In recent months there’s been a lot of talk about smart metering and the wider subject of machine-to-machine communications. With well over 100% penetration of mobile phones in the UK, the promise of machines exchanging information over the mobile network offers operators a new opportunity for growth.
To explain more about the technology and the potential, we invited Ross Catley to join us for this week’s edition of The Fonecast. Ross has worked in the utility & telecommunications industries and is now a consultant who advises on smart metering.
Here’s an edited transcript of our interview, which you can also listen to on our website, from our RSS podcast feed and via iTunes.
What exactly is smart metering?
Smart metering in the UK is the replacement of around 45 million gas and electricity meters in 25 million homes. The new meters are capable of communication and data processing, so in essence they’re mini computers. They’ll also be able to send meter readings back to the energy provider using a Wide Area Network, and communicate around the home using a home area network. Initially, this will enable a display in the house to inform the user how much they’re spending on their energy. Additionally, the meters can be switched remotely between post-pay and pre-pay to improve a consumer’s payment options, and they’ll also enable energy companies to vary the cost of the energy by time of day, so “Economy 7 on steroids”, I guess.
They’ll also be able to measure electricity being generated in the home, and export it to the grid. This is seen as enabling microgeneration to take off; the use of solar panels on the house and wind turbines. Of course I should also say that, rather like when you sometimes forget the iPhone’s actually a phone, the primary task will remain as a meter and to accurately measure energy consumption.
The government has mandated fitting of domestic energy meters in the UK by 2020. There are strong rumours that the new administration is looking to bring forward an already challenging target to 2016, and worldwide it’s estimated that there’s going to be around 500 million meters rolled out by 2025. There are currently roll outs under way in Europe, in Canada, certain states of the US led by California and Texas, and also in Australia.
Moving forward, it’s expected that these devices will communicate with devices inside the house, washing machines, dishwashers, freezers etc, to enable something called ‘peak load shifting’. This will enable the energy companies to control peak electrical load by switching off non-essential appliances. So, for example, a freezer can be switched off for 20 minutes without really very much impact. This is what’s being dubbed the ‘smart grid’. Additionally, the energy companies are looking at electric cars;, not only how the cars can be charged but how the energy for the batteries of the cars can be used to supply some of the peak load to the home.
Overall the project is estimated to cost between £12 billion – 15 billion, so by any stretch of the imagination it’s a big project. The business benefits at the moment are shared between energy retailers in terms of reduced costs to read meters, customer service benefits, and also benefits to the nation, particularly from lower carbon emissions.
So, from a consumer point of view, this is about more accurate billing – presumably estimated bills are a thing of the past? – and being in control of the energy the home’s consuming?
Absolutely. I think overall it’s pretty good news for consumers. They’ll be able to see how much energy they’re using on the in-home display – and it’ll be an end to estimated billing, which is good news for the consumer because they’ll be billed for what they’ve used. Of course, it’s also good news for the energy company, because up to half of the calls they receive are to do with inaccurate bills.
I think the other thing we’ll see in the early days of the roll out is that more customers will start to choose prepay. Now, obviously in the mobile phone sector, prepay is already an accepted method of payment. I think in utilities there’s always been something of a stigma around pre-pay, because generally pre-pay meters were only fitted when people couldn’t pay their bills, and they were used as a way largely of clawing back debt. Because now you’ll be able to remotely switch the meters between post-pay and pre-pay, and you’ll also be able to remotely top-up the meters. You will see an explosion in pre-pay top-up options, and I think probably, looking five years into the future, you will certainly see a range of top-up options on the web or using the telephone that are very similar to mobile phones. Also I think you’ll get things like auto top-up, like, for example, you see with Oyster cards on the tube.
So if you don’t pay, the electricity, gas or water gets turned off to your house automatically – is that how it would work?
That’s right. I think water at the moment is a slightly separate issue. I think they’re looking at water for smart meters, but initially the roll out will be electricity and gas. Certainly the electricity meter is very easily able to switch the electricity off when effectively the top-up runs out; of course, there will be mechanisms to warn you, potentially through the in-home display, text messages and other things.
There’s a lot of debate in the industry at the moment around the valve in the gas meter, because it consumes power, but basically the gas meter will be able to switch off as well. So in essence, you’ll have a pre-pay meter and the service will be cut off, rather like telephones are cut off when the credit runs out.
What are the benefits for utility companies? What are they getting out of this?
I think, in terms of cost benefits, there’s a large amount of benefit from the fact they will no longer need to read the meters; there’s a large workforce and back-end processing involved in reading and collating the data from the meters. Obviously that will be simplified, and a lot of costs taken out.
As I said, the fact that the customers will receive accurate bills will also mean that the customer service operation will become a lower cost because there’ll be less calls. Something in the order of half of the calls the utility company receives are related to the fact that people don’t get accurate bills, and either sending their accurate readings in, or disputing the bills.
I think, going forward, the energy companies see the fact that they’ve got in-home displays as a way of promoting their brand and differentiating their service inside the house. I think, with the ability to connect to the meter, they can see a number of different products and services being available. Again, using the telecoms industry as an example, they’ll be able to differentiate pricing, change pricing by the time of day, and understand more about what a customer wants.
Something you mentioned earlier was the idea that your electricity company can actually control the appliances you have at home. Is this going to be an opt-in option, or is it going to be a default setting, that your electricity company can override your preference to have your freezer switched on all the time, for example?
I think the whole area of privacy and control is a massive one for the smart metering project. In Holland, they’ve actually postponed the roll out of smart metering because of concerns around privacy and invasion. I think, in terms of being able to switch devices off, clearly it raises an awful lot of questions. Certainly in areas of the world where this has been done, the device will always have an override capability, you will always be able to opt out. But I think this is the next stage of smart metering, it’s certainly not one of the early stages of smart metering, and I think the human factors, the way it’s communicated to consumers, and the way it’s rolled out, is really going to determine how widely accepted it is by the population, and how it actually gets used.
Presumably the initial roll out is going to be very expensive and these new meters will be in place for a very long period of time. So although these features may not be used from day one, it’s in the interests of everyone in the industry to ensure that the meter supports these features from day one, even if the fridge doesn’t?
That’s right. So there’s a lot of work going on at the moment with various bodies around what does the functionality of the meter look like because, as you say, it’s incredibly important that the functionality’s right. Of course, one of the things about having a software device in the meter is that the software can be updated, clearly the hardware needs to be right. So the key elements of the hardware are around the communications, as we’ve said, about being able to switch the service on and off. The overall hardware functionality of the meter is under discussion at the moment, but certainly by no means firmed up.
You say it’s going to cost a lot, it’s actually been estimated that the cost of the project is around £12 billion – £15 billion, including procurement of the hardware and the roll out itself, so yeah, a very big project, and they need to get it right.
And who foots that bill?
Because of the carbon emissions, the reduction in carbon emissions, and the fact that it’s going towards meeting the 20%reduction by 2020, the government will subsidise some of it, but the energy companies have to put in a lot of investment, and of course any investment the energy companies put in only means that one person will end up paying for it, and that will be you and I.
Now, smart metering tends to be seen as an opportunity for the mobile industry, but there’s also competition from outside. We’ve recently reported on a BT initiative, so what non-GSM, GPRS, 3G technologies are available as alternatives?
Around the world, there are basically four technologies being used. One of them is cellular, as we’ve discussed, although it’s actually a fairly low take up of cellular around the world. The other technology that’s not used in great volumes is fixed line, where you’d connect a telephone, a broadband line, to the meter. The fact that BT has put its weight behind a radio solution and not fixed line probably tells its own story. It’s costly to provision, although it’s possible it may be used in some very remote areas where no other technology is possible, so you can see a farmhouse in the Lake District and so on possibly having an exceptional installation.
The two main technologies around the world are power line carrier, which is dominant in Europe, and long range radio, which is what you reported on last week, which is dominant in North America. Of the latter, certainly the competition comes from the BT Arqiva, Sensus and Detica consortium, and I think it’s a very strong consortium. You’re getting proven FlexNet technology from Sensus. Arqiva, who currently run the national television broadcasting network and satellite networks and a number of other networks, have got around 9,000 sites to locate this equipment on, and you’ve got Detica providing security. Of course, you’ve got the weight, the project delivery capability and the backhaul, of BT. So they claim that they’ve got strong national coverage, and also they’re running in the 400MHz spectrum in this country, which means in-building coverage is going to be superior to cellular, so a very strong competitor.
The other one, power line carrier is, I think, less of a competitor in the UK. This is where effectively the data is carried over the electricity line itself back to the substation, and then via a backhaul network to the energy provider. Because of the fact that the utility industry is very fragmented in this country, actually putting the relay equipment inside the substations is commercially difficult, and from a health and safety perspective also proving tricky to have third-party access to high voltage locations. So I don’t see this as a particular competitor in the UK, although again it may be used in exceptional circumstances.
So over here, we’re looking at basically either radio or mobile networks, or some combination of the two – that’s what’s looking most likely, when it finally gets rolled out?
I think that’s right. I think almost certainly there will be a combination of technologies, and there will be a dominant technology. I think the big question at the moment is whether that dominant technology will be cellular (probably GPRS), or the new long-range radio service from the BT Arqiva consortium.
What are the advantages and disadvantages between those two solutions?
Well I guess, in terms of the long-range radio, as I’ve said, the big advantage is the fact that the building penetration is better, so therefore they claim they’ve got better coverage. Of course, the challenge is that the network is not yet built. It will require investment, and I think there’s some uncertainty about the cost of the radio equipment. Additionally, although the roll out itself is not supposed to start until 2013, Centrica and Vodafone and a number of others are currently running a programme to already roll out two million meters, based on GPRS, and so there is already a certain amount of momentum with GPRS, and it’s not clear what will happen to the two million rolled out meters if the decision goes with long-range radio.
However, I think that all those issues can be overcome, and there is currently a long-range radio trial running in Reading, and if that’s successful, then I think they’ll be very strong. In terms of GPRS and cellular technologies, I think clearly the fact the infrastructure is available and ready today is a big advantage. It’s certainly in the early days going to use a lot of off-peak capacity, so the capacity is already there without a huge amount of investment, the challenge being that, because cellular networks are designed with very little overlap, there are large areas where the signal becomes weaker. Certainly inside buildings, because meters are generally located in areas like basements or under stairs, and areas where generally radio waves find it hard to get to, they have, in the trials, seen coverage problems. I think the question is how the mobile operators will overcome the coverage problems.
It sounds to me like the key issue now is commercial. It’s less about the technology and what’s the most elegant solution, it’s more about commercial factors and who can win the day.
Absolutely, and I think, whilst the operators are trying to steal commercial advantage, there’s still some very big issues around interworking, because all these meters at the moment have to be able to be swapped between the utility providers, so of those two million Centrica customers that get rolled out, if another company, NPower, or Scottish and Southern, or whoever, decide to run with another technology, it’s very unclear at the moment how the whole supply and transfer processes and everything else will work, and I think that’s one of the really big questions. So yes, there’s a lot of jockeying for commercial advantage, but equally there needs to be a large element of control about this for the market to actually work successfully.
So it’s not just about the technology that arrives in your home, it’s all those downstream factors about who can access the data, and who’s providing your electricity or gas, or whoever it might be, and how they share that information?
Yes, absolutely, and there’s still a lot of talk about that in the industry, how that’s going to play out. I think, well we’re hoping at least, that the prospectus for the central communications provider will be released within the next month or so, and that should at least lay the foundations down for how that company will procure its comms services. So we should get some more clarity, although there have been times in the past in this programme when we’ve thought we were going to get clarity, and actually haven’t.
How much opportunity is there going to be for the small business owner, the independent mobile dealer? Is smart metering all going to happen at a very high level within networks and the utility companies, or is there going to be any kind of business opportunity for the retailer on the high street?
I can’t honestly see much opportunity for the retailer. What I can see is that the billing side of utilities are going to look far more like telcos, in terms of the fact that you’re going to be able to vary tariffs by day of week, time of day, and therefore the billing’s going to get more complicated, far more complicated than a standard utility billing system is used to. So I think there’s opportunities for telecoms billing companies, to see how they can adapt their products to fit the new world of utility, where the pricing structures for electricity and gas, and possibly even water, become more complicated.
I can also see that there are opportunities for the telecoms companies and the utilities companies to produce combined offers, so telecoms companies talk about quad-play; utility companies love to talk about dual fuel; so I can see quintuple and sextuple plays coming up in terms of telco companies and energy companies trying to lock customers in by providing not only their television and broadband and telephone, but gas and electricity as well in the bundle.
So you could get sort of free telephone calls if you get your gas, electricity and television all from the same company?
It’s a marketeer’s dream, the world is your oyster, I think.
We’ve touched on security already. As you add technology, so potentially you add opportunity. What’s the risk of people listening in and somehow intercepting data that’s either going around your house, or data that’s going back to the electricity company? How secure is all this going to be?
Well, I think the systems, we use industry-standard encryption. I guess anything that has data storage, transmission and processing, is always going to be vulnerable to be hacked, but I think, as James said last week, we are happy to do banking over our broadband service, and potentially is information about when you switch the lights on any more sensitive than how much money you have in your bank account. So I think that the wide area network will certainly be secured using standard encryption, and the home area network, which will use a low power radio standard, and the favourite technology at the moment is ZigBee, will also provide encryption. So unless you are absolutely determined, there will be no way to hack into the system. Of course, if somebody is absolutely determined, I guess there are always opportunities to hack any computer system.
It strikes me that the key weakness is the physical meter itself, so if you’re prepared to go to the house, break open the box, and gain physical access to it, then that’s the weak point. The encryption is really a problem that the computer industry solved about ten years ago, and is now used everywhere, basically.
Yes, that’s right, and even then there are a lot of measures being taken within the meter to make them as hacker-proof as possible. So yes, there is always the danger; I think the industry are aware of the danger and I guess, rather like chip and pin devices, kind of ten years ago, they are looking at all the ways that the device could be hacked, and trying to take counter measures against that.
Earlier on you mentioned that 45 million meters would be replaced and 25 million new meters would be put into homes. For mobile network operators, that’s an awful lot of new devices. Are they going to be able to cope if that kind of volume gets deployed? And what does it mean to existing customers on non-smart metering connections?
Yeah, 25 million new devices on one network is an enormous amount of devices. In effect, it will double the number of devices actually sat on the network. However, the volumes of data coming out of these meters are small, although they may be doing quite lot, the transaction size is very small, and certainly initially it will be in off peak periods. So, in terms of capacity, I don’t think there is a major issue, in terms of either radio capacity or capacity in the core networks.
I think the mobile operators are nervous, but I equally think that they are reasonably certain that the investment required to support the small volume of transactions on a large number of devices is actually relatively small. So I think they see this as an opportunity to fill up large amounts of spare, off peak capacity, so I think that the networks will be able to cope with the levels that we certainly know about at the moment.
So they’ll make it work?
Undoubtedly. When you look at the prize of revenues over the next 15 to 20 years of between a billion and a half and two billion pounds, you’ve got to say that, even if they have to invest a few hundred million, it will happen.
So for the mobile networks not to become the chosen standard has massive long-term revenue impacts for them?
It’s long been said that M2M is really where mobile operators want to get into, and I think, in terms of opportunities, this one eclipses all other opportunities, certainly in the near term. It’s got government backing, it’s been mandated, and it’s 25 million devices.
So for those of us who are interested in mobile network operator share prices, the way this one goes, not just in the UK but in other territories, is extremely important.
Yes, and as I said, round the world, so far cellular operators haven’t gained much of a foothold. This country has got certain things which means that cellular operators, I think, have got something of an advantage, certainly over a power line, and it will be extremely interesting to see how it goes.
Finally, let’s fast forward 15 or 20 years. My meter’s been in place for five or ten years. What will I be looking forward to then? What’s the next step beyond the smart meters we’ve talked about today?
Well, I think the smart meter will move into the smart grid, which is where we do start to look at how we balance load. I think the Holy Grail is energy storage as well, so the operators are looking hard at how we can use, for example, electric cars and other devices that may have storage capability, and rather than just using the grid to charge those cars up at night, actually saying, if you come home from work and then switch the oven on, you use the residual power in the car to drive some of the load that you’re then taking, and then charge the car up overnight so it’s ready to go to work again the next morning.
Initiatives are under way looking at areas, for example, 60% of the energy we use in a house is used on heating water. Now a lot of houses around the UK have immersion heaters that people generally don’t use, because they perceive it as expensive, but equally, if the wind blows at night, a lot of the electricity is currently thrown away, because there’s no demand for it. So smart grids will mean that, if we suddenly see the wind blowing, and we can estimate that 24 hours ahead, we can actually plan to switch immersion heaters on, so that the hot water is actually coming from energy that would otherwise be thrown away, and you won’t then have to pull that energy out of the carbon based resources.
So increasingly, the home, the meter, will be aware of what’s going on, and use energy far far more efficiently as we continue to move towards a much lower carbon way of generating our electricity.
So the mobile industry has the potential to play a major part in this total integration of energy consumption?
Very much so, because information is key to all of this, and of course the information is going to be provided over that network.
And I’m sure there are certain mobile companies listening to this who will want to own that content as well.
Very much so.