Improving settlement performance is a ~£200m opportunity for suppliers

Since the migration of first-generation (SMETS1) smart meters into the DCC network, there’s been a steep decline in settlements accuracy across the energy industry, which could be costing suppliers up to £200m based on our analysis.

Industry RF settlement performance is 95.5% for Non-Half Hourly (NHH) and Domestic Half Hourly (HH) meters (as of Feb 2023 settlement month), sitting well below the 97% target.

Identifying and resolving issues relating to non-communicating SMETS1 meters is key to addressing RF underperformance, and we’ve outlined how suppliers can realise this below.

With Market-wide Half Hourly settlements (MHHS) around the corner, and readiness planning well underway, now is the right time to focus on settlement performance to mitigate the risks associated with MHHS and the shortened settlement timetable.

Performance dropped as SMETS1 E&A concluded, due to migration of complex meter points

Although smart meter coverage has steadily increased since 2022, settlement performance started to fall in Q4 2022, coinciding with the conclusion of the enrolment and adoption (E&A) process for SMETS1 meters in the DCC network.

SMETS1 E&A was designed to maximise the interoperability of smart meters across the industry, but the data suggests it hasn’t worked in all cases, with suppliers losing connectivity to some meters as they transferred into DCC systems.

Seeing these issues become more prominent in the final months of E&A is somewhat expected, with suppliers needing to migrate their most difficult and complex meter points during this period – those being the ones most likely to lose connectivity.

18 months on – Why has settlement performance still not recovered?

Suppliers have had 18 months to adjust to the new DCC processes, or to replace and upgrade non-communicating smart meters, but challenges have been faced along the way.

A number of suppliers have migrated to new systems across this period, and have seen significant changes to their operating model, which has included streamlining traditional back-office functions. It’s possible these new ways of working aren’t yet mature enough to identify this drop in settlement performance and the impact it will have, meaning the problem isn’t getting the right level of focus.

As the smart roll-out progresses, suppliers have started to reduce reliance on traditional pedestrian meter readers, meaning their overall capacity and density is lower. As a result, some suppliers may have been unable to switch over to pedestrian meter readings and achieve the same level of success that was possible 5-6 years ago.

Also, a shortage of skilled metering engineers could mean there’s a fixed capacity for installs at a national level, and it’s these engineers who’d also be needed to fix broken SMETS1 meters.  Suppliers may therefore be facing a choice between converting a traditional meter to smart, or to exchange a SMETS1 for SMETS2. Depending on the issues causing the SMETS1 to lose connection, prioritising the SMETS2 over the SMETS1 may be the right choice from a mandate point of view. But if the traditional meter was providing regular readings when the broken SMETS1 wasn’t, then there will be no uplift in billing or settlements accuracy.

Improving settlement performance is a ~£200m opportunity, as MHHS gets closer

Our analysis suggests getting back up to industry target for settlement performance could be worth more than £200m to suppliers, driven by:

• Improved billing accuracy
• Reduction in ops waste due to a fall in inbound demand, as a result of improved billing accuracy and less back billing write offs
• Reduction in hedging and trading risk due to more accurate consumption forecasts at a portfolio level, driven by more accurate EAC/AQs values from improved read data

Imminent industry change will further impact suppliers if performance doesn’t only recover, but improve significantly. With Market-wide Half Hourly Settlements just around the corner, it’s more critical than ever that suppliers prioritise efforts to resolve smart connectivity issues, to avoid a material decline in their settlement performance when the timeline reduces from 14 to 4 months.

Actions to improve settlement performance and mitigate long-term risk

Whilst there is an industry wide challenge with settlement performance, each supplier will have their own specific problems to overcome.

Individual suppliers will also have different resources at their disposal, whether that’s industry expertise, access to engineers and third party meter readers, or just an effective way to obtain readings from customers when all else fails. Data quality, and the ability to fix complex issues quickly, may also be part of the mix.

It’s key that suppliers first establish a plan for how and when they can replace the SMETS1 meters, and from there, understand what they can do in the meantime to mitigate the immediate settlement impacts.

Being able to understand this will rely heavily on the insight suppliers have around their specific problems. An effective diagnostic of the issues, and a plan of action to fix them will be essential.

Suppliers may not also fully understand the impact of these problems. There will likely be an understanding of the regulatory risk, but there are other, less direct impacts to consider from a commercial, customer and debt-focussed perspective. The cost of these issues can quite easily run into the tens of millions.

Establishing this impact will be key in securing the funding required to solve the problem, and mitigate the long-term risk. This, combined with the diagnostic, should be the first step in solving the problem.

For more information on resolving non-communicating SMETS1 meters, improving settlement performance, and preparing for MHHS, contact Jon Vincent.