The emotional world of energy retail and price caps

The big energy news of this week is not the fact that the Conservative manifesto will include price caps, but the fact that the Secretary of State for Energy, Greg Clarke has never switched supplier because he perceives it to be ‘too much hassle’.

Two clear messages come from this statement

1) Despite knowing that there is upward of £100 to be saved on his annual electricity bill, taking action is so low down his list of priorities that he can’t be bothered to switch

2) He has clearly not even tried to switch supplier, because if he had, he would have found it remarkably easy with the help of a price comparison website.

A Mr Evan’s felt sufficiently irritated to write to the Times to express similar sentiment. His letter, published on May 11, was headed ‘Waste of Energy’ and was very explicit- ‘I don’t want price fixing I don’t want price capping; I don’t want confusing multi tariffs; I don’t want to switch; I don’t want choice; I don’t want to pay more or less than other people and I don’t want a ‘smart meter’- All I want is the excellence of gas and electricity supplied to my house at a fair price, and with good customer service when I need it’.

Closer to home, my mother, shocked me recently by saying the latest dinner party conversation was bemoaning the fact that she and her fellow pensioners all felt they were being forced to switch supplier, when they’d far rather not bother.

I suspect that Mr Clarke, Mr Evans and my mother all fall into the category of intelligent, relatively well off and capable consumers. But they don’t want to engage with the electricity market.

There is then a large proportion of the less fortunate, who maybe don’t know how to engage with the market or in all likelihood have much bigger things to worry about. These are the worthy target beneficiaries of price caps.

Price caps will inevitably result in price convergence with a smaller spread between highest and lowest tariffs. This will create even less of an incentive for any customer to switch, even putting off the 1.8 million who have been bothered to switch in the last 12 months.

There is a loud message coming through for energy suppliers.

Half full or half empty?

For pessimists, the proposed price caps represent a death sentence for competition. Customers will stay wherever they are when the music stops, followed by consolidation of the market. The Big 6, after weathering their profits being rebaselined, will breath a sigh of relief and move forward as they were before all the new entrants entered the market.

For those of us who are half full, there is a much more optimistic view- and it is all about changing the proposition to a different engagement model.

The current sales model for domestic customers is all focused on price. With around 50% of those who are switching doing so via a price comparison website, the emotional engagement with suppliers is almost nil.

Price is a challenging point of difference, whilst good for customers, it gradually (or potentially dramatically in the case of the Big 6) erodes margin. Finding other points of difference is essential for the survival of the sector.

Several of the new entrants, who are alert to the importance of customer engagement are developing increasingly sophisticated, algorithm lead models to ‘talk to’ their customers in a better way. The downfall, I fear, is that it is still computers doing the talking.

A colleague, some years ago quoted a phrase to me which has stuck- ‘People buy people’. Computers however clever, cannot engage emotionally- they cannot get eye contact and they cannot pick up non verbal cues.

With the transformation of the energy market accelerating and self generation, storage, smart homes, energy efficiency and electric vehicles all coming to the fore, there is now a much better conversation to be had with individual customers to address their energy needs. Human to human contact, with broad advice and support makes for a very different retail model.

It is not hard to see that this model could transform the retail landscape, and there are already suppliers moving in this direction. For example Bristol Energy have a physical ‘hub’ for customers to visit in the city.

This people focused model inevitably drives the growth of more locally focused, but broader based regional suppliers who know the landscape, the people and the opportunities. Whether the model can operate on a national scale is questionable but not impossible. An analogy may be seen in the Co-Op stores, where we can buy local produce from local people with a sense of familiarity and community spirit, despite the organisation’s national scale.

Reasons to be cheerful

With the advent of price caps, the current retail model of competitive prices offered through price comparison websites, seems likely to be unsustainable. However, there is significant opportunity for innovation in energy retail, and different models and winners will emerge for those who focus as much on the emotions of the people buying energy as the economics of the business.