Home services: a new lease of life for energy suppliers

What’s in this report?

• Introduction
• Key insights
• Expert commentary – Neil Pennington, innovation consultant
• Company interviews: British Gas Local Heroes, First Utility, Ovo Energy, Home Serve

Introduction

It’s no secret that today’s domestic energy retail market is tough. In recent years, retail margins have become squeezed, subject to pressure from declining domestic usage, volatile wholesale prices, rising policy costs and hostile public responses to price rises.

These pressures have not, however, stopped aspirant new entrants from piling in. Since June 2016 alone, 11 new dual fuel suppliers have joined the market, taking the total number of competitors to 49 and reducing big six market share by a further 17 per cent, according to Ofgem’s 2017 State of the Energy Market report.

And not all “new” energy companies are small fry either. First Utility and Ovo Energy both have sizable customer bases now and can be considered worthy opponents to their incumbent rivals. Indeed, First Utility’s acquisition by multi-national energy giant Shell just goes to show how seriously this challenger brand should be taken.

What has not emerged in the market in response to trying market conditions and increasing competitor numbers, however, is significant product differentiation.

Green tariffs, tracker tariffs and tariffs associated with customer benefits like free cinema tickets have proliferated. But beyond the packaging, these offerings are essentially variations on a homogenous model which charges customers a unit price per kilowatt-hour of energy consumed. The supplier-customer relationship has remained transactional, gravitating around a bill for an essential commodity.

Furthermore, the sector’s inability to really shake up the way consumers interact with their energy usage has perpetuated chronic levels of disengagement in the market. And this damaging disconnect has become the crux of political arguments for price regulation – or even renationalisation.

But could this toxic combination of challenges for energy suppliers be about to change?

The transformation of traditional energy supply models by the growth of complementary service offering has been talked about for many years as a route to revolutionised customer experience and more sustainable revenues.

Most incumbent suppliers have at least dabbled in the provision of boiler care contracts to try and tap into this theoretical service benefit. But apart from notable exceptions such as British Gas, whose massive market share and established field force have allowed it to dominate the boiler installation and servicing game, most have struggled to run efficient service enterprises at the same time as fire-fighting fundamental challenges to the traditional retail base.

Now, though, a new strain of services seems to be emerging, hinging on digital capability.

A flurry of supplier announcements in 2017 indicate that ambitious suppliers are mobilising to deliver digitally enabled, asset light “home services” that push at the boundaries of, and sometimes beyond, the world of energy or utilities.

Compared to low margin energy retail activities, home services offer a margin of around 20 per cent, and have also been shown to demonstrably reduce customer churn while improving brand value.

Dutch Utility Enenco, for instance, found that after achieving a high degree of market penetration for its smart thermostat and associated smart home management services in 2016, it saw customer churn drop by 60 per cent and overall NPS scores soar by 30 points.

In this Company Insights study, Utility Week takes a look at a few of the UK energy suppliers moving to gain early advantage in home services provision, as well as the strategy of non-utility home service player Home Serve.

The report leverages insights from a series of in-depth interviews with senior leaders at four UK home services contenders. Where do these organisations see the biggest opportunities in home service provision? Why is now the time to close in on these and what does the future of home services competition in the UK look like?

Key insights

Looking across the insights gained through the four interviews summarised in this report a number of common trends and stand out points are notable.

Service focus: Broadly speaking, suppliers seem to be investing in two major classes of home service provision for UK customers. These relate to smart home services – installing, managing and maintaining smart assets such as domestic energy storage systems, smart thermostats and EVs – and trades connection services, which offer to cut through a currently fragmented and opaque market for the supply of services such us plumbing jobs, boiler servicing, decorating, etc.
Many suppliers have invested in both these areas, though it was notable that investments in 2017 tended to emphasise an interest in the latter – with the exception of Ovo Energy, which poured greater resource into the development of EV services.
There was less interest expressed from profiled companies in the potential of insurance services as an avenue for home service expansion, despite the fact that this has long been speculated about as an opportunity for suppliers (see box).

Service drivers: The main drivers behind energy company investment in home service capability derive from the diminishing margins associated with transactional energy retail accounts and a need to reduce customer churn in an increasingly crowded marketplace with rising levels of consumers switching.
Firms are increasingly convinced – thanks to the availability of data and growing case study references – that home services offer a solution to both these problems. They diversify revenue streams and deepen energy company relationships with their customers, demonstrably improving loyalty and value per customer.

Parallel businesses: As yet, it doesn’t appear that energy retailers with home service offers see the latter as a source of significant disruption to traditional energy supply models. There was little talk, for instance, of their potential to overturn unit pricing per kilowatt-hour of consumption as the basis for energy tariffs in the near term.
Instead, home services are being grown as complementary, parallel value propositions and there are mixed views on the future significance of revenues from services compared with those from energy retail.
This may change in the future, with several contributors anticipating an increasingly symbiotic relationship between services and retail. Ovo Energy seemed to expect services to dominate soonest, with the retail business described as a springboard for higher ambitions in end-to-end support of smart homes.

Target audience: Suppliers with a focus on the provision of trades connection services appear to share a common purpose in targeting a younger and more tech savvy demographic. In the case of British Gas, which launched Local Heroes in 2017, this focus represents a deliberate effort to attract a future customer base – for whom the legacy of the British Gas brand has less meaning and who show a lower propensity to invest in the insurance-style home cover products that have traditionally characterised service offerings from Centrica.

Making money: The revenue models for trades connection services varies. It is free for trades to join the Local Heroes platform, though the company takes a relatively high commission per job booked via the platform. By comparison, Home Serve’s Checkatrade charges a flat rate for annual membership of the platform – which includes a notional commission charge of 0.7 per cent per job. First Utility generates revenues from its trades connection service Bizzby via its equity stake in the company and a small commission charge for jobs booked. Checkatrade boasts the largest network of trades subscribing to its platform – over 25,000. It also claims to generate the most value in terms of work generated through the platform, and value per job.
For a company with established service units in insurance-style home services, it is notable that the launch of on-demand service platforms comes in line with a decline in that traditional market. In its 2017 H1 report, Centrica recorded the loss of 79,000, or 1 per cent, of its services accounts, “reflecting the ongoing market trend for customers using on-demand and home emergency services”. It launched Local Heroes in June 2017.

Smart services: Smart home services from suppliers tend to be founded on a smart thermostat offer, with plans for installation and management of more smart home devices in the pipeline. Ovo is notable for the early focus it has placed on developing EV-related services and for investing to bring associated technology capability in-house. Ovo was also the only company profiled in this study to specify smart meters as a core technology for both immediate and longer-term home service growth.

Customer satisfaction: In order to achieve the engagement and retention results suppliers hope home services will deliver, it is essential that high levels of customer satisfaction are achieved and sustained. All the companies examined in this survey referred to Trustpilot as a key tool for tracking customer satisfaction with their services, and all are successfully sustaining four-star ratings out of a possible five, according to the online service barometer.
Looking more closely at the breakdown of customer reviews, shows some differentiation in terms of the consistency with which very high levels of satisfaction are delivered. It is difficult to draw comparisons between customer satisfaction levels with the services being offered, since the number of reviews on which ratings are based varies widely. However, overall, it appears Ovo Energy is the highest performer (there is no differentiation between its retail and service businesses on Trustpilot) with 90 per cent of customers reporting “excellent” or “great” service and a trust rating of 8.8 out of 10.
It is notable that for both British Gas’s Local Heroes and First Utility’s Bizzby, where it is possible to track satisfaction with the service platform separately from satisfaction with the core brand, satisfaction is currently higher with the former – significantly so in the case of British Gas.

Service competition: First Utility, Ovo Energy and Home Serve all identified Centrica or British Gas as the market leader in energy-related home services in the UK, and showed little interest in the home services manoeuvres of other players. All contributors, however, acknowledged the potential for Amazon to disrupt the home services market and saw this threat as a driver for rapid development of their own service propositions today (see box). Other potential disruptors from outside the energy market were Google and John Lewis.

Plans for the future: Looking to the future, all contributors to this study consider continued investment in home services to be a strategic priority, though surprisingly First Utility’s managing director, Ed Kamm, did not subscribe to the belief that home services are a competitive differentiator.
In 2018 the following areas of focus will be pursued by our profiled service companies:

• Local Heroes. The British Gas platform will focus on growing brand awareness and including a wider range of trades on the platform, which launched with plumbing as its core strength.
• First Utility. In the shadow of the firm’s acquisition by Shell, it’s uncertain what the future holds for First Utility’s service ventures. While the deal completes, the firm says it will continue to support its current initiatives. The focus for 2018 will be on strengthening its broadband and home telecoms business, which it includes in its home service portfolio.
• Ovo Energy. The coming year will be a time for consolidating the value Ovo brought in-house via an acquisition spree in 2018. This may include striking partnerships with other players in the EV value chain to optimise the smart charging technologies and demand response platform purchased last year. There are also plans to extend the value of the Corgi Homeplan business, acquired in early 2017, to enable it to compete in the trades connection service market.
• Home Serve. Striking a partnership with a mid to large-sized energy utility is certainly on the cards for Home Serve in 2018. In terms of growing service capability, the focus will be on adding “soft-fix” capability to its current customer support services and rolling out an emergency response service for fixing urgent issues in the home.

 

Expert Commentary

Neil Pennington, innovation consultant

There is a revolution taking place in the area traditionally known as “energy services”. The changes are driven by a recognition that customers increasingly expect products and services where they want them, when they want them, in a form that they want, for fair value. In short, the imminent future is digital, on-demand and straight to mobile. This report is evidence that a number of companies in the utility market have correctly identified the opportunities this direction of travel may offer them and are organising to face the challenge.

If you look back into the utility market, as recently as three years ago, you would see all the big six with a significant business unit, labelled “energy services”, with strategic aspirations to grow in “non-core” activities which support the core role of retailing energy to customers.

These services were primarily designed to optimise utilisation of an existing direct and contract workforce, established originally for metering or home safety work. Hence most large companies made forays into areas such as boiler maintenance and replacement, the installation of ECO measures (such as cavity wall insulation) and the installation of a range of smart home devices.

But with the core energy supply business coming under pressure from increasing regulatory and market pressure on price and a need to redouble the focus on basic business necessities like winning and retaining customers, some utility incumbents found their service strategy hard to maintain. In 2015, Eon sold its Home Energy Services business to Home Serve, and in 2016 Npower took the same route with its domestic care and maintenance business.

Now, however, it has become clear that a service proposition, closely aligned with the core business, is essential for energy suppliers to respond to the very pressure which cause some to jettison their energy services business. In the past 12 months we have seen suppliers with retained but unloved service businesses pour investment into them. Meanwhile, talk between suppliers without service capability and partners who might provide it through joint venture agreements or alliances have proliferated.

It’s notable too that energy services seem to have been broadly rebranded as “home services” and that these services tend to be focused on two distinct areas (with some overlapping propositions): 1) smart and distributed energy products including thermostats, PV, home storage, EVs, and 2) harnessing local trades networks to provide the full range of household services to the customer.

These service types are less about optimising existing physical assets and personnel and far more about optimising customer data with the aim of creating complex and bespoke relationships – they also recognise a trend away from willingness to pay for an insurance-type service relationship with an energy provider (where poor behaviour places upward pressure on the average cost of such policies for the population), towards an on-demand model (where people only pay for what they use).

In short, they speak directly to the digital, on-demand future mentioned above, and show an awareness among suppliers providing these kinds of services can not only make their traditional business activities more profitable, but generate supplementary, potentially higher value, revenue streams.

Utility companies are not badly positioned to achieve these service goals. They have an established relationship with consumers and most of those trying for early mover advantage are trying to leverage a position of higher trust between the company and consumers than, arguably, other energy retail brands can claim.

So far, there is evidence that this change of approach is working. Trust scores for home service pioneers are generally higher than those held by straight retail brands. And while it’s not yet obvious how service proposition will impact customer switch behaviours or overall supplier profits, global case studies suggest those with robust services, delivering a high degree of customer satisfaction, can expect reduced customer churn and enhanced value per customer in terms of diversified revenue opportunities.

However, all companies profiled here rightly recognise a potential for their home service plans to be disrupted by the expansion of global marque brands such as Amazon, Google and the likes of John Lewis into the same arena.

With superior resources and digital expertise, and a generally better trust footing than energy suppliers, these brands could easily cut suppliers out of the home service market, usurping their position as trusted intermediaries.

Furthermore, it doesn’t seem that suppliers have yet given much thought to how emerging technology might also disrupt their current service model, which is largely based on taking a “commission” for completing smart energy transactions or connecting customers and third parties.

The advent of blockchain, and the trust-less relationships that this brings, is threatening the existence of any intermediary that is margin-taking, by providing co-ordination and trust between the customer and the ultimate provider of service.

This is already happening in the banking and insurance sectors, where its being seen that brand trust is no protection for incumbents with uninventive business models.

Even much vaunted icons of the new economy such as Uber and Air BnB (often cited as the people to follow by utility innovators) are facing disruption from companies such as Arcade City and Slock.it, which are using blockchain to link buyers and sellers together instantly, with secure verification of identity, smart contracts defining the rules, and provenance of transaction and payment secured on the blockchain.

Energy players may believe this kind of disruption is relatively distant from the utility market. But organisations such as the Energy Web Foundation, with its open-source, not-for-profit consortium approach to establishing a global way of enabling new business models using the energy blockchain and autonomous devices, have the potential to significantly accelerate the adoption of blockchain – and other distributed digital technologies for peer-to-peer interaction – for energy and for home services.

When this inevitably occurs, how will the current players face up to the challenge?