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Who will win in the energy industry’s chain reaction?

I‘m in the middle of a chain reaction” – a famous line from a Diana Ross hit song – is an apt chorus for the energy industry. In just twelve months, company debts have grown, ten energy suppliers have ceased trading and the inability of smaller firms to pay liabilities has left Ofgem’s environmental policy funds short by £59 million.

This is bad news for customers. Although Ofgem will protect consumers if their supplier goes bust, sharing personal details with yet another company isn’t high on the public’s agenda. It’s also expensive, with the Supplier of Last Resort (SOLR) mechanism meaning billpayers ultimately bear the cost of this protection. This bill currently totals £171 million and is rising.

To make matters worse, the promised ‘nirvana of disruption’ – better service levels and lower prices – hasn’t materialised. Before their demise, Spark Energy and Extra Energy were rated among the worst energy companies in the country by Which? The situation will exacerbate further if, as expected, wholesale prices continue to rise and customer service purse strings are tightened.

Elsewhere, domestic customers continue to walk away from the Big Six in droves. SSE and npower have recently reported annual customer losses of 430,000 and 500,000 respectively, while British Gas lost 370,000 customers in just four months between June and September 2018. Even if the government’s price cap inadvertently discourages switching by equalising perceived differences between small and large players, its short-term impact on switching volumes is likely to be minimal.

In its fight for customer volumes, the energy industry has undermined its own profitability, with consumer choice proving destabilising. Historical regulatory focus on customers at the fringes has created a culture that ignores customer value. 2019 is, consequently, a critical time to reset the dial – to look beyond short-term disruptive behaviours and rebalance collective culture to support the majority of customers, not simply the few. While fundamental obligations cannot and should not be avoided, the industry needs to focus on building better customer experiences for all.

The cost of doing business is rising inexorably, partly driven by assertion-based policies such as smart metering. Suppliers need to become leaner and promote self-service to drive efficiencies. Parallels with the retail banking industry should not go unnoticed. Like in banking, bigger companies must re-platform on to more agile infrastructure. Value should also be seen as the key differentiator, not price, with customer loyalty earned by offering distinctive propositions such as connected home products and energy as a service.

What is likely to happen over the next 12 months? Firstly, increasing numbers of smaller companies defaulting or seeking refuge in larger rivals will trigger several acquisitions. This requires all suppliers to actively consider their merger and acquisition strategies so they are able to respond swiftly to unpredictable competitor behaviour.

Secondly, there will be a notable divergence of the Big Six’s strategies. Some will ‘go big’, hoovering up smaller suppliers to become a monolith, while others will ‘go home’ and divest into higher-margin pursuits such as digital grid technologies. All suppliers are advised to develop coherent diversification and monetisation strategies so that they can effectively pivot in either direction.

Thirdly, there will be widespread product simplification, especially in the retail sector where disruptors are charging up to £150 less than the Big Six for basic tariffs. This tactic must be adopted to build customer trust. This will likely coincide with increased political pressure to limit price increases, and will require regulation teams to work more closely with product developers to enable acceptable consolidation.

Finally, smaller organisations may seek to survive by combining their purchasing power to hedge wholesale costs. This would require complex commercial agreements and process changes, as well as legal negotiation. If possible, it would be groundbreaking for the industry and a pragmatic way for smaller suppliers to achieve economies of scale.

At the end of a decade characterised by growth in service providers and customer choice, the energy industry is facing a perfect storm. Amid this uncertainty, some will flounder and some will excel. And for those who have prepared for the storm, 2019 could be their most exciting and commercially significant year yet.

For more information and further insights, visit oaklinenergy.com