UPDATED 21 SEPTEMBER 2017
Over the next three years every home and small business in the UK should have their electricity and gas meters replaced with new 'smart' meters. The plan is to put 53 million meters into 30 million homes and small businesses in England, Scotland, and Wales by the end of 2020. It is a challenging target. By the end of 2016 only 5 million smart meters had been installed in homes, split about 57:43 between electricity and gas. Although installations were running at nearly 1 million in the last quarter of 2016 it is clearly an ambitious target to to replace the remaining 45 million by the end of 2020. That would require one million meters a month between now and then.
The meters already fitted - and being fitted in 2017 - are an early model called SMETS1. These meters are being replaced with an upgrade called SMETS2. But by September 2017 no SMETS2 meters had been installed in customer premises. SMETS1 meters do not have interoperability between all suppliers (though some will work with a limited number of other supliers' equipment.
They use the existing mobile phone network for communications and each supplier has its own way of using it and transmitting data. People who have them will usually find that if they switch supplier their meter becomes dumb and has to be read manually. That is more difficult to do with 'smart' meters than it was with old meters designed for reading by a supple human with a torch.
It is hoped that the new SMETS2 meters - which are currently being tested - will start going into homes later in 2017. However, there are concerns that it may not be possible to upgrade the SMETS1 meters to SMETS2. If so millions of SMETS1 meters will have to be replaced. There is a review of the process which sets out a timetable and shows that SMETS1 will not be 'enrolled' into the DCC network until Autumn 2019. That timetable may have already started slipping.
What they do
I put 'smart' in inverted commas because these meters are not in fact very clever. They simply report back to the supplier how much electricity and gas the customer uses each day and, with the customer's permission, every half hour. More frequent reporting will be available in future.
The meter also feeds some information about current use to what is called an 'In Home Display' or IHD. The Government now says there will be one IHD which will cover both electricity and gas if you have it. It will normally be mains-powered and fixed in position but there will be an option for a separate portable battery powered unit. The IHD can show how much fuel is currently being used and can display the cost in £.p. Some of them will have a traffic light system - glowing green when consumption is low through amber to red when it is high. They can also do calculations of past and future use. Some reports suggest that if the IHD is switched off for any reason it is difficult or impossible to get it back online recording usage accurately.
The costs of the programme are fixed and fairly certain to happen, though the amount will probably rise. The latest cost/benefit analysis was published in August 2016. It estimates that manufacturing and installing 53 million meters, communication devices, and IHDs in 30 million premises will cost £5.44bn. There is also a new communications infrastructure network which will cost £3.13bn. That was due to be completed late in 2015 but was in fact not switched on until November 2016. The cost/benefit analysis puts the total costs of the programme over 18 years at £11bn (in 2011 pounds). We will all pay that through our energy bills which will cost more than £400 per household.
Those payments are beginning. In 2017 all major suppliers and some smaller ones have put up the cost of electricity by 10% to 15% and each of them blames that rise in part on smart meters.
Estimates of the savings are more speculative.
Customers will save money because they will use the information from the IHD to cut their energy consumption. That saving is put at £5.3bn over 18 years based on a 2.8% cut in electricity use and 2% in gas use.
Achieving those savings requires active engagement by customers. But many will not be engaged and will end up paying more. A report by the old Department for Energy and Climate Change on some pilot smart meter installations found that initially 96% used their IHD but about four out of ten disconnected them during the research. None were able to identify any clear savings due to the IHD. The Public Accounts Committee estimated in 2014 that customers would save on average about £26 a year.
Customers will also gain, if they choose to, by faster switching from one supplier to another. The process can take weeks now but a 24 hour service is promised. They will also gain if suppliers agree to monthly billing of actual usage rather than sending out estimated bills. It is not clear when either of these changes will happen.
Energy suppliers will save an estimated £8.25 billion. The biggest chunk - £3bn - will be from ending meter reading and other home visits. Reduced customer enquiries and complaints will save £1.2bn. Another £1bn will be saved by managing pre-payment customers better and there is a big saving of £1.4bn from reducing the cost of customers switching supplier. A further £1.2bn is savings made in managing debt and reducing theft.
Networks and the generators will save £1.8bn between them from smoothing the peaks and troughs of demand and generating less power.
Finally, carbon related benefits and air quality improvements will add £1.4bn to bring total savings to £16.7bn.
These figures are from the 2016 cost/benefit analysis and the technical annex and are in 2011 pounds. Actual costs in today's pounds could be 15% to 20% higher.
Less than a third of the savings will be made directly by consumers. And only for those who engage with the energy saving opportunities. Nearly 70% of the savings will go to the industry. The hope is, of course, that suppliers, generators, and transmitters of electricity and gas will pass some of those savings on. They may. But some of their savings - on debt management and prepayment meters for example - will come at a direct cost to the customers affected though they may be passed on to others. The savings from carbon reduction and air quality improvements will not be felt directly in the pocket by consumers.
So while the customers will pay for the £11 billion cost of the smart meter programme through their bills, the savings of £5.4 billion will be felt only by those who adjust their behaviour and and some of the remaining £11.3 billion only if the industry passes on its own savings to customers in lower prices.
The energy industry has a very poor record in passing on savings. In 2014 they took many months to pass any of the gains from the fall in the wholesale price of gas and none reduced electricity prices even though much of that is generated by burning gas.
The impact assessment does not take account of one significant extra cost.
Bills will no longer be estimated as they will be based on actual usage over a month. That is promoted by the Government as good news for consumers. But it will be expensive for gas and electricity suppliers. For many years they have encouraged customers to agree to pay estimated bills monthly by direct debit rather than quarterly based on meter readings. The result is that the firms have kept hundreds of millions of pounds on their books belonging to customers. The value of that is shown by the fact that customers who pay a more accurate quarterly bill can be charged 7% extra or more more than monthly direct debit customers. If they no longer make that saving then prices will inevitably rise.
This money the suppliers routinely hang onto is separate from the £400m that Ofgem found they had wrongly kept when customers switched to another supplier. In February 2014 it ordered firms to refund this money. It does not bode well for hopes that the industry would voluntarily return to customers the savings it makes from smart meters.
Time of use
The report also makes no assessment of the costs or savings to be made from what are called Time of Use tariffs. Once the smart meter network is rolled out suppliers will start making customers manage the load, especially in electricity supply. In other words when demand is high the price goes up. When demand is low the price comes down. And with half hour reporting - and it may be more frequent in future - time of use tariffs could be very specific.
For example, energy could be more expensive between 7am and 9 am when most people are getting up, putting on the kettle, and making breakfast. Or between 5pm and 8pm when evening meals are being cooked. The result would be that poorer families could not afford to eat dinner at dinner time.
Ultimately the cost of power could rise during the adverts in soaps or the interval in football matches when millions put the kettle on make a cup of tea.
Time of use tariffs mean that the customer is drafted in to manage the national power load. By pricing people out of energy use at peak times the peaks and troughs of usage - so irksome to the engineers managing the grid - are smoothed out.
Debt and disconnection
Smart meters will also enable energy suppliers to manage debt and disconnection remotely. Customers can be switched from credit payment to prepayment by the supplier without changing the meter. It also means that if someone has not paid their bill then the supplier will be able to throw a switch and disconnect them. There are currently safeguards about who can be disconnected and when. But once the conditions are met the process is much simpler.
The delivery of this programme is in the hands of the six large and dozen smaller energy suppliers. They will each fit the meters for their own customers. Which could mean 18 different engineers visiting the same street or block of flats to do the same job in neighbouring homes.
The central Data & Communication Company (DCC) is run by Capita. It will be responsible for collecting the data sent back by smart meters and forwarding it to the right energy supplier, the networks and energy services companies. Others may also get access to it. In 2014 the Information Commissioner expressed concerns about the security and use of this data.
The data network will be run by two companies - Arqiva will cover northern England and Scotland using a long-range radio network and Telefonica UK will cover the rest of England and Wales using a cellular technology with what it calls 'mesh technology' to fill the gaps in the cellular network. The target is to cover 99.25% of dwellings - which will leave 225,000 premises unconnected. Apart from remote dwellings, tall buildings and multi-occupied premises are problems that have not been solved.
Meanwhile Smart Energy GB spent £38.5m in 2016 - which will rise to £49m in 2017 - to persuade us all that the smart meter programme is a good thing. What it calls building consumer awareness and understanding of smart meters and encouraging consumer engagement.£40m of that £49m in 2017 is for advertising, much of it using the Gas and Leccy characters.
On 7 March 2015 the Energy and Climate Change Select Committee expressed concerns about delays and unresolved challenges in the smart meter programme. "Without significant and immediate changes to the present policy, the programme runs the risk of falling far short of expectations. At worst it could prove to be a costly failure."
In December 2014 the Ontario auditor general Bonnie Lysyk said that the state's smart meter programme had cost twice its estimate and made few if any savings for customers or suppliers and failed to reduce energy consumption.
21 September 2017
Monday, 9 October 2017
Some householders who get the new means-tested benefit Universal Credit will keep just 20p of every pound extra they earn – an effective tax rate of 80%. In some parts of England it could be more - losing up to 82.4p in every pound that is earned, leaving them with barely 17p for every extra pound they earn. Those losses could undermine the work incentives which the new system is designed to create.
For graduates on incomes above £17,775 but low enough to get Universal Credit, the deductions would be more, adding about 2.5 percentage points to those figures. Worst case would be earn £1 keep 15.3p.
1 April 2017
Universal Credit began to be rolled out from October 2013 to replace six means-tested benefits and tax credits. By 2020 it should apply to most new claims for help with income or rent. It is paid to people on low incomes who cannot work, are looking for work, or work on very low pay.
It is supposed to let people keep more of what they earn and thus boost incentives both to return to work and to earn more once in work. For every £1 extra earned the credit is reduced by 63p from April 2017 allowing the claimant to keep 37p. Before that it was 65p. This so called ‘withdrawal rate’ of 63p in the pound is said to be much lower than rates under the previous and allowing people to keep 37p of what they earn is seen as an incentive to work. However, that figure of 63p withdrawal rate is only accurate for people who earn less than £157 a week and are not householders.
Universal Credit is worked out after tax and National Insurance have been deducted. In 2017/18 anyone earning more than £157 a week will pay National Insurance and once they earn more than £221 a week income tax begins. Someone paying National Insurance will lose 12p in the pound before their Universal Credit is worked out. The total loss from NI and reduction in Universal Credit is just over 67p from each £1 they earn. So they keep less than 33p. If they pay income tax as well they lose just over 75p of each pound and keep just over 25p. The calculation were originally confirmed by Pensions Minister Steve Webb in Parliament in 2012 when the details were different. (Hansard, House of Commons, 11 September 2012, col.196).
But that is only part of the picture.
Universal Credit, despite its name, does not replace all means-tested benefits. It does not include the means-tested reduction in council tax which used to be called Council Tax Benefit but since 1 April 2013 has been replaced by a very similar scheme called Council Tax Support which is operated by local councils. Like all means-tested benefits Council Tax Support is withdrawn as income rises. The standard taper is 20p for each £1 rise in net income (after tax, NI, and Universal Credit withdrawal). In other words for each extra pound of net income help with council tax is reduced by 20p. The result is that for each £1 earned a total of 80p disappears in tax, NI, reduced Universal Credit, and reduced Council Tax Support. The calculation is at the foot of this blogpost.
In some areas of England and Wales the reduction for every £1 of income earned may be even higher. As part of the transfer to local councils the Government has cut the money it currently pays towards help with council tax. From 1 April 2013 councils get 90% of the money they got to pay Council Tax Benefit. The Government has already said that out of that reduced budget they will have to pay exactly the same benefit to anyone over pension age. Nearly half of all Council Tax Benefit recipients are pensioners so the other half – working age people who can claim Universal Credit – will bear the whole of the funding cut. That will mean a reduction for them of between 19% and 33% according to the Institute for Fiscal Studies (www.ifs.org.uk/comms/comm123.pdf chapter 5).
Councils have now published the details of their schemes for the fifth year of local council tax support. In 2017/18 the great majority are keeping the taper at 20%. But 18 have a higher taper. Seven have raised it to 30%; another 12 to 25%, and one to 23% . Only three have cut it to 15%. The analysis is done by the New Policy Institute.
In areas which raise the Council Tax Support taper to 25% householders on Universal Credit who pay tax will find that 81p of each pound earned disappears in deductions. In areas with a 30% taper they will lose 82p and keep less than 18p for each extra pound earned in income tax, National Insurance, reduced Universal Credit and reduced Council Tax Support. In the three areas where the taper is 15% people will lose 79p of each extra pound.
Students on plan 1 or plan 2 who pay in effect an extra 9% tax whose income is low enough to be entitled to Universal Credit lose typically 82.5p in the extra pound keeping just 17.5p. In areas where the council tax withdrawal rate is 30% they keep just 15p in every extra £1 they earn.
It is a tax
Some people object to the total deductions made from a means-tested benefit being called a 'tax'. They say that the reduction in a subsidy from taxpayers is not a tax. Tax, they say, mean a levy on your own money not a reduction in the money the state gives you.
But it is a tax. And officially so. In his Spring Budget, 8 March 2017, Phillip Hammond confirmed that the tapered loss of this benefit was a tax. He confirmed the reduction in the taper rate by saying "the Universal Credit taper rate will be reduced in April from 65% to 63%, cutting tax for 3 million families on low incomes."
Losing 80% or more of each extra pound you earn is hardly an incentive to work or to work harder. It is almost twice the 42% tax and NI deductions for higher rate taxpayers with incomes over £45,000, three times the minimum wage.
CALCULATION OF TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER
FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER SHOWING EFFECT OF 63% UC TAPER FROM APRIL 2017
Net after tax
Net after UC
This blogpost replaces the one originally published 19 September 2012.