In 1865, following intense lobbying from horse-drawn carriage operators and the public railway industry, Palmerston’s government passed The Locomotive Act, forcing cars to be preceded by someone walking with a red flag. This law effectively stopped innovation in powered road transport in Britain for over a quarter of a century.
Today, lobbyists, consultants and entrenched interests risk similarly stifling the transition to renewable energy. While it is inevitable that we will decarbonise energy, it could end up taking a lot longer than necessary, and costing vastly more. Insidiously, the costs are buried deep in the system, making them opaque and regressive as they flow through to energy bills.
Last week’s article in Utility Week was helpful in highlighting some of the myths that risk repeating the follies of 19th century locomotion laws and setting the UK back in the critical mission to decarbonise.
First – the headline highlighted the supposed risk of “sleepwalking into a two-tier energy system”. Yet we have had a regressive two-tier energy system for decades, where customers who don’t “engage” have been charged up to 50 per cent more than those who do (and even worse for those on prepay meters). This has been tempered by the energy price cap – but is still a feature of incumbents’ pricing models.
Note that this “engagement” has no impact on the overall cost of the energy system, it just shifts costs from some customers to others – mainly benefiting high income households at the expense of low-income households.
One observer repeats the dangerous myth that challenger brands at the heart of much of the innovation in the market are not that interested in attracting vulnerable customers because they are likely to come with bigger costs to serve. He says: “You have customers who are proactively engaged, they are tech savvy and have the ability to seek out the best deals and take advantage of decarbonising their house and fundamentally reducing their energy bills.”
This is, frankly, rubbish.
First, challenger retailers relentlessly seek out all customers. Take five of the biggest: Octopus, Bulb, Utilita, Shell and Utility Warehouse. Between them, they serve around 20 per cent of UK households and recruit customers not just via online channels, but through telesales, door-to-door, shopping centres, partnerships with local authorities and charities, and customer referrals. Indeed, it is incumbents who are particularly dependent on, and often dominate, online price comparison websites.
Second, Octopus’s data shows that vulnerable customers cost about the same to support as ‘switchy’ customers and every customer of a challenger is a switcher. Switchers come with the cost of onboarding, offboarding, dealing with direct debits and closing balances, and the frequent debt left when people switch and move. And that’s before the very high costs of customer acquisition. The reality is that legacy energy suppliers enjoy large books of lucrative, low-cost-to-serve disengaged customers, being charged at, or close to, the price cap.
The only reason incumbents are so unprofitable is a failure to have invested in the digital systems which would reduce their costs to serve across all customers – including vulnerable and fuel poor customers.
The price cap has begun to change this: Eon/Npower licensing Octopus’s Kraken, Ovo rolling SSE onto Orion and British Gas emulating challengers with Evolve. These platforms don’t just reduce costs but also dramatically improve service and act as a platform for the innovation energy so desperately needs.
The reality is that companies like Octopus are driving high standards for all customers. If a company truly cares about its customers, it doesn’t need to categorise – it’s not like Tesco have different doors for vulnerable and non-vulnerable households. Indeed, doing so is futile as households move in and out of vulnerability – and, sadly, we’ll see a lot more of that with Covid. Retailers need to treat all customers well, not subject them to labels and merry-go-rounds.
For example, our website is designed with every form of accessibility in mind. Unlike the many companies who claim they care about vulnerable customers, every page is navigable with large fonts, no mouse, screen readers, etc. We wrote the book on it. Key financials are in the plain text of monthly emails – not buried away in an unreadable pdf hidden behind a password you’ll never remember.
This isn’t to serve tech-savvy millennials – it’s to meet the needs of the 93 per cent of UK households who have internet access and the 20 per cent of UK citizens who have a disability. Like my 95-year-old gran, who lives in sheltered accommodation and uses a cheap Android tablet to stay in touch. Her poor eyesight and Parkinsons means she can’t use most incumbents’ websites, and her hearing and speech difficulties make telephony difficult.
For those who don’t have internet access, Octopus doesn’t have call-handling targets – if a customer needs to stay on the phone for an hour, that’s fine. If our team thinks they need additional help, they’ll offer it there and then. The same technology that reduces cost gives our people the time and tools to provide better support to customers when they need it.
This grounding in outstanding service means we speak with some authority about enabling customers to benefit as we transition to green energy. And as challengers, our relentless focus on driving costs down means we think about the whole system.
EVs for the many, not the few
Another of Utility Week‘s interviewees said “We have to ensure that all consumers benefit from a smarter energy system, not just the tech-savvy prosumers who drive electric vehicles (EVs), or have solar panels”.
The reality is that EVs are being taken up very rapidly. Octopus’s data shows that EV owners without time-of-use tariffs significantly increase demand at peak times.
Unless we incentivise EV drivers to charge when the system is quiet and when renewable electrons are abundant, we face the perverse reality that everyone else – including low-income households – will be paying for upgrades which could easily be avoided, and it’s a double whammy as they will be paying more for electricity as EV users push up demand at these times. Smart tariffs for high electricity users push costs down for everyone.
Moreover, this commentator is guilty of the classical error in face of innovative disruption – forgetting that today’s early adopters are very rapidly paving the way to the mass market. At launch in 2007, the £419 iPhone was a plaything for well-off geeks, but it paved the way for the $40 Android.
Likewise, EVs are currently seen as expensive, but they’re on track rapidly to become significantly cheaper than petrol cars. We need to accommodate them now.
And it’s a myth that low-income households will suffer from dynamic tariffs. Octopus’s data shows that our low-income and Warm Home Discount customers would actually be slightly better off, on average, on our Agile tariff. Even without behaviour change.
The current energy system is rigged against low-income households – the idea of switching annually makes sense to those who work in bureaucratic jobs but a predicted saving on a 12-month contract is less appealing to those who need savings now. Low income households are bargain-hunters in other markets – making the most of mobile minutes, 99p stores, etc. Dynamic or time-of-use pricing allows them to find bargains in energy too.
And of course, no-one is saying that everyone needs to be on dynamic or time-of-use tariffs but we do need them to be attractive to customers if we are going to make a renewables-based system work at lowest cost. Grasping the opportunity they offer will pave the way for the affordable mass electrification of heating and transport.
Does the energy industry really want to be the 21st century equivalent of the lobbyists behind Palmerston’s Red Flag, or do they want to be at the vanguard of the most important societal revolution since the internet? This is the opportunity to drive costs down for everyone, whilst addressing the climate emergency and creating hundreds of thousands of jobs in a green recovery.