Will UK energy companies carry smart meter delay costs?

Price caps and smart meter costs could cripple the UK’s energy companies.

The latest delay to the multi-billion-pound UK government-mandated smart meter scheme translates to even higher costs for utilities due to the tougher roll-out targets. Added to this, is the threat of an energy price cap from the new incoming Government.

Senior energy industry sources, according to The Telegraph, have expressed their concern around this double blow to utility finances which could result in reductions in much-needed investment in the retail energy market and dividends could be put at risk.

According to a senior executive, the smart meter delay could add £700m in costs across the sector and the Conservative Party’s election campaign pledge to cut £100 from 17 million energy bills reduces utility earnings by hundreds of millions of pounds.

Cost of missing smart meter deadlines

The UK’s smart meter network was supposed to have been delivered by the end of 2015 but delays have pushed this date out to the end of 2017. The cost has also risen from £220m to approximately £900m.

Responsible for the delivery of the meters, Data Communications Company (DCC) has stated that the roll out is now in its final stages and deployment will be carried out "at the earliest possible opportunity". A DCC spokesperson announced that it expects to claim over £290m in revenue from energy companies for this financial year alone.

The DCC’s most recent stumbling block emerged in November last year when the final system update failed to include prepaid energy meters which are used by around 19 million people. The DCC said the problem would be rectified by this May but energy companies have been advised that this will only be sorted out by end July.

In the interim, energy companies face fines from the industry regulator if they fail to roll out smart meters. This had led to the delivery of a large number of first generation meters to residential areas. However, to be compliant with the new system, most of these meters will have to be replaced at an estimated cost of £500m.

One senior industry executive said the DCC “massively” underestimated the sheer complexity of creating a system designed to connect 45 million household energy systems.

Cybersecurity has also been a major concern so even more funding has been ploughed into the security of the project to avoid cyberattacks which are becoming increasingly prevalent.

Price cap plans uncertain, job losses possible

Energy companies have been warning their customers that they will have to carry the rollout costs but with the price cap plans, utilities may end up having to carry the increases themselves.

While there is a great deal of uncertainty around the price cap plans, analysts estimate that a "full political blow" could cost Centrica, the British Gas parent company, £200m. The hit is a 25% drop from Centrica’s £600m in earnings before interest and tax from its supply business last year and could potentially crush its share price by 16% to 160 pence.

Iain Conn, Chief Executive Officer at Centrica, refused to rule out a raid on shareholder payouts or "deeper" job cuts to "weather the political firestorm". He said: ‘We’ll have to look at all options to drive our efficiency if the market has fundamentally changed."

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