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UTILITY WEEK | 6Th - 12Th JUnE 2014 | 21 Finance & Investment T he rollout of smart electricity and gas meters is being undertaken on a global scale, with the EU implementing a smart metering policy requiring 80 per cent of households to have smart electricity meters installed by 2020. While this policy varies in different member states, it does set Europe to be the fastest penetration in the world during this time period. An alternative to traditional meters, smart meters use real-time sensors, taking readings automatically and sending them via a range of technologies to energy retailers. According to the Department of Energy & Climate Change (Decc), the rollout will create £7 billion in benefits for suppliers and consumers over the next 20 years. So what is the UK doing to ensure consumers and suppliers make the switch? The government is imple- menting a mandatory rollout of smart electricity and gas meters between 2015 and 2020 to households and businesses. This programme aims to roll out 53 million meters, which will affect 30 million premises and busi- nesses at a cost estimated by Decc of up to £12 billion. Unlike elsewhere in Europe, UK energy suppliers are responsible for funding, planning and delivering the installation of the smart meters, including home moni- tors and displays. As a result, energy suppliers need to adapt their business models, including upgrading their information technology, billing systems and internal processes to handle data; procuring equipment; and recruiting and training staff. To date there have been more than one million domestic smart meters installed in the UK, with the majority of installations funded by competitive meter asset providers (MAPs). Given the large funding requirement of the mass rollout, the com- plexity of the programme and the corporate credit rating pressure on energy suppliers, innovative and flexible financing for the procurement and installation of smart meters will be a key item on the critical path for all UK energy suppliers during the mass rollout. Given these ambitious rollout plans and targets, smart meters will remain at the top of the agenda for energy ministers across the EU over the coming years. Daniel Wong, head of Macquarie Capital, Europe "Innovative and flexible financing for smart meters will be a key item for all UK energy suppliers." Investor view Daniel Wong Analysis ciation rate, which has a comparatively greater impact on its regulatory asset value (RAV). Interestingly, the sector's biggest hitter – and a one-time favourite to be a fast-tracker – is Severn Trent, which famously turned down a £22 per share bid last summer; its shares cur- rently trade at 10-15 per cent below this figure. At its recent full-year results meeting, Sev- ern Trent confirmed that issues surrounding the Elan Viaduct, a key part of the Birmingham strategic water resilience project, were a cen- tral sticking point with Ofwat; there was also unfinished business on asset legacy issues. Aer receiving its final determination in December, Severn Trent has confirmed it will address its dividend pay-out level. If new chief executive Liv Garfield is obliged to choose the dividend cut option, last year's decision to reject the £22 per share offer will look very short-sighted. If, however, the divi- dend base can be held, with at least some annual increase, the shares should rally. While United Utilities has recently been in the public eye – via its excellent Watermen TV programme – it still has major issues with Ofwat regarding the overall cost of its mas- sive wastewater programme. Given widespread deprivation, especially in industrial Lancashire, United Utilities is still negotiating with Ofwat about the supply costs of this retail base, where debt levels are higher than average. The dialogue, accord- ing to United Utilities' chief executive Steve Mogford, remains "constructive". Like Severn Trent, United Utilities will also have to review its dividend base once a final determination is issued by Ofwat in December. None of the remaining 12 companies is publicly quoted, apart from Dee Valley Water. However, very considerable interest will fall on Thames Water, which currently has net debt of about £8.7 billion. Apart from its formidable ongoing capital expenditure budget, it is also vigorously promoting its £4.2 billion Thames Tideway scheme. How this latter project is financed – assum- ing it proceeds as planned – is far from certain, although Ofwat has consistently argued that it should lie outside the current RAV regime. Several water companies owned by pri- vate equity investors, with higher than average debt levels, will undoubtedly be con- cerned about the low Wacc figure assumed by Ofwat; furthermore, some of the current generous tax offsets could be pared back. But the one certainty is that the finance and regulatory departments of the outstand- ing 14 water firms will have a busy summer. Nigel Hawkins (nigelhawkins1010@ aol.com) is a director of Nigel Hawkins Associates, which undertakes investment and policy research Unlike elsewhere in Europe, UK energy suppliers are responsible for delivering smart meters