Collective purchasing is gaining momentum. The new energy secretary Ed Davey is a big fan and his department has established a working group on collective switching. Consumer Focus is about to publish a paper on it, and heating oil buying groups were the toast of the recent select committee enquiry into off-grid fuel poverty.
The question is, can collective purchasing work for electricity and gas? That is what Which?, campaign group 38 Degrees and a few hundred thousand people will find out next month when the Big Switch is due to take place – a collective switching gambit with well over of 200,000 people signed up at the last count. The answer depends on supplier.
Bar SSE, which has confirmed it will not take part, all the major retailers have been cagey. None has made a firm commitment to bid in the reverse auction scheduled for 19 April.
SSE suggested that asking for a discount for one group of customers offset by another was effectively predatory pricing. It said that the move risked tariff proliferation – going against the grain of regulatory reforms. It also risked breaking Supply Licence conditions in relation to cost-reflective and non-discrimination obligations. “This will obviously be of concern to Which? given its comments to Ofgem to take a ‘firm approach’ to energy companies found breaching licence conditions,” SSE generation and supply director Alistair Phillips-Davies said last week in an open letter.
Privately, two other big six suppliers have also accused Which? of hypocrisy for not disclosing the cut it will make from the deal.
Some small suppliers, such as First Utility and Ovo, which both have about 90,000 customers, are attracted to the prospect of potentially doubling their customer bases. But not overnight.
“The principle is great,” says First Utility chief financial officer Darren Braham. “The difficulty is making it happen and whether consumers will actually benefit.” He is interested in taking part, provided First Utility can see more detail from Which?, but will not make a decision whether to bid until a few days before the auction. Braham claims numbers would not be a problem; First Utility could handle a massive influx of customers “over a few days”, he says. Even so, he remains sceptical about whether anyone will actually get a better deal.
Ovo chief executive Stephen Fitzpatrick puts it bluntly: “The difficulty is with all the loss leaders in the market. I don’t think will sign up 150,000 customers to a loss-making tariff. So customers would probably be better off negotiating on their own.”
He says while Ovo would “love another 150,000 customers”, it would need at least three months to prepare and switch them over. Will Ovo participate? Not as things stand, says Fitzpatrick. “It would be very difficult for us to offer a better deal than what we already have in the market.”
As the auction date looms, other suppliers may formally drop out. Or they could avoid the flack by taking part but putting in “a lousy bid”, according to Bart Stevens, one of the founders of Ichoosr, which has been through all this before in Belgium, Germany and the Netherlands. “For , it’s a calculation: if I don’t bid, the organisers will pour a bucket of shit over me; but that is probably cheaper than giving a lower price for customers versus the four million that are paying more. So they bite the dust for a week, but then it is over, and it is cheaper.”
Without the suppliers, there is no auction. So how did Ichoosr manage to get EDF, Eon and RWE involved in the European collective switches? “You have to take baby steps,” says Stevens, “and you need the suppliers with you.
“Suppliers are the old mastodons of industry with a very flat product. All of a sudden they are thrown into this Facebook-Twitter bonanza and the hype of the internet; it is bleeping and crunching but the industry is like an oil tanker trying to move two degrees. So you have to be careful with these guys because you need them. They need to understand the model and the consequences.”
To do that means starting small and letting all parties get comfortable. “Get the consumer, the regulator and the suppliers accustomed to the idea. Start even with 5,000, then you have something to talk about, something to measure and you can extrapolate to larger numbers in the future,” says Stevens.
He says even the big six would struggle to take on hundreds of thousands of customers in one go. Those that participated in the last auction in the Netherlands asked Ichoosr to cap it at 100,000 registrants.
“Can you imagine the workload of switching people from the help desk perspective? It is massive,” says Stevens. “They have not set up their operations to handle that and they cannot do that because they don’t even know if they are going to win the auction.”
All things considered, it’s easy to see why suppliers are reluctant to support the auction. There is a chance it may not actually happen, at least in the current format.
Which? accepts that failure is a possible outcome. Speaking before SSE opted out, executive director Richard Lloyd was confident that the majority of suppliers would take part. He insisted they would receive all the information they need to decide whether to bid. Asked whether small suppliers could handle tens of thousands of new customers in one go, Lloyd said “there could be a number of different approaches” regarding how and when the switch is processed. He said it was up to suppliers to decide whether to take part. “But obviously we will say who is not,” he warned.
Which? has the expertise to handle the technical side of the switch, Lloyd insisted. “We wouldn’t have done this if we weren’t confident.”
Lloyd would not be drawn on what Which? stands to make from any collective switch, should it happen. He said Which? is a charity so it cannot make a profit, but that it had incurred “quite a lot of costs in setting this up”. Those costs will be covered. For individual switching, Lloyd said Which? “takes a fee that is about 50 per cent of the other commercial switching sites”.
Whatever happens, Which? is going into this “with eyes wide open”, said Lloyd, and he admitted that it may end up being a learning exercise. But at worst it will have succeeded in engaging more people. It could well see tens of thousands of people looking at how much they could save by switching individually. And that would be good both for consumers and for switching sites.
The next big thing
“Collective switching offers consumers the opportunity to ‘do better, by doing nothing’ – an attractive proposition in markets where consumers want better value, but where inertia is the norm,” says Richard Bates, director of the consumer empowerment programme at Consumer Focus. “It wasn’t always a feasible proposition though – organising group action in this way used to be prohibitively expensive, but technology has eroded those costs.
“Understand this and you’ll see why collective switching is set to disrupt the energy market. Those it unsettles will want to decry it, some will want to observe from the sidelines first time around, but those who realise change is afoot will embrace the opportunity. Sure, there’s work to be done in developing the processes. Which? will need to overcome the pioneer’s curse and work through the inevitable challenges and frustrations. But make no mistake, this is just the beginning. Ichoosr has shown it can be done; and the numbers attracted to the Big Switch show the consumer appetite is there.”
This article first appeared in Utility Week’s print edition of 23 March 2012.
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