The value proposition

The energy industry has serious work to do in persuading consumers that the work it does really is serious, says David Brown.

Consumer trust in the energy sector is at an all-time low. Customers are moving to smaller retailers that offer fewer, simpler and often cheaper tariffs and payment plans. British Gas alone lost 362,000 residential customers in 2013, according to The Independent (20 February 2014), as challenger brands adopting more customer-centric, open business practices proved increasingly attractive.

This is evidence that competition in the sector is on the rise, but many argue that the big six suppliers are still dominating the market, hence the decision from Ofgem to refer the sector to the Competition and Markets Authority (CMA).

It is easy to point fingers, but the focus should be on promoting competition and supporting retailers on a path towards the differentiation that underpins competition. Should this be the course of action, the industry will go one of two ways in terms of customer service and pricing. It will either centralise or diversify. A centralised industry will see all the retailers with ostensibly similar pricing and customer relationship management practices, differentiating themselves with unique corporate social responsibility and investment practices.

A diversified industry will see retailers competing on obvious points of difference. They will either offer cheaper energy tariffs at the expense of investment and customer service or centre business plans on excellent service and social responsibility practices. The second model prevails currently. Prices and service practices vary across the retailers and if current trends are any indicator, those who can provide good customer service, reasonable prices and honest practices will be successful. In other words, trusted utilities will win out on the day.

Perhaps the most radical change will happen in the FMCG (fast moving consumer goods) and retail sectors in response to the British Retail Consortium’s (BRC) recent proposals. The BRC proposed in February this year that the current business rates system be scrapped, and it made four recommendations to replace it. The most pertinent for the energy sector is a tax that would be based on gas and electricity use. This change would require an amendment to the Climate Change Levy and would mean that companies or landlords that reduce electricity and gas usage, or invest in energy efficient technology and business practices, would face lower business rates.

Putting the politics behind this recommendation aside, this is of importance to the energy sector because it will ramp up the complexity of the billing process and the volume and type of information that will need to be made available to consumers.

It is already evident that some parts of the industry are struggling with archaic software and lack agility when it comes to change. If these recommendations are enacted, some retailers will not be able to keep pace with their competitors.

The energy sector is in a problematic position. Renewables need government subsidies, and that means taxpayers foot the bill. Whether these costs are levied by  energy retailers or are absorbed into general taxation is academic. Consumers need to understand the need for subsidies and investment and how these are being spent.

At the moment, the industry is doing a poor job of communicating. Bills are poorly explained and poorly understood, as are tariffs. The money must keep flowing to support long-term investment in sustainable energy. For this to be successful it must be underpinned by customers having a clear understanding of what they are paying for, why it costs what it does and its overall “value”.

Energy suppliers and retailers are facing a bumpy road and difficult decisions over the next few years. Some will fall behind while others excel in an industry working hard to change its image and regain consumer trust. Maybe a focus on communicating value to customers instead of the usual cost approach is the key. Introducing more transparency in conjunction with a customer-centric approach will at least ensure that utilities can evolve with their customers.