With steady progress in smart rollout and customer switching on the rise, gained smart meters make up an increasing proportion of every supplier’s portfolio. This changes the profile of their metering costs.
Rental charges for smart meters will be higher than for the meters they replace. The difference can be more marked where smart meters are inherited rather than installed, without a contract in place with the owner of those meters. Here, MAPs apply higher ‘deemed’ rental charges, reflecting the greater risk on their investment, and also to incentivise suppliers to enter contract negotiations.
The financial impact can be considerable. Without signed churn contracts, a growing challenger supplier with 200k meters could pay an extra £5m over five years.
The chart below shows the impact of smart rollout and churn on a growing supplier’s meter portfolio over the next four years.
On top of this is a regulatory incentive. In March 2021, Ofgem published an open letter on suppliers’ smart rollout progress against obligations.
They note: We are disappointed that there continues to be difficulties and inefficiencies for both parties – MAPs and Suppliers – to reach fair and equitable agreements in all circumstances in the required timeframes. Our expectation is that all industry parties should work constructively together to ensure that the market operates effectively. We expect to see a marked improvement in the overall performance of this area of the market going forward.
So why are so many suppliers yet to enter into smart metering churn arrangements with all Meter Asset Providers? For several reasons:
- The agreements can be complex, covering fault scenarios, firmware management, meter replacement and terms around the introduction of new meter types
- They apply for the life of the meter. Long-term commitments can be hard to reach agreement on
- Legal and contract management resource is limited for Suppliers and MAPs, with negotiations often taking months or years
- Churn rental prices are sometimes not seen as sufficiently attractive to move off deemed rates
Suppliers are right to be cautious, but inaction is a risky strategy. Inefficient costs will grow month on month. And we expect to see greater regulatory scrutiny in the coming year. So at the very least, proper appraisal of continued operation under deemed rentals should be a high priority.
Suppliers doing this now will be better placed to optimise cost and to address the concerns Ofgem raises in its letter.
Engage has a deep experience of managing smart churn arrangements. We have worked alongside suppliers and MAPs in this area and can provide practical advice on options and implications. Our clients trust us to deliver and value our flexible, collaborative and benefits driven approach.
Please contact us or look us up on LinkedIn if you’d like to talk through your next steps.