UK energy is facing severe challenges. Security of supply will become precarious as our indigenous gas supplies decline and our aged nuclear and coal plants prepare for shutdown, while replacements are mired in planning and environmental obstacles. Our share of renewables is below almost all our European counterparts. Our prices have increased substantially and moved beyond our leading European neighbours. Into this battlefield rides the white knight of smart metering, with a government consultation aimed at deploying smart meters into every home by 2020. However, within a day of the announcement, it was estimated that the true cost could be at least £13.1 billion, not the suggested £7 billion to £9 billion. This would virtually wipe out the projected benefits. Is smart metering a white knight or a white elephant?

What are the white knight's credentials? Consumers will be able to reduce cost and CO2 emissions by as much as 15 per cent. The energy companies will save money by consigning meter reading to history and dramatically simplifying billing and settlement. Most radically, if smart meters are used to develop a smart grid, energy companies will be able to manage demand in real time, avoiding spikes in usage and reducing the number of power stations that we must build to stave off blackouts.

However, there are several white elephants in the smart meter room. Will this really change long-term consumer behaviour? Will people switch off every standby appliance every night to save £30 a year? Would an energy display on the fridge without the meter achieve the same savings at 5 per cent of the cost? Would the money be better spent on loft insulation and double-glazing subsidies?

The national programme will be a huge challenge. There will need to be standards to support different types of meter and a national infrastructure to ensure that the data from the meters is available in the right place at the right time. Someone will have to finance this and a future generation will have to pay for it.

Despite these risks, the scale of the challenges we face means that smart metering has to be a vital part of our national energy infrastructure. How do we make it successful? First, we must get the level of competition correct. The UK did a brilliant job of creating the world's first truly liberalised domestic energy market. However, competition was driven down to very low levels, including segregation of the metering business. This incurred a cost wholly disproportionate to the benefit. We must not make the same mistake again.

Second, we must apply the lessons from elsewhere. Work in Australia and the United States has identified that significant benefits accrue to distributors, the people who own the pipes and wires; in the US, savings of 30 per cent have been achieved. Our benefits are primarily identified at a consumer, supplier and metering level.

Smart metering is a prerequisite of a smart grid. Our energy supply has been driven top down by large power stations. In the future, it must support bottom-up demand management, local generation and consumers selling energy back to the grid. This 21st-century infrastructure will be achieved only with a solid smart meter base.

Ted Hopcroft is an energy specialist with PA Consulting Group

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