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The Crazy World of Energy Retail

With around 50 domestic and 40 non domestic suppliers now operating in the UK, there is a great deal to be cheerful about when talking about energy market competition. However, with prices increasing, price caps being talked about, and fundamental market transformation underway, it is a tough market to operate in. Pressure is beginning to show on new players with one failure, one ‘for sale’ notice and several retrenchments recently evident. So can the future winners be spotted?

The simple answer is yes- those businesses focusing on the madness of energy retail rather than conventional business theory will win out. History shows that a focus on the following, in priority order results in business success, however counter intuitive some may seem:

1. You don’t know the cost of what you’re selling until after you’ve sold it

What other business genuinely faces the challenge of having to set its prices before knowing how much its’ product costs? Nor knows how much product will be used and therefore needs to be sourced until after the event? This is the reality of energy retail with businesses having to forecast costs and volumes which are not confirmed until after the power is used. A laser focus on risk management - and the fact that you may never recover what you are obliged to pay out, is the primary feature of all successful energy retail businesses operating in the UK. Sadly those who do not have this focus and don’t effectively manage the risks associated with sourcing and managing commodity and non commodity costs may be destined to a similar outcome as GB Energy.

2. More than 30 pieces of data changes hands in order to register a single meter

Mad though it may seem, the industry was designed with complex, but prescribed, ‘handshake’ processes that different industry bodies use to manage flows of data. A new supplier has to interact with the old supplier, meter operators, data collectors and meter providers when setting up and taking on a new supply. Effective and efficient systems and data handling and management processes are essential to manage all consumer and industry data flows, whether relating to registrations, objections, billing or settlements. Failure to keep absolute control of these inevitably leads to rising unbilled and billed debt, complaints and serious cashflow issues. Looking back in time, OFGEM investigations and fines, and supplier complaint spikes, can pretty much be mapped one on one to a failure to effectively manage data whether through system migrations or overambitious and uncontrolled growth.

3. You can’t differentiate the quality of the product

Fundamentally consumers buy light and heat, which has the same qualities whoever it is bought from. Therefore, price is the first, second and third point of differentiation for suppliers, which can only be delivered if there is complete control of power sourcing and risk management (back to point 1). Only, once price is there or there abouts, do people really care about service, and when they care about service it is all about billing accurately and resolving their queries as quickly as possible. In fact, the supplier who never needs to be talked to is usually the favourite. To deliver this service, control and management of data is the essential pre-requisite (back to point 2).

4. The word ‘customer’ is not mentioned until point 4

The majority of business customers and around 40% of domestic customers now chose their supplier via an intermediary, whether a broker in the business space or a price comparison website in the domestic space. Often, customers are coming to suppliers based on price alone (point 3). Once the customer has signed up with you, how do you get to know them? Other than knowing where they live and how much energy they use, it is really hard to get emotional engagement with customers, who may look very similar but have very different drivers and behaviours when it comes to buying and using energy. Most customer loyalty inevitably comes from good prices and no complaints (points 1,2 and 3). Ultimately it is a fine line between trying to beat the challenge with effective marketing building brand awareness and advocacy, versus less activity and greater bottom line profits.

The crazy world of energy retail flies in the face of conventional sales and marketing practice. Those who get it and focus on the fundamental risks will be successful, those who get their priorities in the wrong order are likely to come unstuck when scaling up. The good news is that customer need is not going to go away, nor the desire for more competition, so there is still real opportunity for many well run and competitive suppliers.

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