Utility Week

Utility Week 19th September

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

Issue link: https://fhpublishing.uberflip.com/i/382339

Contents of this Issue

Navigation

Page 9 of 31

10 | 19th - 25th September 2014 | UtILItY WeeK Interview and First Utility's position ahead of other new entrants. But he's also confident about the future and keen to see how the arrival of smart metering will further influence consumer switching. First Utility is unusually well set up for this revolu- tion in the UK energy market. A young company, its IT and billing infrastructure was built with smart metering in mind. "The way that we have constructed our operating model is geared around things like cost of service, efficiency, automation and the ability – right from the get-go – to accommodate meter readings every 30 min- utes," explains McCaig. "That makes us fundamentally different from the incumbents, some of whom are set up to take a reading just once or twice a year." While McCaig knows change is afoot at rival sup- pliers as they prepare for the smart meter rollout next year, he is firmly of the belief that being built "from the ground up" for the age of smart technology puts First Utility in an unassailable position. "The other thing to remember about smart meter- ing – which will be very challenging for the incumbents, above and beyond getting the technology right – is that the more contact you have with a customer the more aware they are of what they are paying you," he says. "A large, passive majority of incumbents' custom- ers are on expensive variable rate tariffs," he claims, suggesting that the arrival of smart metering may prove to be akin to "opening Pandora's box" for some of them. "There are millions of 'sleeping' customers who may be woken up by smart interaction," he predicts. Perhaps such considerations lie behind recent murmurings from the Public Accounts Committee about the inability of competition to stop consumers shoul- dering a heavy cost burden for smart metering? Either way, McCaig complains that progress with the rollout is "painfully slow" and that it is delaying the sector's abil- ity to regain customer trust. "Around one-half to two-thirds of customer com- plaints in the UK arise from meter misreads and inaccu- rate billing," says McCaig. "Smart metering simply takes that away. All those things that cause so much grief for customers could be gone. "But we are implementing the system in an unneces- sarily complex way and without enough velocity. I think this is very short-sighted of the industry," McCaig point- edly concludes. With the Competition and Markets Authority's inquiry into the energy market gathering steam, the problem of customer trust, and the integrity of industry action to regain it, is kept at the forefront of the news agenda – and people's list of concerns. Given this, it seems only right to ask if First Utility's recent launch of The First Utility Foundation, a charity that will receive 1 per cent of company profits to help needy families and individuals, was designed to bolster the growing independent's brand. McCaig says not. "The First Utility Foundation is absolutely not about gaining trust or getting a good image with customers. "This is a distinction that is very important to me. I wanted to launch the foundation because I believe strongly that businesses should do things beyond their fiscal, regulatory or policy obligations, to give something back to society. It's a noble philosophy – which, conveniently, doesn't do the brand any damage either. And with trust in utili- ties overall slumping with disheartening momentum, some good press is sorely needed. Low cost and transparency Integral to First Utility's recent customer growth is its commitment to being cheaper than the big six on both power and gas. It's not a price promise it has made lightly – or easily, with cash- back mechanisms needing to pass a number of Ofgem examinations before they were approved. A buying partnership with Shell, struck in December 2013, is also essential to making the price promise viable for a supplier operating without the much debated benefits of vertical integration. First Utility's agreement with Shell enables the firm to pass all of its trades for power and gas through Shell's commodity desk. As well as being a cost-effective way of sourcing, it also effectively means First Utility operates an uncollateralised model. "This gives us a lot of flexibility in the market," says McCaig. "The ebbs and flows of seasonality and volume are largely irrelevant to us." Before Shell, First Utility had a similar agreement with Morgan Stanley, which also works with Spark Energy. The switch was driven by a desire for a partner with more "scale and reach". But beneficial though the Shell partnership is, McCaig is keen to emphasise that it is not an answer to lack of liquidity in the energy market. "The concern of independents about the wholesale market is not about access," he says, "I think this sometimes gets muddled. "Independents have no problem getting access to commodities – the problem is knowing that you are paying a fair and transparent price. We made this point very clearly in our response to the CMA inquiry." First Utility told the CMA that, due to downstream pressures, the lack of liquidity in the energy wholesale market on a 12-24 month outlook was extreme enough to characterise the market as "dysfunc- tional and inefficient". "The lack of liquidity means that very little is traded, therefore there are no third parties creating innovation and efficiency in the market," McCaig says. "Alongside this you have very little visibility of how the self-supply component being carried out by the incumbents is operating from a financial point of view. "All of these factors have an impact on cost. This is why it is so important to understand that our concern is not about access to commodities but about knowing that they have a fair and transparent price, the benefits of which can be passed on to the consumer." First Utility's own analysis of market conditions suggests the cost of inefficiencies equates to between £30 and £50 per consumer. McCaig does not wish to vilify the incumbents for this state of affairs. Indeed, he says that the blame game over energy costs has become too politicised and "irrational" to be helpful. "It's negative that the big six are so on the back foot now – that they can barely say a word in public without being lambasted. They are not evil." That said, he does not think the big six are blameless. He does not allow that market inefficiencies are the "unintended consequences" of Ofgem's interventions, as some have suggested. "You don't create a vertical integration model for fun," he says. "You do it because you believe there is an economic benefit. But [the big six] have kept that benefit for the shareholders instead of passing it on to the consumer." Does McCaig believe that the CMA will be able to unravel this "opaque" system and put something more valuable in its place? It's too early to predict outcomes, he responds. "But I do think that this inquiry is the most important element in the industry's battle to regain trust. It must come out with a set of rules that work, and which the public believes are fair." So far, McCaig suggests this aim has already been compromised by the decision to exclude networks, distribution and transmission from the scope of the inquiry – "frankly, these account for 25 cent of the bill". However, he is not disillusioned and assures that First Utility is still fully engaged with the process. "This is a once in 20-year opportunity. Everybody needs to take it very seriously and we want to play our part as the largest independent in the market."

Articles in this issue

Archives of this issue

view archives of Utility Week - Utility Week 19th September