billion, and over 15 years it is £4.7 billion. If you take the £240 per meter number and multiply it by 53 million customers, you get £1.2 billion.

You make it sound as though the consumer will put in £6 and get out between £23 and £40. That sounds great-it sounds like a benefit of somewhere between 3.8 and 6.6 times, which is a cost-benefit ratio to die for. Anybody would go for that. Yet when you look at the summary of all the benefits, of the £18 billion of benefit, consumers get only £6 billion-they get only a third of the total benefit. If they are actually getting a benefit of four to six times what they are putting in, it suggests that somebody else is getting more benefit. Am I missing something? Is it because it is not £6? Is it actually a lot more than that, or what?

Daron Walker: When we gave the figure as £6, that was the net average impact on bills at the peak, when meter installation is at its highest. We have a set of numbers in the impact assessment that effectively shows, year by year, what we expect the net impact to be on the average bill as the meters are rolled out, and £6 is the peak net figure for a dual fuel customer.

Q136 Mr Bacon: But that is assuming that the assumptions about reductions in energy consumption are correct.

Daron Walker: Absolutely.

Q137 Mr Bacon: Right. Consumers are not actually thick; they are very distrustful, for very good reasons. In this particular industry, they’ve been rogered; they’ve been rogered in the insurance industry and lots of other industries as well. They have every reason to be sceptical. Wouldn’t it be easier just to be plain and simple, tell them the raw numbers and say, "Here are your total costs, here are the total benefits, arranged depending on how often you turn off your fire when you’re not using it and so on, and here is the potential total benefit," rather than coming up with a spivvy number like £6?

Moira Wallace: I think that is the first impact assessment that has been described as "spivvy". Well, maybe not the first. I would like to make a distinction. We are using those numbers in a very technical document called an impact assessment, which is not our consumer engagement strategy. You make some very good points about explaining what will happen when, how they can benefit most and what it will cost. Those are perfectly good points. We would not pretend that the numbers in our assessment are a marketing tool or are about engaging the consumer.

Q138 Fiona Mactaggart: Are you concerned that you trust these companies too much? We have already heard that they charge poorer people more for each therm of energy. You say that the average expectation will be £6, but I do not see any suggestion that that will be capped in any way, or that it will be regulated so that it does not bear harder on the poorer customer. Earlier, Moira said that your job in this is protecting customers. I cannot see that that is what you’re doing.

Moira Wallace: At the moment, lots of people are paying more than they should for their energy, and we need to encourage them to go out and get the best tariff that they can. We are doing lots on that at the moment, including writing to the 8 million people who currently pay in cash or by cheque, as we all used to do 20 years ago, saying, "This is crazy. You should get on to at least a direct debit deal. Here’s how to do it."

Q139 Fiona Mactaggart: But poorer people don’t have bank accounts, Moira.

Moira Wallace: Some do and some don’t. There are quite a lot of people who do have bank accounts and could pay by direct debit but do not-I count a number of them among my elderly relatives. There are lots of people who just have a way of doing it, and we need to help them get on to a different means of paying, so that they are getting the better deal that other people are getting and that they are currently subsidising. That is something that we are trying to do quite apart from this, but this might help. In all markets, some people subsidise others if you are not careful. You have to be very savvy. We have to help people who do not have all the tools to do this to be very savvy. Smart meters might do that. They would be much more comprehensible than a bill, however user-friendly you make a bill.

Q140 Fiona Mactaggart: I think you have misunderstood your poorer consumer. I imagine a desperate mum sitting there with her kid’s football kit that has to go into the washing machine, knowing that if she puts it into the washing machine in time for it to be dry by the time the kid has to play football, she will pay more than she should for it. She might not have the flexibility in her life to say, as I would, "Sod it, I can pay the extra."

I am really worried. I am very glad that you are going to do research with poorer customers, but I am concerned. I look at your business plan: smart metering has 12 points of action, vulnerable customers have three points of action. That says something to me: They’re all done, unlike smart metering. It seems to me that there is no engagement between those two programmes, and that there is a real lack of effort to use it intelligently to understand how poorer customers work. The poorest customers know when they spend the most, because they use a key. They are the best informed about what costs what, when. They are therefore the least likely to benefit from this programme, and I see nothing in here in which you are using your regulatory power to protect them.

Moira Wallace: We are trying to identify the ways that poorer customers could benefit, or the ways that they could be prejudiced. We are trying to turn up the volume on the first and turn down the volume on the second, and we welcome any input on this. But in terms of the actual choices that we have made, one of the reasons-I will come back to this-why we have chosen to say that this is what new meters will look like, is that otherwise the market will be cherry-picked. The market will be cherry-picked and some people who have the flexibility to take advantage of very sophisticated time-of-use tariffs will do so, and the differential between what the rich pay and what the poor pay will get wider. So we are trying to do this in a way that actually builds everyone in and makes it available to everyone, which otherwise might not be done in terms of the company’s own commercial incentives. But, as I have said, we are trying to be on the look out for ways we could maximise the benefit to poorer customers and to avoid any prejudice. I have a feeling Daron wants to say more.

Daron Walker: The other thing to add is that a fundamental part of our evaluation strategy that we are working up, and which we plan to publish next spring, will be tracking the distributional impacts, including the impacts on the vulnerable, from this programme. So we are very alive to the issue. I am actually also the SRO for fuel poverty, so it is something I worry about a lot in another part of my daily life.

Q141 Chair: How long do you expect to be in your current job, Mr Walker?

Moira Wallace: A long time, if I have anything to do it. We talked about this. Someone said they are going to ask if you are going to be there till 2019, and I think that that might be unreasonable, but we are trying to keep our SROs in place for a good long time, and Daron has not been there that long.

Q142 Mr Bacon: Mr Walker, the Financial Times reported the other day that the Queen was about to enter fuel poverty. As the fuel poverty SRO, do you have any comment on that?

Daron Walker: It is a very interesting fact that I also read in the FT. There is currently an independent review of the fuel poverty definition.

Mr Bacon: The headline was "They’re changing bulbs at Buckingham Palace".

Moira Wallace: Is it not also the case that she has got a smart meter?

Daron Walker: She has got a smart meter.

Q143 Fiona Mactaggart: Is there a reason why the amount that the consumer pays is not capped, whereas some other charges will be capped?

Moira Wallace: By capped?

Q144 Fiona Mactaggart: There is a maximum. There are some of your charges in your agreement where there is a maximum amount that can be charged, aren’t there?

Moira Wallace: Yes. Some of the investment programmes that we fund directly, but which are recovered from the energy bill, are subject to a cap. This has not been considered as one of those because it has been run rather differently, because it has been run directly by the suppliers.

Q145 Fiona Mactaggart: Why can it not be capped, then?

Moira Wallace: I think it comes back to the competition discussion, which we are now going to head back to for the umpteenth time, which is that our view is-

Chair: Don’t repeat it.

Q146 Meg Hillier: Picking up on Fiona’s points about poorer customers, what are you going to do about people being cut off? There are two issues here. One, the technology makes it a lot easier to do it remotely. Two, what regulatory powers will you have to stop people being cut off, because it is so much easier?

Daron Walker: This is one of a number of things that the regulatory regime will have to adapt to, to take account of these new possibilities. Ofgem consulted earlier in the year on new rules around remote disconnection. There will be licence conditions obligations on energy companies. In addition, they will have to go through a series of checks to establish whether the customer they are about disconnect is vulnerable, and they will have a number of measures before they are allowed to remote disconnect.

Q147 Meg Hillier: It could still happen by accident, couldn’t it, because the technology will allow it-the flick of a switch, or a computer button pressed?

Daron Walker: Again, that comes back to the safeguards in place to ensure that they have a rigorous process before they remote disconnect.

Q148 Meg Hillier: A lot of my constituents use keys-the pre-pay meters-because they know exactly what they are paying. In fact, some of my young constituents use their EMA to pay for electricity and to keep the lights on in the house. That is how they know precisely what is going on. We did not quite get the answer out of you or the other witnesses. Will the new meters allow for people to use some sort of pre-pay? I know that they can see the data more clearly, but they still worry about that bill every quarter.

Daron Walker: One of the potential benefits is that you will be able to reduce the cost of having PPM in the system, so you should see the cost of serving a PPM customer aligning more closely with the standard credit, for example, because you will be able to switch it into pre-paid mode and you will be able to do all that without having to visit the home. The cost of serving should go down, so you should start seeing the tariffs go down.

Q149 Fiona Mactaggart: You keep saying "should" and I understand that. But you believe these companies, which have operated a cartel and which have made it very hard for new companies to develop, because they are not selling enough gas, as you have pointed out. You believe that they will pass this on, but I don’t understand why you believe that, because so far they haven’t. Evidence suggests that they are not passing on savings to customers, so why "should" they? They "ought" to-is that what you mean by "should"? Or do you know they will?

Daron Walker: Ofgem has been tracking various things. One of the things that it introduced 18 months ago, or a couple of years ago, was the requirement for non-discriminatory pricing, to check that if prices are divided by more than the information about cost to serve, the company is no longer complying with their licence condition. Ofgem has taken action and we have seen differentials between tariffs reducing as a result of that. But fundamentally, if you have a pre-payment system that is cheaper, that will reduce costs. That information will be transparent-that it is reducing costs-and the regulator will take action if people are not reducing the differential between tariffs.

Amyas Morse: I have one question, if I may. As I listened to the EDF witness, each time he had a chance to speak he repeated the suggestion that you do substantial area trialling. Are you convinced about that? I mean, why do you think he is suggesting that and are you really convinced that that is not of any value?

Moira Wallace: We do want to do more trialling.

Amyas Morse: But on the basis that he was suggesting? He was talking about selecting quite large urban groupings and carrying out these area trials to see if the behaviour and all the other aspects stack up. I am not recommending it myself, but since he chose to keep on saying it about three or four times in his testimony, I am bound to ask about it. I just wondered what your reaction to it was.

Moira Wallace: We want to do more trialling and I think that we have to see how we can fill in the evidence gaps. I want to think a little bit about the right way to do that. When I say that, it is not because I don’t want the evidence, but there is a balance to be struck here because there is also quite a lot to be said for getting on with this, because the sooner that people can start to realise the benefits, the longer they will realise them for.

So I want enough evidence and enough confidence, but I don’t want this to be one of those programmes that is always a couple of years away from actually starting, because the other thing that Mr de Rivaz said was that people have been talking about this for 10 years. We have a metering system that is 40 years old, in terms of the technology that is being replaced. It is ’70s and ’60s technology, and we would be better placed if we had a different technology. I don’t want this to take for ever.

Q150 Chair: Everybody says that this stuff gets redundant and that new meters will be redundant much more quickly, and we are all hearing about this smart grid that is coming in. So the smart grid comes in and the smart meters are no longer appropriate, so we will have to put in new smart meters. It could well happen. Who pays for that?

Moira Wallace: We are trying to organise it so that we don’t have to do that.

Q151 Chair: But you don’t know, because you haven’t developed your smart grid enough. There is something to be said for developing the two concurrently. You have decided not to do that. You are going for the smart meter first and waiting for the smart grid to come along. I bet the technology will say that the smart meters are no longer appropriate.

Moira Wallace: We are doing everything we can to prevent that from happening, subject to keeping the costs under control. It has influenced a number of decisions that we’ve made, not least because we read the NAO Report. The Report said that we should build in flexibility, and so we’re building in flexibility.

There are two particular places where we are building in flexibility. The first thing is that the smart meter will be modular, so there will be the meter and the communications module, which is the element that it is most likely that you would want to replace first. That will be separate, so we have taken that decision not to have everything in one big box that you would have to completely redo if things change later on. But we are also building in flexibility in the communications procurement that we are doing, to understand if we can now build in the functionality that we need for a smart grid. Would that be worth doing? How much would it cost? How much would it benefit? So we are trying to avoid the situation where, a little while later, someone comes along and says, "No, no, we need the latest thing."

Q152 Chair: But if there are modifications-even though you have limited them-who pays?

Moira Wallace: We would have to settle that at the time.

Q153 Chair: But who would you expect to pay in your current business model?

Moira Wallace: It would depend a little bit, because with the smart grid, it’s more distributed. I do not really want to guess at it; I would just be making up the answer.

Daron Walker: On the meter itself, we have done thorough testing with a range of experts, and we have included functionality for current and foreseeable future needs for smart grids. The point Moira was talking about is that the key area where flexibility is needed is around communications procurement.

Q154 Chair: But at the moment, the industry and consumers are paying for that. You have to modify things for the smart grid. Who pays? It is a simple question.

Daron Walker: We would have to take a decision about whether the cost-benefit of modifying the communication set-up stacked up before we made any changes, but the reality is that if we did make those changes, and there was a positive NPV case for doing that, ultimately consumers would pay for those costs.

Chair: Thank you. That’s what I thought.

Q155 Ian Swales: In this Committee, we talk a lot about money, but one of the big hidden costs that we always discover is slippage in time. I just want to explore whether your programme is actually realistic. First, installers tell us we have only 20% of the capacity that we will need in two years’ time, and that is probably based on an unrealistic level of installations per day. What are you going to do to make sure we have enough people who can actually do what you need when you want to start in just two and a bit years’ time?

Daron Walker: The first thing to say is that this programme is very much a partnership between Government, in the central programme, trying to define the framework; the energy companies, and we are working closely with them; and consumer groups. The key thing for the energy companies is the transparency of the forward plan, and we are working closely with them to share assumptions and ensure that they understand at what stage things will come to fruition. But, fundamentally, it will be for the energy suppliers to mobilise their resources. At the moment, 5% of meters are replaced every year, and metering is with the energy suppliers. They make sure that the logistics work. The same will be true for the roll-out of smart metering.

Q156 Ian Swales: You have led me into my next question. You have said that 5% of meters are replaced every year, but Ms Wallace said that nobody is going to have their homes forcibly entered. How on earth are you going to get basically to every house-30 million houses-by 2019? There are going to be an awful lot of people who are not going to let the energy companies through the door. How on earth are you going to get to 30 million?

Daron Walker: Two things. First, the assessment of the 2019 end date was based on an extensive piece of consultation and research, and on working with the energy companies on what was practically achievable. That followed our consultation last July, when we published the prospectus. We worked with the energy companies over that time to work out a sensible and achievable roll-out time scale. We have finished consulting on the licence obligation, and we are now analysing responses. Again, we proposed the 2019 end date, and we are still analysing those responses. The evidence base from the suppliers and from other experts was that that was achievable and doable.

Q157 Ian Swales: It might be, assuming someone invests in a lot of training over the next few years, and we do not know who that will be, but as to the assumption that it is technically achievable in terms of boots on the street and so on, how are you going to get into 30 million houses in that time scale? The number of people who do not want to do this will not be small; it will be large. What levels of coercion are you going to employ? What did you mean by licence obligation? Did that relate to this point?

Daron Walker: The licence obligation is effectively mandating the energy companies to take all reasonable steps to complete the roll-out by 2019. The questions you ask are effectively questions for the energy suppliers about how they organise their manpower and access to consumers’ homes, and about how they ensure they engage with consumers to make sure they-

Chair: You are accountable-that was the reason for the accountability questions.

Q158 Ian Swales: Let us be specific. I am going back to what Ms Wallace said earlier-nobody is going to be forced to have one of these meters.

Moira Wallace: Part of it comes back to the importance of customer engagement and customer information programmes, because it is very clear that people are going to have to see what is in it for them. They are going to have to understand it and have all the consumer groups and all their welfare groups saying, "This is a good idea for you and this is what it will help you to do." That is a big task for us.

Q159 Ian Swales: If I can come back on that, it comes back to something that Fiona said a few minutes ago. We have to understand the psychology of people. Cavity wall insulation has been a no-brainer for two decades, but what is the take up for that? Even though it is virtually being given away through various programmes, there are still loads of people who don’t want it, can’t be bothered and take no interest. I think you are being completely unrealistic, if you do not mind me saying so, about the likelihood of virtually every single householder in the country putting their hands up and saying, "Yes, we want one of these," in this time scale.

Moira Wallace: People got their meters replaced even before we invented the smart meters programme. I am sure most of you have had your meters replaced at some point.

Q160 Ian Swales: I think that 5% a year was the statistic.

Moira Wallace: Yes.

Q161 Ian Swales: So is the plan that we will simply have a faster meter replacement programme?

Moira Wallace: Yes, and it will be quite fast. In the later years of the programme, four or five times as many meters will be replaced, as would be if we were not going down there. So yes, it is a significant escalation.

Q162 Ian Swales: So what did you mean when you said that nobody is going to be forced to have one of these meters? In fact, everybody will be forced via the-

Moira Wallace: What we mean is that everyone will be very strongly encouraged. If you had your meter replaced five years ago, you got lots of letters from your energy company, saying, "We would really like to come to replace your meter. We called five times, but you were out. When would be a good time?" They would also phone you. When we say that people are not going to be forced to do this, what I mean is that some other countries made it mandatory on the individual and suggested that people would have to pay a fine or be sent to prison if they did not do it. We are not going down that road.

Q163 Ian Swales: My final question is: as these are installed, who owns the meter?

Daron Walker: The energy suppliers, as they do now.

Q164 Ian Swales: So if I change energy suppliers, the ownership of my meter changes, does it?

Daron Walker: It is a core part of the programme’s function to ensure proper interoperability. That is technical interoperability, so if you switch from one supplier to another, the new supplier is able to operate the system in smart mode. That is a key thing that we are trying to achieve.

Q165 Chair: Who owns the meter?

Daron Walker: They will then have commercial arrangements, as they do now, for dumb meters and they will arrange payments between the relevant suppliers. That commercial arrangement functions at the moment and that will be true for the future.

Q166 Mr Bacon: May I ask you about security and cyber-attacks? Paragraph 3.9 says: "The Department is seeking to mitigate the risks that the system is vulnerable to security breaches, criminal cyber-attacks and the accidental release, theft and misuse of personal data." At the bottom of that paragraph, however, it says: "The scope of the risk assessment does not currently cover the data communications company data centre and operational premises that have still to be designed. The Department has also still to develop a detailed mitigation plan."

As I drove down from Norfolk this morning, I listened to a radio programme that talked about the problem of cyber-attack and the fact that many of the entities that need to protect against it are in the private sector, are not necessarily as willing to spend as much on it as they should, and will probably only wake up to it when something bad has already happened. One fellow said that, for entities involved in these sorts of activities, whether they be electricity companies or whatever, it may have to become a licensing condition for them to show that they have adequate protection against cyber attack, in order to have a licence. That may become one of the conditions. Is that likely?

Moira Wallace: Yes, I think so. We are now a lot further on than the position described in the report. We have put a lot of effort into this. Cyber-security is something you need take very seriously. We already take it seriously throughout the energy infrastructure, because it is very important, even now.

Mr Bacon: But if it is going to be remote-

Moira Wallace: I will check with Daron, but I am confident that it is no longer true to say that we have not risk-assessed the data communication company, because I believe we have. We have taken advice from the top people, including those who will have been talking about it this morning, on what the risks are, how to mitigate them, what the standards will be, and who will have to be accredited.

Q167 Mr Bacon: Do you now have a detailed mitigation plan?

Moira Wallace: Yes we do.

Q168 Mr Bacon: You do. Is it partly as a result of the publication of this report that you stepped up your pace of activity?

Moira Wallace: I don’t know that that is actually true, but anyway we do take it very seriously and we are involving all the people it would effect.

Q169 Chair: Pike Research-one of the staff gave me this quote-has said, "It would be naive to think that smart meters will not be successfully attacked. They will be." Do you disagree?

Moira Wallace: I am sure that people will attempt it, but we are taking the absolute best advice we can.

Q170 Chair: I know you are taking it seriously, but the whole point is that the system itself is open to risk of people getting information, finding out when you are in and deciding when to burgle your house.

Moira Wallace: The whole purpose of the risk mitigation work we are doing is to make sure that that can’t happen.

Q171 Chair: Can’t happen or mitigate it happening?

Moira Wallace: Can’t happen. That is the standard people will expect.

Q172 Chair: So this guy who said, "It would be naive to think that smart meters will not be successfully attacked. They will be" is wrong?

Moira Wallace: I am happy to go away and take that to our experts, but, as you can imagine, it is our intention to give people a very, very high level of assurance about this.

Q173 Mr Bacon: I met an anti-virus campaigner recently. Among other things, we were talking about online banking. This chap said, "I wouldn’t dream of doing it. I know far too much." It is a fact that although the risks are quite low, they are significantly higher if you do online banking than they are if you do other kinds of more vanilla traditional banking. This is accepted as a risk some people are happy to take, but it is known to be a higher risk. You make it sound as if it is not going to be a higher risk.

Moira Wallace: It is a huge risk, which is why we are devoting a very large amount of effort not just to saying, "Oh, there’s a risk," but to all the different points in the system that need to be protected and to keeping what level of protection they need constantly under review. A huge amount of effort goes into that, not just in our programme, but across all the critical national infrastructure of which this would be part. We have critical national infrastructure already where we do this work.

Q174 Meg Hillier: What is the Department’s budget for this public information programme?

Moira Wallace: For the public information programme, we have assumed about £100 million.

Daron Walker: In the impact assessment, there is a sum of around £100 million over the life of the programme. In the budget that we have for the next four years, there is around £20 million for consumer engagement. However, that is an estimate, because one of the key things will be the consumer engagement strategy that we are due to publish for consultation next year. We need to make sure that we get the balance right between what we do from Government and the central programme, and what suppliers do. At the moment, that is just an estimate, but there is a figure in the budget.

Q175 Meg Hillier: So it is £20 million over four years.

Daron Walker: In that four year period. However-

Moira Wallace: We are in year one.

Daron Walker: We are in year one and we will need to revise that according to the consumer engagement strategy, the responses we get, the further evidence we gather and the work with suppliers. I would not stick to that figure, but that is the figure we have for now.

Q176 Ian Swales: Just a quick and perhaps naive question, figure 8 says that the cost of installing smart meters is £11 billion, which no doubt will move. The benefit statement says that the networks and the suppliers get about £9 billion or £10 billion of benefit. In other words, my question is: what would the companies do if we just said, "Right, the Government are playing no part in this. We are not going to spend a penny."? Do you honestly think we would still have dumb meters in every house by 2019?

Moira Wallace: We would have smart meters in some houses and they would not be interoperable. It would become a barrier to competition. That is what I think would happen.

Q177 Ian Swales: So the energy companies would put meters in that would only work with that company? It is an interesting thought.

Mr Bacon: It rather depends what Ofgem told them they could and could not do, doesn’t it?

Ian Swales: You could regulate. My point is that with technology moving and the amount of benefit for the energy companies, the Government should not be a soft touch on this, because they have massive reasons for doing this themselves.

Mr Bacon: This is why British Gas is absolutely choking at the chain and has written to the Chair on this issue. It is gagging to get on with this. It sees all these call centres that it has had to run being minimised. It sees huge benefits to it, anyway. I think that is Mr Swales’s point.

Moira Wallace: There is a great deal of consumer protection that we are building in. Just as British Gas is influencing us, we are influencing it. One of the big things that we are putting into this is the in-home display. It would be perfectly possible to achieve all the benefits that the companies might want, with the consumer seeing no difference at all and my meter still being something I have to stand on a chair to reach.

Chair: Thank you. That was very clear evidence. You have met a sceptical audience this afternoon. The interesting thing is the unanimity across the Committee, so I hope you take that away and at least think about trialling. Most of us feel, before embarking on what could be another disaster, you might just trial it and see whether there is a real benefit. Thank you.

Prepared 14th November 2011