After a tough year during which several suppliers exited the market and the revelation that an “unprecedented” number of companies failed to pay their renewables obligation (RO) payments, Juliet Davenport is one industry stalwart who has a clear vision about what has to be done.
Davenport founded Wiltshire-based Good Energy in 1999 and in the two decades since has seen the comings and goings of many start-up suppliers, a number of which exited the market in the past two years. Good Energy has more than 250,000 domestic and business customers, it owns two wind farms and six solar farms, and employs 340 people.
Davenport was a climate scientist before she launched the company, and it was from this background that she developed an interest in the energy sector.
“If you want to do something about climate, energy is not a bad place to start,” she says.
Speaking to Utility Week at her office in Chippenham, Davenport reflects on the changes she has seen during her tenure and is keen to share with us the direction she believes the industry should now be taking.
“I guess I’ve lived through quite a lot of change, I hope we have been part of precipitating that change.
“What’s fascinating is I think we are seeing more disruption now than we have ever seen before. That’s not unusual, it’s a bit like an adoption U-curve. You’d expect it to be hard to begin with, and as technology prices come down you see this shoot, and that’s kind of where I think we are at.”
There is indeed a myriad of choices for the modern energy consumer, with about 70 market players vying for new customers and challenging the long held dominance of the big six energy companies. More recently no fewer than 11 players have left the scene since the start of 2018, with more departures expected in the coming months.
The energy veteran is keen to share her thoughts on these supplier failures and where the sector’s newer entrants may be going wrong.
“I think what we have seen is that people have got away with coming into this market without having to buy power forward, therefore not having to change customer prices the whole time, they have been pretty lucky.
But, says Davenport, if you look at the steady increase in power and gas prices that happened between April and October 2018, essentially it meant they then had to constantly put prices up or run out of money. This has led to a large number of companies exiting the market.
“These suppliers got used to having a really nice time, it’s been really flat, they didn’t need that much cash. They could come in and buy a supply licence for half a million quid and off you go.”
She also cites the capacity market, which was suspended towards the end of last year, as having an influence on pricing. “When we came in, we had to put a bond up of a million pounds to show that we had enough cash to be able to trade for a year. That is a barrier but also, you might argue, that barrier is not a bad thing to have if it makes sure that people are thinking about their cash and how they use it.”
Industry regulator Ofgem has vowed to tighten up financial requirements in the coming months.
Recent supplier failures have been precipitated by credit default under the balancing and settlement code, which is administered by Elexon.
Parties that trade on the balancing mechanism are required to post sufficient collateral to cover their outstanding payments in case they go under. Elexon, as the code administrator, will issue a warning if the amount owed exceeds a certain percentage of their credit cover.
There are different levels of credit default and shortly before Economy Energy went bust in January, the company was revealed to be in ‘level two default’, indicating the supplier’s outstanding charges amounted to more than 90 per cent of its credit cover.
Another example is Brilliant Energy. In March it too was revealed to be in level two credit default and ceased trading shortly afterwards.
RO payments
There was more financial woe for energy retailers in October last year when it was revealed that an “unprecedented” number of suppliers had failed to pay their renewables obligation (RO) payments.
This led to a shortfall of £58.6 million and triggered a mutualisation process for the first time, meaning compliant suppliers had to pick up the costs. Davenport says that getting free cash flow on schemes like the RO is not working.
“You can charge your customers for it, but you don’t have to pay it out until the end of the year, so they get 15 months free cashflow. For me, that doesn’t really work, we collect ROCs as we go along, so why not make the compliance windows shorter?
“If they are not paying it then you need to call it. I think that’s the issue – that part of the market hasn’t been run as tightly as the other parts.
“You can’t not pay distribution companies, you can’t not pay National Grid, you can’t not pay Elexon but you can not pay Ofgem at the moment and therefore that’s what people do.”
Current estimates suggest this year’s predicted RO shortfall could be as high as £44 million. Perhaps voicing the concerns of the wider industry as well as her own, Davenport clearly resents the fact that compliant suppliers such as Good Energy pick up the costs.
“Our customers are having to pay twice. They have paid for the RO once and they pay it again for somebody else who hasn’t paid it. Why should they have to do that? That’s not fair. What it means is all the companies that are actually charging correctly are being penalised.”
That said, Ofgem is in the process of bringing in tougher licence conditions for energy suppliers, in part to halt the glut of supplier failures, often leading to the supplier of last resort (SoLR) mechanism being invoked.
At the time of writing, the SoLR mechanism has been invoked three times in 2019.
Audit process
With 20 years of experience under her belt, it’s clear that Davenport is passionate about a sector she knows well.
She says Good Energy advised Ofgem “a long time ago” of its view that the robustness of the audit for market entrants should be improved.
To this end, she believes the energy regulator should toughen up the audit process for new entrants and tighten up the rules for market entry in general.
“We suggested you should have a public disclosure audit on the same level as a PLC. There is no reason for not doing that. What it means is that all energy companies have to become more transparent, which is I think a good thing from a consumer point of view.
“It means that the auditors have got a real view of risk – they do a whole risk review.
“That would mean that all the directors of those companies would be far more on the hook for the risks that they were running.”
Smart meters
Another issue that plagues the energy retail sphere is the smart meter rollout. With the 2020 deadline to offer all homes a device fast approaching, it seems the industry is nowhere near achieving its goal.
The national media has been inundated with reports of first-generation (SMETS1) devices going “dumb” when customers switch suppliers, an issue currently being resolved by the Data Communications Company (DCC). Davenport says she is concerned that customers have not had the best first experience with smart meters.
SMETS2 devices, she says, should have been ready from the beginning, especially considering the number of first-generation devices that have lost their operating capacity after a supplier switch. “Essentially you are excluding a whole part of the marketplace from being able to switch along.
“Our view was we went straight to SMETS2. We were really angry that essentially SMETS2 was being delayed and it was being delayed because there was no deadline pushed through until the last minute.
“None of the metering companies would switch to SMETS2 until that deadline was put in place by BEIS (the Department for Business, Energy and Industrial Strategy), and there was a lot of heavy lobbying from the incumbents not to put it in place.
“You have given 11 million customers not a great experience of being on smart metering potentially, which is a real shame. So, you undermine the whole programme.”
Derogation
Hardly a day goes by in 2019 when a conversation about energy retail does not turn to the default price cap, introduced on 1 January.
Soon after, Ofgem granted a derogation to three renewable energy suppliers, including Good Energy, in relation to the cap. These derogations were granted for standard variable tariffs (SVTs) where consumers had chosen a tariff that contributes to renewable generation. They will be in effect until 1 September, a deadline extended from 31 March. At this point the companies will have to submit further evidence to the regulator to achieve permanent derogation.
Speaking about the extension, Davenport says: “That’s partially because I think of the amount of time – they want to make sure they are going through it properly to give both themselves and the companies enough time to provide the data.
“We are pretty much ready to go, but we recognise that it’s quite complex to do and they want to take time over it.”
In spending any amount of time with someone like Juliet Davenport, it’s clear that two decades in the energy industry has equipped her with an enviable depth of knowledge about a complex sector.
And that vision and focus means she is unashamedly vocal about the pressing need for change.