Everything comes at a price Lucinda Dann explores price comparison websites, the essential intermediaries in the domestic energy market.

Price comparison sites are key to a dynamic domestic energy market. They have become integral players in the constant push to increase switching and important facilitators for customers seeking cheaper tariffs – and therefore of the wider policy ambition to drive down bills.

However, in recent months switching sites have come under fire for failures in transparency and, thereby, misrepresenting their helpfulness to customers.

Despite the largest switching sites telling the Energy and Climate Change Select Committee in February that hiding the cheapest tariff available to customers was wrong, evidence found that this was in fact common practice for many price comparison players. Instead of showing the full gamut of deals available, these sites only showed tariffs on which they would receive commission. Customers had to manually opt-in to a whole market view to see the full range of tariffs.

In March Ofgem showed it can flex some muscle in the domestic market, if not on the business side, by publishing a revised code of conduct for energy price comparison websites. Enforced from the 1 April, accredited sites must now show all tariffs available as standard and explain more clearly that commission is earned on switches made through the site.

Consumer collective the Big Deal, which published the original research revealing the underhand tactics of other switching sites, has made calls for commissions to be made public, saying: “Commissions are a cost that end up on our bills. If comparison sites have been colluding to fix these commissions at a high level, that is a scandal. Comparison sites should now publish their commissions as a matter of urgency, but many consumers will never trust them again.”

Unsurprisingly, not all switching site chief executives have backed this call and, in a written submission to the committee hearing, Ofgem also outlined its reasons for not making commissions public. The regulator said that doing so would risk “confusing customers”, “lead them
to make poor decisions to lower the amount of commission earned”, and “lead to tacit coordination among suppliers and/or sites.”

That said, in February, before the code was published, Ofgem launched an investigation into energy price comparison sites over whether “two or more” have been sharing information on the commission rate they are charging to energy suppliers, which somewhat blows a hole in their last argument against the publication of commissions.

The committee mused over whether the time is right to introduce a not-for-profit switching site to take commissions completely out of the equation, like the Australian government has chosen to do. Whether it chooses to recommend this action or not it seems there is a growing feeling that services designed to make the notoriously confusing energy market clearer, are themselves getting into increasingly murky waters. Calls for greater transparency, scrutiny and regulation are not unlikely.

Lucinda Dann

 

Demand-side TPIs

TPIs could prove an ideal interface between DNOs, ­suppliers and National Grid.

In the domestic market, consumption data made available by smart meters, or alternatively by the evolution of the internet of things, will provide a key opportunity to data and analytics companies within the energy sector within five years.

Dr Chris Brauer, director of Innovation at Goldsmiths, University of London, believes major suppliers will be “looking to partner with organisations to create a consolidated capability inside of these areas to be able to compete”. He also expects to see more of the big players in the data and analytics world move into the energy demand aggregation market. Google has already signalled its intent in its acquisition of Nest, a smart thermostat that could provide a gateway to future service provision.

The Energy Saving Trust’s director of operations, Duncan McCombie, says: “To see this kind of market, you have to move away from ownership of a customer to more access to assets and services. Google bought Nest because it saw a future opportunity, and Eon is doing exactly the same by acquiring a part stake in Enervee.”

Thomas O’Reilly, head of strategic planning at Siemens, believes that distribution network operators – or spin-off organisations – could make a play for ownership of the consumer demand-side aggregation marketplace, motivated by the desire to manage substation capacity more closely.

“From an aggregator point of view, that service can come from any number of different sources, such as traditional demand response through switching things off, or non-traditional demand response such as switching distributed generation assets on,” says O’Reilly. This generation may already exist or may be procured as part of a managed service.

The role of the aggregator, as O’Reilly sees it, will be to provide scalable demand response that can cope with hundreds of thousands of assets in a specific geographical location. Aggregators will also need to manage conflicts between distribution network operators and National Grid.

Smart energy technology expert John Scott, director of Chiltern Power, adds that the arrival of electrified transport, will throw newly “attractive loads” open for TPI management.

Lucinda Dann

 

Market waits for mandatory code

Energy companies are still waiting for Ofgem to pronounce on a mandatory code of conduct for non-domestic TPIs.

In March the delivery of a long-promised mandatory code of conduct for non-domestic TPIs was delayed until after the results of the ongoing Competition and Markets Authority investigation of the energy market. Already two years in production, the code should bring transparency to an opaque market, where just a small section of players is willing to declare what they earn in commission.

The code, if enforced, will require TPIs to declare their commission earnings and require energy suppliers to deal only with licensed TPIs. Today, it is by no means standard for suppliers to place any specific requirements on TPIs serving their mutual customers to behave in a certain way. Some suppliers, such as EDF Energy, have their own TPI partner auditing structures, but others have none.

As TPIs handle the majority of contracts in the non-domestic market – up to 85 per cent of large industrial contracts – the introduction of a universal and mandatory code of conduct would bring about big changes in the way business is conducted in the industrial and commercial energy market.

There is already a voluntary code of practice for TPIs, but Ofgem admitted in a letter announcing the delay of the mandatory code that it knows that only a few follow these rules. Jo Butlin, chief executive of commercial energy solutions provider Utylix, says that “half of the TPI world is massively frustrated that it has been shelved, and half are hugely relieved”.

It is the relieved ones, she says, who are damaging trust within the TPI market by operating in a world of “smoke and mirrors.”

Butlin believes Ofgem’s delay is a detriment to non-domestic customers and that “a lot of [TPI] businesses are making a lot of money by not being transparent”. Ofgem justifies its decision by saying the delay “reduces regulatory uncertainty by clarifying external conditions” and that it doesn’t want to “overburden” the industry in the midst of what has been billed as a seminal CMA investigation.

Peter Bennell, the chief executive of the UK’s fifth largest business electricity supplier, Haven Power, told a room full of TPIs at its annual conference that he thought Ofgem was using the CMA as an excuse.

“I don’t think Ofgem knows what to do and I think they have parked it with the CMA who say they will have a little look at it. But I think it will come back. I’m afraid there are too many disreputable TPIs who bring the rest into disrepute.”

Butlin agrees, saying “that felt like an excuse rather than a real answer”. While she acknowledges part of the challenge with the non-domestic market is that the term TPI “covers a broad church”, she doesn’t think introducing transparency should be difficult, or take so long.

A different approach that would effect a lot of change in the industry would be if suppliers took it upon themselves to put commission on bills. But while suppliers seem in favour of more transparency around TPIs and commission, no-one wants to be the first to move. “It’s a competitive market,” Butlin says, “you can understand [the reluctance]. It would be better if Ofgem just imposed it”.

The big question left on the table is what will the outcome of the CMA be next week? Butlin does not think it will be anything very radical. However, it will open the door for Ofgem to prove whether or not is “has teeth”.

Cornwall Energy director Robert Buckley does not believe the end product will be a “code with an Ofgem badge on the front of it”. He suggests instead a move towards a framework which is left to others to manage.

Whatever happens, the code will not be allowed to fade quietly away under the cover of the CMA results. As Butlin says, a “lot of the customers get told that the TPIs are doing it for free and they are absolutely not”, and until that changes, every­body will be tarred with the same brush.

Lucinda Dann

 

Viewpoint: The rule of Three Letter Acronyms

Do TPIs simplify a complex market or exploit customer ignorance?

Three letter acronyms (TLAs) rarely represent the most accessible of customer experiences and often simply guarantee that customer confusion is imminent.

For example, everyone has a DNO and is charged for consuming KWh’s on the basis of recovering charges against the Rav of the Rab. Yet I doubt that anybody outside the utility industry has the foggiest notion what any of these things mean.

Similarly, middlemen or third party intermediaries (TPIs) are intrinsically prone to creating muddled understanding of industry value chains for end users.

Part of the challenge in defining what the value of utility TPIs should be – and in ensuring they actually generate this value – lies in the multiplicity of their role and in this, the financial sector’s independent financial advisers (IFAs) could provide a useful point of reference:

• What do they do and what value do they create?

In both cases, they provide a range of services some of which are based on the provision of market-independent technical advice (i.e. energy efficiency or hedging strategies) and some of which are based on market comparisons and/or product advice (this may include access to deals that are not publically available).

In the case of the utility TPI, there is also an aggregation and negotiation service for which the IFA has no direct equivalent. In both cases, a failure to clearly differentiate between the independent and non-independent roles creates the potential for abuse of trust.

• How do they make money and do they make too much?

In both cases there are a range of business models and revenue models at play, but as with IFAs, utility TPIs often make much of their money from a small margin that is applied to the customer’s fees. Given the implied independence issue above, it is essential that the existence and nature of these charges are transparent to the customer. Knowing whether the intermediary is being incentivised by any potential suppliers, and how, is fundamental.

The Competition and Markets Authority highlights the variance in margins between domestic at 3.3 per cent, big businesses and 2.1 per cent and SMEs at 8.6 per cent as grounds for concern that SME’s may be suffering from a lack of competition. This may just reflect the different amounts of value being added for each segment.

Retail Market Reform (RMR – another TLA) aims to make the retail market simpler, clearer and fairer for consumers while intermediaries would claim to save customers money. These two aims are not mutually exclusive and are both worth having. Utilyx reckons that as much as 0.5 per cent to 1 per cent of the average energy bill could be made up of “hidden charges” costing UK businesses as much as £100 million per year.

But there is no reason for these costs to be hidden, and if they are offset by a bigger underlying saving then they are entirely justified. This model works well in other complex markets such as life insurance and mortgages, which share many of the same features in how they are sold and in the potential for customers to pay vastly different amounts for essentially the same service.

While I would be the last to hold up the financial sector as a model for serving customer needs, the comparison is informative. One simple principle can ensure that customers are protected against the potential pitfalls: transparency.

This means that:

1. Intermediaries must declare their independence or otherwise.

2. Intermediaries must state how and how much they get paid and by whom.

The financial sector is a particularly bad offender in the TLA world with its APRs, PPIs and IFAs. But in a rare act of unintended philanthropy, the last of these might just provide a very helpful analogy for something that the utility world is unduly struggling to grapple with.

Toby Ashong, director and head of infrastructure, Boxwood, recently acquired by KPMG

 

Getting it together

The relationship between TPIs and suppliers also needs work.

Improving transparency lies at the heart of the challenge for TPIs looking to move forward in the energy sector. But straight talking and honesty are not only needed between the TPI and its customers – supplier-TPI ­relationships also need attention. For this reason, EDF Energy last month held a dedicated session for its B2B TPIs for the first time at its annual Talk Power Conference.

The experimental session brought together around 40 representatives from UK third party intermediaries working in the industrial and commercial energy market.

The session aimed to promote open dialogue between EDF Energy relationship managers and their TPI contacts on the challenges they face in supporting business customers through the regulatory mire that attends the energy market, and around ways to make their interaction more mutually effective.

The session focused heavily on the complexity of the regulatory and legislative landscape for industrial and commercial energy users, flagging developments which would need to be carefully communicated by brokers and energy advisers. Siobhan Hyland, EDF Energy’s policy and regulation manager, highlighted some key areas that have the potential to affect customers in terms of costs, benefits and compliance obligations and set a challenge for TPIs and suppliers to “leverage the best deal” for customers.

To achieve this, it was agreed that more could be done to ensure that a high regard for transparency among ethical TPIs and suppliers translates into practical information-sharing between the two groups – though all present claimed already to be extremely transparent with customers about fees, commissions, etc.

To this end, TPI delegates pinpointed smart metering as a key area of concern where they feel they have insufficient visibility of supplier intentions to inform and advise their clients effectively. One delegate asked if B2B customers will effectively have to subsidise the rollout of domestic smart meters – an initiative which will cost EDF Energy alone in the region of £1.2 billion. He further questioned whether the B2B cost implication of such a move would be spread over the full five years of the national smart meter rollout, or was likely to be “front loaded”.

While there wasn’t a ready answer for this query at the Talk Power session, EDF Energy representatives promised to follow up with clarification. A similar promise of news came in response to multiple calls for insight into supplier intentions around P272 – Ofgem’s proposal to alter the balancing and settlement code for non-domestic users so that actual half-hourly consumption data is used for billing, rather than estimated consumption. TPIs wanted to know precisely when and how EDF Energy – and other suppliers – would transfer customers to the new settlement arrangements and how it will effect contract renewal processes.

 EDF Energy’s TPI workshop finished with a series of interactive questions which surveyed the opinion of attendees on the likely evolution of the energy market, and their role within it, over the next five years. One question asked delegates how they expected TPI-supplier relationships to change, with the following results:

•    They will become more collaborative:
62 per cent.

•    They will become more competitive:
21 per cent.

•    No change: 17 per cent.

In the light of this indication that TPIs have an appetite for more collaborative working, Utility Week asked Rebecca Sedler, director of EDF Energy’s B2B commercial, why working relationships between suppliers and TPIs had not been so strong in the past.

“Because of the strong belief that the TPI business model has bred from supplier service failings – and because of industry failings,” she replied. But now, as pressure mounts for all participants in the energy industry to simplify customer experience, Sedler hopes this “reticence to collaborate” can be overcome in order to maximise the value that TPIs offer for “niche” energy requirements.

“There’s a strong argument to say that the emergence of TPIs has been the result of service failings on the part of large suppliers – and as a result of complexity in our market,” she allowed. “But I think when you look at that very complex regulatory landscape and at the large number of stakeholders involved in energy procurement decisions, you realise that having that intermediary, having that consultant, adds quite a niche service – so it’s not just for troubleshooting where there are industry failings or service failings. It’s offering guidance on these niche areas which may affect certain businesses.”

Jane Gray

* P272 has now been superseded by P322, extending the deadline for transfer to April 2017.

 

Viewpoint: More than intermediaries: the role of the TPI in supporting business

In today’s energy industry there are now several hundred TPIs operating in the market who, at the most basic level, help business customers buy energy. But the role of some TPIs has changed dramatically over recent years and, in response to the changing needs of customers, companies such as Utilyx now engage in customer relationships that go way beyond assisting energy procurement.

With approximately 50 per cent of the bill relating to non-energy costs, it is no longer enough just to address the half of the bill relating to the commodity price. We forecast that 83 per cent of cost increases between now and 2025 will come from non-commodity price increases.

This means that what customers need from TPIs is not just support in buying energy. They need help managing price and consumption together to manage total costs.

The minimum a customer expects a TPI to be able to offer is the essentials: delivering the best buying strategy and complying with legislation. However, businesses also need support in improving what they already do, whether validating that they are paying the right amount in energy costs for their portfolio of sites, or providing the insight and reporting to pinpoint exactly what energy they are consuming and where.

Taking it to the next level is essential for more sophisticated customers, whether building strategies to manage long-term energy costs, carbon agendas or security of supply. Our customers are increasingly focused on optimising their consumption, business processes and generation. The best of the best are optimising their bills by managing their processes and buildings to minimise their exposure to high prices.

The complexity facing customers in managing their energy costs has grown significantly in the past few years. What customers want is end-to-end support. Energy management has moved on, the services offered to support customers have moved on. The role of the simple broker is no longer enough to support business in today’s energy world.

Jo Butlin, managing director, Utilyx

 

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