Smart meters are reporting devices and will not themselves change the behaviour of energy users. However, their roll-out will make the public keenly aware of the cost of consuming energy and more receptive to potential means of reducing it. This change in consumer attitudes – in a fully liberalised market – will in turn encourage competition on retail service and price, to the benefit of end users. As energy retailers renew their operations and end users adjust their usage patterns, the energy market as a whole will change dramatically.
Smart meters are designed to record (on a half-hourly basis) electricity or gas usage (in addition to other features being discussed) and to report this information to the energy retailer on a regular basis. Energy retailers can use this information to offer their customers incentives to change their consumption patterns.
In the UK, retail energy prices have increased steadily during the past four years, by 50% for households and 125% for non-domestic users. The cost of meeting our energy needs will continue to increase because of the growing use of expensive renewable energy, the introduction of carbon taxes, increasing fuel prices, the need to capture and store carbon dioxide, etc., and the growth in demand for energy (as a result of population and economy growth, for example). Players across the value chain – from generation through to transmission, balancing, distribution and retail – will be affected by an acute need for effective demand management.
At the same time, climate change issues have risen to the top of the public agenda and several initiatives to reduce peak-time energy demand (which is a key driver of carbon dioxide emissions) have been launched. Smart meters are considered to be critical to reducing energy costs and peak-time energy demand. They are also expected to support the growth of micro-generation and specifically allow any surplus energy to be resold back to the distribution network.
The roll-out of smart meters will heighten users’ awareness of their energy usage because it will enable retailers to provide every household with more-detailed information on usage (and carbon footprint) directly on the meter or on their bill. Coupled with users’ increasing awareness of climate change and rising energy costs, this information will create and encourage a desire to reduce costs. This, in turn, will drive an increase in competition (if the market is fully liberalised), as customers consider their options (see Figure 1).
Figure 1: The effects of smart meters in a fully liberalised market [Source: Analysys Mason]
Retailers need to rapidly rework their operations to prepare for this increase in competition levels, by implementing several initiatives.
- Establish upgraded decision support systems: To ensure that the information uploaded from smart meters is used most effectively, retailers will require best-of-class systems for billing, data mining and analysis, revenue assurance, quality of service monitoring and so on.
- Improve customer segmentation: A fine segmentation of end users, based on location, demographics and usage patterns, will improve retailers’ understanding of their customer bases’ expectations and needs. The half-hourly granularity of usage information will drive focused initiatives targeted towards specific categories of end users, whereby they will be encouraged to reduce wasted energy (for example, as a result of unused equipment), reduce peak-time usage and optimise their use of dual-fuel energy.
- Develop new service propositions and innovative tariffs: Retailers need to offer tailored tariffs that aim to increase customer retention, reduce usage during peak time and provide additional information about usage, carbon footprint, proportion of renewable energy and so on.
- Propose compelling loyalty programmes: As energy cost awareness and competition increases, retailers will need to reward long-standing customers by creating innovative retention strategies to protect their top line. Loyalty programmes could include incentives such as higher quality of service or equipment upgrades.
- Set up efficient customer-facing systems: To attract and then retain customers, retailers need to offer compelling and one-to-one tailored marketing collateral, information-rich but clear bills, call-centre support systems and trained staff, and a convincing Web presence.
Energy retailers have already developed some of these capabilities for a relatively small number of industrial customers. They now need to roll out systems and processes to be able to deal with mass-market requirements (that is, for households and SMEs). Retailers can also learn from the experiences of players in other industries: the telecoms players, for example, have faced and overcome many similar challenges.
A prerequisite for smart meters is the ability to communicate frequently with central databases. This will require a complex, multi-technology telecoms system. The market has recognised that the model for sharing information between energy stakeholders will be a key issue, but significant efforts should also be dedicated to the design of a cost-efficient, nationwide telecoms platform. In this context, the UK government’s Department of Energy and Climate Change is consulting the market on the best model to establish in order to make it easier for usage information to be collected, while simultaneously making it easier for end users to switch supplier.
Analysys Mason has extensive experience in supporting governments and private companies when facing dramatic industry changes. Our growing expertise in energy issues is backed up by 25 years of experience in strategic consulting, research support and operation management. We can help governments to set up a telecoms platform to support smart meters and energy players to renew their commercial strategy and internal systems to benefit from this paradigm shift.