Utility Week

10 | 28TH SEPTEMBER - 4TH OCTOBER 2018 | UTILITY WEEK Policy & Regulation Analysis S maller suppliers have been getting a lot of attention recently – not all of it good. The highly publicised demise of Iresa has raised questions from both the media and customers about which could be the next to fold. The Iresa saga echoes the earlier fates of Future Energy and GB Energy, and the pur- chase of Flow Energy by Co-op Energy. The market is now saturated with suppliers, reck- oned to be about 70 at the last count, which means the water is becoming a lot murkier for customers when it comes to switching provider. Many suppliers, both large and small, have announced price increases, blaming a steep and sudden rise in wholesale prices – which have gone up by around 20 per cent since April. Then there are those that have come under criticism for failing to serve their cus- tomers properly because they are struggling to cope with demand. Reports of three-hour hold times, inaccurate billing and other tech- nical issues have resulted in thousands of frustrated customers. This led to a warning from the Energy Ombudsman to those sup- pliers looking to grow quickly that they must ensure the correct infrastructure, resources, systems and people are in place to cope. What's more, the trouble experienced by some small suppliers has sparked con- cern that Ofgem's supplier licence regime is not fit for purpose, with consumer advocate groups saying it is too easy for small sup- pliers to gain licences. As a result, Ofgem recently committed to reviewing its approach to supplier licensing, meaning tougher rules could be on the cards to protect consumers against poor customer service and financial instability. "Not many small suppliers are actually making any money yet," says Ryan Thom- son, a partner at Baringa. "Some have come in and have a niche area they're focusing on, but for many it will be a while before they're profitable." He tells Utility Week: "It appears the busi- ness model hasn't changed – suppliers enter the market with a very cheap tariff, which is potentially loss-making, to draw customers in and they hope they stay long enough to make money. The general assumption is that most suppliers experience a 35 per cent loss at point of renewal. For some, it's a case of them having to build up a portfolio of cus- tomers quickly and hoping someone comes in and values them high and buys them." Using loss-leading tariffs to draw in cus- tomers is alright in itself, as long as suppliers are sufficiently hedged against fluctuating wholesale prices and have enough cash flow to be able to stay afloat. Ian Barker – manag- ing partner at BFY Consulting – says: "We're able to see from our analysis that a number of suppliers are using loss-leading tariffs to gain market share. Some of those suppliers appear to be well hedged going into winter – which given that prices have risen by circa 45-50 per cent since the start of the year will be crucial. Suppliers who aren't hedged or have poor forecasting capa- bility and are selling at a loss are placing themselves at risk of failure if they don't have deep pockets to get through the winter." He warns that suppliers acquiring cus- tomers with discounted prices and offer- ing poor service are at risk of "service meltdown", as happened with Iresa, which didn't have enough cash coming in to be able to service customers adequately. Survival strategies In this tough environment, how do those offering the cheapest tariffs expect to survive? Challenger brand Outfox the Market – which is on target to reach 100,000 custom- ers – is on Which?'s cheapest tariffs list for August. It insists that sustainable and stra- tegic growth are key to survival. "Our effi- ciency as a business allows us to provide a cheap but sustainable pricing structure," the company's operations director, Brad Goodfellow, says. "We didn't enter into this with a smash and grab philosophy looking to make a quick profit. We have invested in the right technologies; the best people and decisions are always made with a long-term perspective." Outfox the Market is a renewable energy company, which launched in September 2017 with a business model in which mem- bers pay wholesale prices for their energy in exchange for a monthly membership fee based on estimated annual consumption. It operates as part of Foxglove Energy Supply, the licensee that includes Fischer Energy, Fischer EV and Eco 7 Energy. Foxglove has a deal with Orsted, which supplies 100 per cent renewable electricity to customers of all four brands. "Cheap prices aren't everything," says Goodfellow. "A mistake some smaller sup- pliers make is to promote rock bottom prices without having the infrastructure in place to meet the demand. As with all industries, sometimes things go wrong and if you haven't got the num- bers or experience to deal with issues, it doesn't matter how cheap you are, people will soon get tired of poor service and leave." He says one of the main objectives of the supplier is to end hold times. "Our live chat system has an average wait time of 20 sec- onds and we respond to all emails within two hours." Another key to its success, it says, is that it is "upfront with its customers". "We recently raised our prices, and this has gen- erally been accepted without much com- plaint. There is no getting away from the increases in wholesale costs and operating at a loss is only going to end one way. You can have millions of customers but if the out- come is going out of business it's not good for anyone." Smarter energy purchasing Other firms point to a strategy of buying their electricity more smartly, which allows them to offer the customer cheaper deals. Buy energy cheaper, buy smartly. Usio Energy, another supplier featured on Survival of the fittest The five cheapest tariffs identified by Which? offer significant discounts, but how are these suppliers able to undercut the market? And are such tariffs sustainable? Lois Vallely investigates. "Suppliers enter the market with a very cheap tariff, and hope customers stay long enough to make money."

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