There’s no denying that the energy sector is going through a dramatic period of change. Here at Deltra, we’re always intrigued by how such events occur, which is why we recently sat down with a close contact of ours, Sebastiaan van Dort.
Sebastiaan is a leading consultant to energy suppliers and the wider energy sector and has been a consultant at blue-chip energy and construction companies, as well as at a rapidly growing start-up. So who better to help us gain a better understanding of the current crisis and the future of the energy sector than him.
Hi Sebastiaan, what, in your opinion, is the key contributor to the current crisis in the energy market causing 8 smaller suppliers to collapse during 2018?
Crisis is a strong word, but there are definitely some underlying trends that make it harder for smaller energy retailers to stay competitive in the current market.
Firstly, there is the general volatility in the wholesale market, fluctuating wholesale prices disproportionately impact smaller suppliers as they are unable to hedge for the longer-term. Some of the bigger players are able to hedge one to three years ahead and are thus able to weather any short-term volatility much better.
Secondly, there are the social obligations, once a smaller supplier breaches the customer supply volume of 250k customers they have to deliver programmes like the Energy Company Obligation, Warm Home Discount etc. These programmes can very complex and expensive to deliver, and I believe smaller suppliers that become obligated underestimate the impact on consumer bills. This means they struggle to offer a more competitive price in the future.
With comparison websites driving a lot of customer growth and acquisition, you can see that suppliers will struggle to keep enough customers. There is also a lag from when these suppliers start implementing these policies and when the impact hits, and so once suppliers see the effects on their bottom line it is often very late in the day. We can see that quite a number of those that recently got in trouble had to deliver these obligations - (Specifically; Extra Energy, Economy Energy and Spark Energy)
To top it off there is the Price Cap; this impacts smaller suppliers who sell highly competitive fixed rates and rely on a percentage of those to roll over into the high margin Standard Tariff Variable (SVT), where profit margins are much better. As the SVT is now capped it significantly reduces future cash flow. On top of the this the capped SVT also dissuades switching.
Are there any future trends that you think smaller energy suppliers should be wary of going forward?
There are some trends on the horizon that I genuinely think will cause issues for smaller suppliers in the short term future.
Firstly there’s the lowering of the Energy Company Obligation Threshold. This threshold currently stands at a domestic customer supply volume of 250k, from April 2019 this will drop to 200k, and by 2020 this will drop to 150k. This means that smaller suppliers will have to start delivering this very expensive and complex policy. As previously mentioned this, in turn, means that they will struggle to offer a more competitive price, combine this with the price cap and you can see that it’s going to be hard for these suppliers to keep customers and to attract new customers, based on price alone.
Secondly, I also think that picking up the tabs for those suppliers that fail should also be a cause for concern. There is a genuine risk of the domino effect. I recently published an article on why I think smaller suppliers might struggle and many industry insiders informed that there is a genuine risk that when a supplier fails the new supplier who has picked up those customers can recover any additional costs from the entire supply chain, creating additional costs for suppliers.
Once you combine this, with the other trends; SVT, Wholesale volatility and the increased cost due to the Energy Company Obligation and you can see that there is a genuine risk to those suppliers.
In contrast, some suppliers are faring well (Bulb Energy, Octopus Energy, So Energy). What has enabled these companies to flourish in the struggled market conditions and is this success sustainable?
To this question I have an initial response, for some, it is still early days, we forget that some of this year’s failures were yesterday’s successes and we don’t know the background to their finances. That said on a recent Which? Survey the smaller energy suppliers fared much better than their big six counterparts, in particular, Octopus Energy topped the table. There are two observations I have, firstly, most of these firms score high in customer satisfaction surveys. Again, Octopus, in particular, scored a 96% satisfaction rate, pretty impressive.
I feel that most of these currently successful firms have a different offer; a social/local offer like Robin Hood or Bristol Energy; a 100% renewable offer in the case of Bulb and Octopus energy; and these firms generally offer out of the box thinking. When I worked for OVO Energy, they were very agile, and they came up with some really great propositions (like interest on credit), great web and mobile user experience, and excellent customer service. They were pushing the boundaries more so than their bigger rivals. This differentiating and being agile is also something which makes me excited about some of the smaller suppliers, as technology is developing at ever-increasing rates, and the cost of this technology comes down we can see some of the suppliers coming up with new and exciting propositions.
I recently noticed that Octopus Energy customers can now pair the world's first time-of-use energy tariff with the ‘If This Then That’ (IFTTT) App. This app connects various smart technology via algorithms to execute certain behaviours. It allows Octopus customer to really benefit from dynamic energy pricing, and it is claimed saving cash and carbon without even having to think about it. Again, this is really innovative and offers like this add value to customers. This type of proposition using technology and adding value means that this firm has something different to offer than just price.
What advice would you give to Energy Suppliers in terms of their priorities for business transformation during 2019?
Do not underestimate the impact social obligations and think how you’re going deliver them. Many of the suppliers that went under had to deliver these obligations, and I believe they underestimate the impact on their customer bills and the time lag it takes for this to take effect. Maybe speak to a great consultant who has experience in this field!!!!!
Secondly, find a way to differentiate other than price – Greater customer services or a new technological offer for example, as you will struggle to compete on price alone. You should also focus on the long-term fundamentals over fast growth at all cost.
Finally – consider what your margin of safety is. With volatile wholesale prices, the price cap, social obligations and potentially having to pick up the tab of other failed suppliers you will need a margin of safety.