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Energy Bill

My Lords, I am grateful to my noble friend Lord Dubs for these amendments and for the way in which he has deployed his case. As we discussed in Committee, a rollout of smart meters to domestic customers would be a major technical and logistical challenge. It would require a visit to every house in Great Britain and the replacement of some 47 million electricity and gas meters. We are therefore talking about a major and inevitably costly undertaking, and someone has to bear the costs. Various proposals have been put forward for the practical delivery of a project of this scale so that any rollout of smart meters is both efficient and cost effective. Uniquely, Britain has a competitive market for metering. When one considers a large-scale rollout of smart meters, one sees that this presents some advantages but, as my noble friend recognised, some challenges, too. For example, unlike some countries where the metering operator has a monopoly, we have a wide range of players in our metering market. This poses challenges to delivering a well organised and managed rollout. Competition can deliver greater innovation and help minimise costs to the consumer, from which we reap the benefits. The context, which my noble friend established and which I have sought to reinforce, is therefore one of a major undertaking. I turn first to Amendments Nos. 23 and 28, which I shall ask him not to press, while being grateful to him for raising such important and complex matters. The stranding of existing meter assets will occur in any smart-meter rollout which is taken forward faster than on a new-and-replacement basis. Stranding would arise because existing non-smart meters would be removed before the end of their usual life cycle. This early removal of meters would result in costs to suppliers or meter providers, depending on the type of contractual or other arrangements in place. I reiterate the fact that we are talking about 47 million households. On the other hand, an accelerated rollout would mean that some of the benefits of smart metering for both consumers and business could be realised more quickly; I know that my noble friend has that point at heart. The Government have undertaken work to examine these issues and understand which timeframe for a rollout would deliver the benefits of smart metering as cost effectively as possible. Our analysis to date suggests that the issue of stranded assets is a complex one. I shall outline some of the complexities so that the House is fully aware of the difficulties with which we need to wrestle. For example, it is not possible at this stage to place a specific value on stranded meters. This value will depend on a wide range of factors, particularly the speed of any potential rollout, because that would determine how fast meters become unusable, and the value attendant upon meters that may have been installed quite recently. But of course there is also the issue of the market model deployed. Some early central estimates suggest that the cost of stranded assets by this process could be between £1.5 billion and £2 billion for a 10-year rollout, but these figures would change significantly, depending on the factors that I described. Amendment No. 23 makes it explicit that, in exercising his power in relation to smart meters, the Secretary of State can make financial provisions in relation to the replacement of existing meters. Amendment No. 28 is an amendment to existing levy-raising powers in the Gas Act to make clear that amounts raised by a levy can be paid out to all gas licensees. I believe that it is my noble friend’s intention, as he covered it in his opening remarks—it is certainly the view of some industry stakeholders—that these amendments would enable the Government to establish a mechanism to ensure that the impact of stranded assets was not borne significantly more by some market players than by others. In other words, the concept of fairness needs to obtain. Some stakeholders are also arguing for this mechanism to compensate for all the stranded metering assets created as a result of any accelerated rollout of smart meters—and therefore, in effect, for 100 per cent of these costs to be passed through to consumers. The end payer would be the consumer. I recognise the issue of stranded assets as one with potentially significant costs for smart metering. We all see the potential benefits of smart metering, but we are talking about a huge exercise and very significant costs. The Government need to wrestle with the fairness of the distribution of the costs, which are bound to be part of the Government’s considerations in deciding how to move forward, particularly as the costs may ultimately be borne by the consumer. While it is right and proper that the Government consider these costs as part of our analysis, I do not share the view of those who argue that there should be automatic 100 per cent compensation in the event that the Government impose an accelerated timetable for smart metering. I am grateful to the noble Lord, Lord Teverson, who has demonstrated his understanding of this issue. We have to be cautious about the precedent that this could set. Any automatic 100 per cent compensation cost-recovery mechanism would mean that those costs would be passed straight through to consumers. Putting a levy on consumers at any time is a fraught exercise, but particularly at this time of high energy prices, and we would need a high level of proof and quantification to justify such an impost on such a large number of our people. I am sure the House would agree that it is for companies to factor in and subsequently bear the risk of their commercial decisions. Generally speaking, changes of law do not and should not result in a right to automatic compensation. Our interest in stranding at this stage is therefore in understanding the market impacts and subsequent impacts on consumers and considering whether these impacts are sufficient to justify government intervention in the market. We have to balance what is in the best interests of consumers, including in the long term, and what is in the best interests of those delivering smart meters. Ofgem has, at our request, already undertaken an initial analysis of the levels of stranding and how this stranding cost is spread across the industry. We have looked carefully at that work and considered industry analysis. While that has revealed the complexity of the issue, it has not suggested a clear-cut need for a compensation mechanism of the type proposed by the amendments, which would be mandatory on the Government irrespective of the timescale adopted for the rollout of smart meters. Therefore, it is only right that before taking the significant step of legal powers of compensation in this context, we need to fully understand how much of an issue that is and the implications for the energy market, for consumers and for the progress of smart metering. The Government have decided that it would not be right to take powers at this stage to address stranded assets, but we recognise the significance of the issue and we have asked Ofgem to continue its work to conduct a detailed analysis, looking particularly at market impacts. As with any policy area, if the evidence changes or becomes clearer and more compelling as a result of this further work, the Government can reconsider whether any new legal powers are needed. I am grateful to my noble friend for raising a fundamental issue of the greatest interest to the House, but I hope that he will recognise that a great deal of further work needs to be done, and it would be premature for the Government to be legislating at this stage for automatic compensation. I hope that he will recognise that I have difficulty with Amendments Nos. 23 and 28 and that he will not press them. However, I have rather better news for my noble friend about Amendment No. 24. There are a number of different market models for rollout of smart meters. At one end of the spectrum is an entirely centrally planned rollout by a series of regional monopolies, through models with an element of co-operation between suppliers and ending at the opposite extreme with a rollout delivered entirely through the existing competitive metering market. Examining the case for changes to the existing competitive metering market is a complex issue and an important element of our ongoing work to assess the costs and benefits of a rollout. The Government are working with a range of stakeholders to define and evaluate various market models, and we expect to be in a position to reach final conclusions in due course as part of our broader work looking at the possible implementation of a domestic rollout. At this stage, therefore, our objective has been to ensure that we have appropriate legal powers to underpin a wide range of market model options. Ensuring that all market model options remain open is the objective behind my noble friend’s amendment, as he said. The amendment is broadly similar to the existing wording at Clause 81(3)(k). This paragraph enables the Secretary of State, as part of exercising this power to mandate the rolling out of smart meters, to modify suppliers' licences to require suppliers to enter into certain types of agreements. The amendment would expand the wording of this paragraph to make it clear that the Secretary of State could also require licence holders, "““to enter (or refrain from entering) into””," agreements solely or collectively. It also adds that these agreements could be, "““in relation to a specified area””." It is the Government’s intention—we share the sentiments of my noble friend in tabling Amendment No. 24—for all market model options to be possible. Our own analysis suggests that there may be a case for amending the Bill further to ensure this, but we are unsure that Amendment No. 24 quite does so. We accept my noble friend’s objective, and intend to deliver against it. We will bring forward an amendment at Third Reading to resolve the matter, and I hope that he will recognise our intentions. He has been extremely constructive this afternoon on Amendment No. 24, and if he withdraws it we intend to consider the matter. I hope that he will be kind enough not to press the other two amendments.