At first glance, Spark is a poster boy for competition in energy. A small supplier to rental tenants which recently signed up its 100,000th household, it is an entrepreneurial David slugging it out against the Goliaths of the big six. So far, so good – but a quick Google search suggests there’s more to this story. The supplier is being investigated by Ofgem for switching customers to other suppliers without their knowledge, and its high level of service complaints was featured on the BBC’s Watchdog in 2013.
When he meets Utility Week on a summer morning in a bustling central London brasserie, Spark’s managing director Chris Gauld holds up his hands on the switching: the business was young and made a mistake, he admits. The complex regulatory regime is just one of the barriers to entry that small suppliers face, and Gauld has also had to grapple with the closed shop of the wholesale market and the day-to-day uncertainty of energy prices. But Spark is growing up, and Gauld outlines big plans for the future, including a move into social rented accommodation and broadband provision.
The story began in 2007, when Gauld, then a fresh-faced 35, was running a property management company in Glasgow. He spotted a gap in the market: “We had four people full-time managing tenant utilities – and tenants were having a nightmare, landlords were getting bills they didn’t recognise, and we were paying people to sort it out. We went out looking for a solution, couldn’t find one so we said, ‘we’ll start an energy company. It can’t be that hard’.”
Gauld laughs ruefully. Seven years on, he knows just how hard it can be. Spark is a new entrant to the energy market and, despite former climate change minister Greg Barker’s stated desire to see the big six turn into a “big 60,000”, it is a rare beast indeed. Backed by private money from a group of wealthy investors, it has had solid success in the sales channel through its route to market – partnerships with lettings agents, who receive a kickback for signing up their tenants to Spark. As Gauld says: “The success has been in the sales channel – the biggest lettings agents get it and like it.”
This route to market has also caused Spark major problems. Until recently, the company was dogged by service complaints, which were picked up by the BBC’s Watchdog programme in 2013. Among the most frequent complaints were accusations that the company was nigh-on impossible to leave. Even more seriously, it soon emerged that Spark Energy had been switching non-paying customers to the big six without the customers’ knowledge, by entering their personal details on big six websites.
This was a serious transgression, and Ofgem quickly announced an investigation. Nearly a year later, that investigation is still ongoing. Ofgem refused to comment on its progress.
Asked what was happening, Gauld replies: “I don’t know.” He is quick to dismiss the episode as “historical”, but willing to admit mistakes were made: “We definitely didn’t get it all right in that period. We didn’t have a big compliance team, we missed some things and did some things that I still think were probably right but didn’t fit with the one-size-fits-all regulation. You learn from it – we’ve fixed all that stuff now.”
He is particularly proud of the company’s more recent service scores – outranking the big six in the Which? 2014 customer satisfaction survey this year, and scores of 4.7 out of five on its own review site – and cites these as evidence that the business’s troubles are behind it.
Regulation is not the only hurdle would-be market entrants must leap. Perhaps an even greater one is getting access to the wholesale markets, notoriously difficult for small companies. In its earliest days, Spark had to buy energy on the spot market – Gauld describes it as “crazy”, with a shudder, remembering the business’s exposure to extreme price fluctuations.
After a couple of years building up the business, Spark was able to buy energy through an aggregator of the output of independent renewable generators. This was better than the spot market – and had the great advantage of allowing Spark to buy on credit – but meant the company was stuck buying everything the generator produced for an agreed period of time – “sometimes it’s not as much as they thought, sometimes it’s more”.
This precariousness ended, and Spark came of age, in January when it signed a deal with Morgan Stanley. Through a partnership that Gauld describes as “expensive but safe”, Morgan Stanley buys all Spark’s energy on an 18-month hedge: “They take a lot of the risk because they can spread it over a much bigger portfolio, and they give us credit terms, so our cashflow has improved. It’s been a big relief, because it means we can invest in service and the company, without having to always worry about prices.”
The success is reflected in Spark’s financial results. The company made a loss of £3.27 million in the year to June 2012; by the following year, to June 2013, it had broken into profit – a modest £337,000. This year, Gauld says, the audited accounts will show turnover in the region of £80 million and profits “breaking in to seven figures”. The company employs more than 200 people and this summer announced that more than 100,000 households are on its books.
This leaves it ripe for expansion, after a period of focusing on the basics. “About 18 months ago, we realised that we had the building blocks in place. The business was secure, we were profitable and cash generative, and I said to the board, let’s have 18 months really consolidating the business.
“The basic stuff worked, but our service wasn’t what we wanted it to be; our reputation wasn’t what we wanted it to be… We’ve spent the past year sorting service, sorting our brand and reputation, so the silent majority can tell their story. We’ve had a really successful year.”
The next step is to move into the social rented sector, a natural progression from the private rented sector. Spark is also launching a broadband service and other bells and whistles for its existing customers – such as an app that informs house-sharers of the split of their energy bill.
With growth comes responsibility, and Gauld says the energy company obligation (Eco) is at the top of his agenda. Energy suppliers have to meet the Eco obligation when they pass the 250,000 customer account threshold. Some small suppliers complain that it puts an unmanageable burden on their businesses, but Gauld is more optimistic: “Companies like us, which are nimble and can do things differently, have a good chance of making Eco work.”
He is also eager to see the outcome of the Competition and Markets Authority (CMA) inquiry into competition in the energy sector next year: “The debate on energy is not smart enough, I hope that will help. Another thing I hope it will do is provide fairer access to the wholesale market.
“Most small suppliers are paying about a five per cent premium, while the profit margin on the retail side for the big six is about five per cent.”
Does he hope that thousands of other entrepreneurs will follow his example and start up energy businesses? “Well, not in our market,” he laughs. “I do worry that on top of the challenges of getting into the market, there’s a temptation by politicians to grab the easy headline, and a temptation then for stakeholders and regulators to knee-jerk a solution and sometimes the consequences of that are bad for competition rather than good for competition.”
It’s a point of view echoed a couple of weeks after the interview by a prestigious group of former regulators, led by professor Stephen Littlechild, who sent an open letter calling on the Competition Markets Authority to consider the unintended consequences of market interventions as part of its competition inquiry.
But, for Spark at least, the notorious barriers to entry have been overcome. And now? “The sky’s the limit,” says Gauld, “there are 4.5 million properties in each of the social and private rental sectors, and we can supply them all!”