Monday 12 August 2019

Too hot in the Energy kitchen

Interesting news from the Energy sector. My colleague Nick Drew has written extensively on the problems in the Retail Energy market where over-regulation of the supply-side and consumer pressure from the demand end has led to a game where it is very hard to make any money.

Domestic supply used to be a real money-spinner, people have to pay their electric bills and if they did not there was in the old days the threat of a meter you would have to put coins in! Long gone are those days, now Uswitch and other services make it very easy to switch between suppliers and so the margins are disappearing very fast from the retail supply end of the market. In many ways, a good example of the market at work, destroying the business models of the oligopolies just as it should.

Of course, we have yin and yang in business. There are plenty of new entrants, funded by Private Equity and City institutions. who think they can come in and clean up where the old school has left off.

The result of the above is a deal announced over the weekend. SSE (Scottish and Southern Electric in old terms) is selling its retail business to newcomer Ovo. SSE just can't see the point when they are churning customers so quickly at moment. Ovo think their superior brand and service will overcome this.

Personally, I think the lack of loyalty or any incentive to be loyal to your energy provider makes playing the game on superior brand a very dicey one - but it is not my money so good luck to Ovo!

In the meantime, it will be interesting to see what the other of the old Big Six energy suppliers do with their low margin retail businesses - my guess is there is more divestment to come. They can then focus on generation where there are plentiful Government subsidies still to be found.


Anonymous said...

If you recall, it is only a short 6 months since SSE decided to pull out of the deal to buy NPower. The turbulence may be more to do with SSE than the actual market.

After all, we're all going to be buying electric cars and the consumer end is due to boom.

Love to have seen the strategy documents at SSE over the past 18 months or which consultants they used. They clearly have someone whispering in their ear as no sane businessman would flip flop as they have done.

Anonymous said...

Energy companies really only have themselves to blame.

The difference between the standard tariff that you default to after your fixed term tariff has ended is usually so large that you're always going to switch, unless you're happy wasting hundreds of pounds.

If they just automatically put you on an equivalent tariff then people would be less motivated.

Having regulations making the change as easy as possible also helps, along with those little meerkats giving a dual reason for making the switch - saving money and getting a secondary benefit from the switch with either a toy or discount movies/meals.

Nick Drew said...

SSE have indeed been all over the place

They were, and maybe still are, big users of 'Third Party Intermediaries' to solicit commercial business. The TPI sector is chocka with utterly bent players taking very fat commissions from both sides, and lying through their teeth as to how they select a supplier for their *clients*. (Their real clients are of course the suppliers who are willing to grease their palms for favourable referrals.) One of the worst, UtilityWise, itself went bust earlier this year. SSE were thick with them - a sure sign of a company that doesn't know what it is doing

Why Ian Marchant has been so highly regarded beats me - this TPI nonsense all started on his watch (though the worst UTW excesses were after he left). Shows what dressing down and being *cool* and scottish can do for you

I hope this Ovo deal represents some sort of genuine new chapter for SSE, and not just dragging down Ovo, who look(ed) like being one of the proper innovators in this unhappy sector

Raedwald said...

First - smart meters. The NAO estimate that 70% of the 12.5m SMETS1 meters already installed lose functionality when the consumer changes supplier. SSE has been finding it a burden complying with the govt targets for smart meter roll-out by 2020 and like many suppliers, is faced with having installed meters that only work with, erm SSE. It's already has a 2018 fine of £700k for missing its gas meter target .. are there clouds on the horizon for electric roll out? And do OVO get to reset the clock and start again if they take over SSE's customers?

Second, an EU compliance whinge. Electricity competition came from EU requirements to free up domestic markets and the UK has been a willing complier - as you write, to the benefit of consumers if not of energy cos. Here in Austria they've never bothered complying. Only Vienna has a choice of power suppliers - the rest of us have to take the single Landes power supply co. Monopoly rules. Oh, and each state has its own monopoly transmission firm as well. No choice of anything at all.

And whilst we have cheap, reliable, blisteringly fast LTE internet access, 'leccy is stuck back in the 1950s. I've just installed a new State-mandated consumer unit / meter housing - its size and source mandated by law, made by Schrack, the sole State Vertailer supplier, a domestic steel fabricator that survives only through such legislation. Designed by power company engineers, it is the size of a small fridge though only 40cm deep. It cost 1,000 €. It weighs 60kg and without a trace of irony the makers call it the 'ECO' model. When I explain in the UK the equivalent is the size of a shoe box and costs 50€ they shake their heads in disbelief.

UK consumers have actually got a good deal on power.

Nick Drew said...

Mr R -

whenever we bash on about how shocking was the waste in the monopoly days of CEGB, BG etc, we get comments saying how a bit of redundancy never did anyone any harm, etc etc

yours is an excellent reminder of how grotesque the 'redundancy' is when monopolies are given free rein

Bill Quango MP said...

It used to be a mantra of sales that it takes ten times the time and cost to attract a new customer, compared to retaining an existing one.

Quite when this thousand year old business method was binned I can't esactly recall.
Bound to be around the Millenium and the decade of Blair shuffling that followed.

The strange fact is, for a long time, the new method worked. New customers were poached from rivals on discounts, that were paid for by the existing customers, who never changed supplier.

As everyone has said already, once the difference between rates became massive, and the ease of switching was made far simpler and less troublesome,the model would face a problem.

I can recall my longterm insurance company suddenly giving a business insurance quote that was some 20% higher than usual. A very apologetic broker, who had done most of our company [and domestic] insurances for donkey's, said there was not much he could do.

All that business was lost. We got the 'better' deal from whatever the insurance equivalent of parcel monkey is. Old Time Insurnce you can trust, got nothing. Except a whole in their books, where for at leastten years they had a guaranteed sign up.

And, once I'd switched it the once, it becomes the [highly irritating, but necessary] normal practice whenever renewing.

Sometimes, it is impossible to retain a customer. But to have devised an actual policy that forces them to seek out competitors, is, to me, bizzare.

Timbo614 said...

Car insurance the same. I was surprised by Aviva sticking to the text of their current TV Ad that "it's cheaper when you renew". Without any prompting my quote was £30.00 cheaper this year than last! Guess what? I didn't bother with the normal renewal rigmarole of getting switching quotes. I just renewed it with them.

In my opinion the big 6 leccy cos shafted themslves some while back - remember all the 15%, 10%, 8% increases almost month on month? The only way to partially circumvent them was to switch. So we all got used to the idea.

Anonymous said...

"The strange fact is, for a long time, the new method worked. New customers were poached from rivals on discounts, that were paid for by the existing customers, who never changed supplier."

A lot of oldies think they won't be ripped off by their power supplier - true in 1979, not true now.

Those commenters who talk about Veblen goods and the increased utility of 200 crap TV channels rather than 3 not-bad ones should ponder the decreased utility of having to, each time you renew your car and house insurance, your phone, broadband, satellite, your gas and electric, check all the alternatives on the assumption that your provider is trying to rip you off.

There are no end to the ways in which low trust societies are worse than high-trust ones.

Nick Drew said...

@ low trust societies are worse than high-trust ones

trust can be a mighty efficiency factor, for sure, but I think we need to factor in

a) scope for abuse of trust which, let's face it, is an endemic problem (priests, monopolies ...) Trust, but Verify is a good slogan

b) the Chinese approach to achieving / enforcing *trust* - which, at the end of the day, is only a radical, hi-tech version of what religions have always done, or tried to do (either in terms of practical measures or 'virtual' methods)