Hidden Supply Chain Risks and Energy Competition

Competition in the energy supply market remains a hot topic in the media. On the positive side, there is more competition now than ever before, and the number of customers switching supplier reflects growing engagement and choice. However, the not so positive perspective, is that there are increasing numbers of smaller suppliers being investigated by OFGEM and under Citizen’s Advice scrutiny due to poor service and a growing number of new entrant failures. Citizen’s Advice have called for OFGEM to scrutinize new entrants more closely, but there is an argument to say that the scrutiny needs to be more focused on the market design rather than those participating in it.

What is not often talked about is the growing pressure on small suppliers principally caused by the so called ‘supplier hub’ model and the supply chain delivering to the hub. The model is based on the principle that underpins market design, whereby the licenced supplier is accountable for anything that touches the end customer as prescribed in licence conditions. This is the case, whether or not there is direct control of costs or performance.

When the model was designed, it was only the ‘big 6’ who operated in the energy market and the well trailed vertically integrated model was universal. This model meant suppliers’ having their own in house developed systems, metering solutions, and trading and risk management functions which meant that the ‘supplier hub’ was a natural model for the market.

The plethora of new entrants have only been able to develop due to the growth of independent expert businesses offering bespoke outsourced services which support the complexities of the industry process design. Utiligroup and Gentrack (Junifer) were the leaders in this field with their system solutions really unlocking the ability for new suppliers to enter the market. These businesses have subsequently been followed by a number of new specialist providers of core systems as well as metering services, trading services, settlement services, revenue protection services, prepayment infrastructure services, web services etc. New entrant suppliers entering the market, are effectively gluing together not only Systems as a Service (SaaS) but Everything as a Service.

Where the challenge comes, is that in complying with licence conditions, new suppliers have a restricted number of supply chain options that they can go to in order to deliver specialist services at an economic rate. For example, by complying with the licence condition to offer a range of payment options to customers, there is a need to have contracts in place with direct debit providers, credit/debit card providers, prepayment infrastructure providers and, in some cases high street cash/cheque solution providers. To comply with Smart Energy Code requirements, suppliers have to contract with providers of Smart meters and the associated data services.

With the growing number of new entrants, it has become a sellers’ market for supply chain services and new entrants are under increasing pressure from a cost perspective. Commercial leverage sits with the supply chain not the energy supplier. The reality, is that to deliver licence conditions new entrants have few choices who to contract with, and in some cases are presented with a choice of one and a ‘take it or leave it’ offer.

Equally with a growing number of new entrant customers, supply chain partners themselves, who in the main are relatively immature SMEs, are increasingly under performance pressure. This pressure ultimately manifests itself in the new entrant’s declining customer service and potentially Ofgem investigations and fines. With the current market design, the energy supplier is responsible for their supply chain performance, but management of performance through contracts with their associated SLAs and KPIs, can only be effective to a point. Risk allocation is clearly asymmetric.

With the pending price caps being imposed from the top, it is easy to see many more new entrants being backed into corners, and potentially squeezed out of the market. Market design, and ultimately service accountability, need reviewing urgently before the growth of competition stalls and potentially declines.