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Business Analysis & Features

Smart meters: the clock is ticking

Every home in Britain will have an 'intelligent' energy meter under a planned £5bn scheme.But some key elementsof the project have yetto be decided. By Danny Fortson

Smart meters don't look so smart. Bolted into a slab of wood perched on a cabinet at EDF Energy's headquarters in Victoria, the prototypes of the next generation of electricity and gas meters look very much like those you might find tucked in the cupboard or under the stairs in any home in the country.

The circuits inside the meters, the brains of the machines, are of course far more advanced than the current generation, which has essentially remained unchanged for decades. Despite the less than revolutionary look, the wholesale roll-out of the new machines across the country would, according to Duncan Sedgwick, head of the Energy Retailers Association (ERA), represent a change "bigger than North Sea gasification". He added: "This will fundamentally change our relationship with energy usage."

What he is referring to is the sexy bit of the technology: a sleek, handheld digital display device, connected wirelessly via a hub to the power and gas meters. It looks like it could be the new model iPod. The prototype – developed by meter-maker PRI for EDF under a government pilot programme to develop and test different approaches to smart meters – is a glimpse of the potential the new technology offers. Detach it from its cradle on the wall and you can navigate through the touchscreen to watch your energy and gas bills as they tick ever upward. Review times of peak usage, receive email messages from your friendly energy company with tips on how to save energy, even see a running total of carbon emitted due to your energy usage for the year. You know exactly how much energy you are using at any given time – and so presumably use less – and so does your supplier.

It is a central component of the UK's low-carbon energy future, and not too far in the future, every single home in the country will be fitted with one of these, or something like it. At least, that is what industry wants. The ultimate decision on how the roll-out, "the biggest customer visit programme that the UK has ever seen," as Mr Sedgwick dubs it, will be structured is the Government's.

Not surprisingly, opinions differ on how the £5bn project should be done. Indeed, amid the prickly public debate over rising energy bills and climate change, smart meters have become a hot political commodity. Any day now, Malcolm Wicks, the Energy minister at the Department for Business, Enterprise and Regulatory Reform, will reveal the grand plan for how 26 million homes will be fitted with the new kit. At the latest, Mr Wicks is expected to publish the plan by the end of this month.

Meanwhile, the Chancellor, Alistair Darling, is this week expected to unveil a move to reduce the tariffs energy companies charge their most vulnerable customers, those on pre-pay meters. The Conservative MP Charles Hendry will also take up the issue today by proposing an amendment to the Energy Bill that would lay down a firm deadline – 10 years – by which every home must be fitted with a smart meter. The introduction of new meters would go a long way toward addressing what has become a key concern for politicians: fuel poverty. Homes with pre-pay meters are subjected to significantly higher rates than those who pay through direct debit.

"We need a fixed timescale to make this happen," said Mr Hendry. "With clear knowledge of consumption patterns, companies could attack fuel poverty by offering more targeted tariffs."

The House of Commons is expected to vote on the amendment today.

Indeed, smart meters are one of those rare issues able to unite warring parties. EnergyWatch, the consumer rights bulldog that spends most of its time attacking the energy industry, finds itself in the rare position of being in total agreement with the energy companies. Both are fully behind the idea, and equally dismissive of a government proposal to roll out clip-on electricity meters, seen as a "half measure" of marginal utility. EnergyWatch does worry, however, about the potential of companies to remotely shut off supplies if bills go unpaid, and says stringent guidelines will have to be put in place.

Where opinions really diverge is how they should be deployed. The scale of the project is daunting. Every one of the 26 million homes in the UK has an electricity meter; roughly 21 million have a gas meter. To replace every single one of these would mean ripping out 47 million old meters and installing the same number of new ones. In virtually every case, this would mean entering customer homes. It is project of such scale and complexity, it almost begs to be bungled.

The ERA estimates it will cost about £100 per meter – or between £4.7bn and £5bn in total. Energy companies estimate that they can recoup about half that cost in savings alone from the elimination of estimated bills and home visits by meter readers. To pay for the rest, they want to be able to offset the money they churn into the programme against that invested under the Carbon Emission Reduction Target scheme. The government initiative, which takes effect next month, requires energy companies to invest about £3bn into energy efficiency and reduction measures over the next three years. They claim it is unfair to have to foot the smart meter bill in addition to that investment.

Whether the Government is inclined to agree is unclear. Whatever the decision, it will have come after months of wrangling and closed-door lobbying. The other sticking point is the structure of the roll-out. The energy companies have proposed a regional franchise model, under which the country would be divided into several geographical regions, each up for competitive bidding. The winner would be responsible for all the installation and replacement work in their given part of the country. Ofgem, the regulator, argues against this, preferring a fully competitive market in which no single region is controlled by a single company.