12 Jun 2019

From the current political stasis, through the (temporary) abandonment of the free market in the retail sector to the (temporary) suspension of the capacity market, the generation and retail sectors of the electricity market are in a state of flux. Throw in the question of whether the UK is serious about fracking for shale gas or not, the Extinction Rebellion protests and the Climate Change Committee report on the Government's current decarbonisation policies and you have a political and regulatory context that is not conducive to investment. However, saying we are living in uncertain times is the easy part. 

The more difficult question is, if you are the GC of an energy utility what do you do? 

One priority would be to "get off the naughty step". It is easy for politicians to blame energy suppliers for raising prices swiftly when wholesale costs increase, while passing through price falls much more slowly. Whatever the reality is, the perception and the current narrative is that the privatised, liberalised markets work in the interests of shareholders, not of customers. This then plays into political pressure on the regulator to be more interventionist, on the basis that regulatory intervention, rather than an open market, protects consumers' interests. 

The first step here is reducing the cost to serve, which is probably the key challenge for every single retailer of whatever size. Approaches to this question differ; some suppliers are looking to consolidate in the UK, with the now collapsed SSE/Npower merger being an example of this. Others, such as E.ON, are looking at building pan-European supply businesses. Both approaches work on the basis that serving more customers using the same infrastructure will reduce costs per customer. 

The current rash of small supplier insolvencies has created opportunities to acquire customer portfolios at reduced costs. For a utility GC, the requirements are to understand how the supplier of last resort (SoLR) process operates and how it interacts with the insolvency regime under the Gas, Electricity and Energy Acts (the short answer to which is that they don't interact very well). There is also the question of the type of customers that will be acquired. The supply terms of the defunct supplier may have been materially different, possibly reflecting the nature of the customer base. The other requirement is how to make your bid attractive to Ofgem, so you are selected as the SoLR. Having worked with both successful bidders and suppliers exiting the market, we can assist with this process. 

This leads to the question of which customers does a business want? This is a market where a material number of customers sign up to direct debit deals and then cancel their direct debits, leaving the suppliers to pursue them for the debt. There are also customers who will accept prices that are so low, they contribute to the supplier going insolvent, who then complain vociferously that they are not allowed to continue on those below cost tariffs with their new supplier. This is not a market where all customers have equal value. 

This also leads to a question as to how the legal team (both internal and external) are contributing to these processes. Are your external firms leading the way on the application of IT to these processes and/or the provision of legal services more generally? Are they working with you to deconstruct each step of a legal matter and to apply project management techniques, IT and legal experience in a combined fashion to improve the process and/or reduce costs? If not, then they should be. 

There is a further challenge coming around distinguishing the core energy products by price. The introduction of the SVT tariff cap is causing a predictable narrowing of the gap between fixed prices in the market and variable tariffs. The next option is likely to be the advent of time of use tariffs for small commercial and even domestic customers. This is in some ways going back to the future, as Economy 7 tariffs have offered within day changes in tariff since the late 1970's. The roll-out of smart meters potentially allows tariffs to be set on a half-hourly basis; the regulatory and legal implications of such a step are not entirely clear yet. One aspect that is bound to come to the fore with this change, and the potential future internet of things is the already complex question of data protection.  

Just as law firms are expanding the scope of service they can provide, energy retailers are increasing the range of products that they are offering to customers. The market is seeing diversification into the provision of insurance, boilers and web apps for controlling domestic devices. In the Industrial & Commercial market, there is also the installation of small CHP facilities to provide on-site supply to those larger consumers. A number of companies are also adopting the multi-utility supply approach where providing other services such as phone, or in the business sector, water, can be combined, to reduce the cost to serve each client. This in turn brings new regulatory challenges, as the regime governing each of those sectors differs from the others. 

The degree of change and uncertainty in the GB energy markets is already substantial. These changes will bring challenges, but also opportunities. Taking those opportunities will require energy suppliers to be alert and nimble, but also to be aware of the legal and regulatory risks involved. As has been shown by the suppliers exiting the market, when some offers appear too good to be true, that might well be the case. 

Doing nothing is unlikely to be a sustainable approach, or one that will appeal to directors of and investors in utility companies. If you would like to discuss the changes that we are seeing in the market and how these might affect your business, please get in touch with us using the contact form on the right, or directly with Chris Towner.