Shall we start at the end? Following the Competition and Markets Authority's (CMA) 21-month investigation into the energy market, Ofgem's nearly two-year Retail Market Review, and considerable political spotlight on the energy market, we now have a bunch of proposed remedies. And it seems likely the proposed remedies will finally be adopted in June. You can find all the proposed remedies here.
The CMA's objective is to create a framework for effective competition. That makes sense, right? The CMA is all about competition. That is the name on the tin. But what is the end goal – That consumers can get fair and reasonably priced energy. The theory is that the more intense the competition, the cheaper the cost of energy for customers.
For energy suppliers, it means that they must either reduce their costs or increase their customer profitability.
Cut 'N' Move
To get the prices down, suppliers will need to cut costs or reduce margins. All energy suppliers face similarly large fixed costs that are exogenous to them (the cost of generation, the wholesale cost of gas, transmission or transportation costs, distribution costs, and regulatory levies). If the theory is correct and the proposed remedies bring down prices, energy suppliers will have to look seriously at bringing down the costs they can control – for example, business systems and customer service. Many of the systems and business processes are old. Some are prehistoric. Those suppliers who invest in modernising and installing new systems can gain the advantage in this new world of switching. Not just by reducing costs, but also by providing better and value added services to customers.
"Flick the Switch"
The first line of the "Guns for Hire" track on AC/DC's 1983 album "Flick of the Switch" seems quite appropriate - "The word is out that I'm about". The CMA wants customers to switch more. It has found that around 70% of customers are on relatively expansive default tariffs. To help customers switch more, one of the CMA's proposals is to create a database of disengaged customers. This database will be controlled by Ofgem and have a list of domestic and SME customers who have not recently switched suppliers. Competing suppliers will be able to access the database in order to better target potential customers. The competition for acquiring new customers and retaining the existing is set to become intense.
Will switching work? Will it lead to more competition and thereby give customers fair and reasonably priced energy? We will have to wait and see. In the meantime, suppliers must remember - customers do not necessarily switch purely on cost alone. They may be attracted by better customer services offered by competitors.
Let's face it – energy suppliers haven't got the best reputation for customer service. Those suppliers that invest in new systems and processes will be able to offer better service, provide value added, and be better able to retain happy customers.
Back to the future
Speaking of value added, shall we remind ourselves of smart meters? The CMA see smart meters as capable of improving customer engagement by making the relationship between price and consumption more visible and improving the accuracy of bills. Yes, smart meters will lead to the end of estimated bills – this means energy suppliers will have increased and better cash collection. It will also give customers a better understanding of their energy usage.
Let's not forget other benefits for energy companies - suppliers can better reduce their fixed costs via network optimization — better balancing of the network and a live view of grid activity will reduce balancing costs and losses. Rolling out tailored Time of Use tariffs can help create brand loyalty or differentiate suppliers in the market. Suppliers can also reduce non-technical losses, for example, by detecting unexpected consumption patterns, which may indicate potential theft.
Beyond the obvious, the diversity of smart opportunities can hardly be imagined. New services could be developed facilitating the provision of health services, personal care, household security and local government services, to name just a few. For example, imagine a diabetic person having the ability to record their blood sugar using a pen device that then transmits the results to their doctor via a smart meter.
Opportunities for energy suppliers are endless. In this increasingly competitive market, those suppliers who lag behind may find themselves on the verge of extinction.
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