Utility Week

22 | 1ST - 7TH DECEMBER 2017 | UTILITY WEEK Customers Analysis Centrica sails into a storm An initiative on SVTs came too late to stop Centrica haemorrhaging customers, and stock market value. Utility Week asks whether this is just bad news or a disaster for the UK's biggest energy supplier. Customer exodus by Alice Cooke When Centrica announced last week that it had lost 823,000 customers in four months, resulting in a record fall in share price and its worst ever day on the stock market, the papers would have you believe the company will soon be down and out. But the industry sees things differently. In the wake of the customer loss announcement, Centrica saw the big- gest share price fall in its history, wiping £1.4 billion off its stock market value. This drop was thanks in part to a £46 million accounting error in North America, but closer to home there were other factors at play. These factors came to light not long aer the announcement earlier in the week that the company will drop its standard variable tariff (SVT) in the new year, for new custom- ers at least. At the time, this looked like a pre-Budget attempt to head off government price-capping plans, but with hindsight, per- haps the timing was orchestrated to get the news out before it was entirely upstaged and forgotten. Perhaps it might be prudent to ask why this happened in the first place. Centrica said customers le due to the supplier's decision to hike prices by 12.5 per cent from September, which it announced in August – and it chose to do that months aer all the other big suppliers, meaning the media had something of a field day. But it said it also lost accounts because of "collective switch, white-label fixed price and prepayment tariffs". A question of balance It is no coincidence that in the same period that 823,000 people jumped ship, the com- pany unveiled a 12.5 per cent price hike. It said as much in the announcement, attribut- ing 150,000 lost accounts to that and market switching trends. But this doesn't tell the full story. "Add to that the collective switch effect," says Paul Massara, former chief executive of Npower. He says that judging by the fig- ures, British Gas will probably have gained around 5,000-6,000 low margin customers on a collective switch, and then found keep- ing them didn't make business sense. They would have been great for customer num- bers, but wouldn't have brought in much revenue. British Gas would have been well aware these customers would be contacted and asked whether they'd like to switch to a lower-priced tariff, and it just wouldn't have been worth the company's while to offer them all a competitive deal. So, letting them leave would make financial sense but would have made the previous numbers look over- inflated, and created a jolt in these figures. "It just happens to have been realised now." David Elmes, professor at Warwick Busi- ness School, agrees, but adds that it is also a question of strategy: "[Centrica chief execu- tive] Iain Conn came in [in July 2014] and gave the company a new direction – one that's more focused on giving customers ser- vices and choice rather than just commodity products, to help them manage their energy in a more efficient manner. The challenge is that he's trying to make a transition in the company when the markets continue to be as tough as ever." He adds that traditional utility businesses are under pressure, and says: "We're yet to see the fruits of some of the shis Conn's encouraging the company to make – the new services and the ways of doing business that he's trying to introduce, so he's had an awkward earnings call where some of the traditional businesses have stumbled, and he doesn't have the good news yet. That's what's happened here." Green Energy chief executive Doug Stew- art says the price hike announced in the sum- mer didn't help: "British Gas gained nothing from delaying its price increases until the end of summer rather than putting them up with the rest of the industry. It was pilloried in the press even though it had offered all its customers lower rates for the best part of a year. The company gained nothing in reputa- tional terms." Massara adds that the political and tech- nological fields are changing all the time, and British Gas is not keeping up. He points in particular to renewable energy and the potential it has to affect revenue. He adds that this is not a company-wide problem, so much as continent-wide one: "It's an issue throughout Europe – the transition is hap- pening faster than people think, and the whole industry needs to be taking much more radical steps to change with it." But in the absence of radical steps, where have the customers gone? "It's hard to say," says Elmes, "but smaller suppliers have been winning market share lately, so they may well be spread around the marketplace." If the latest Energy UK figures are any- thing to go by, he may well be right – more than 600,000 customers switched electricity supplier in October alone, taking the total number of customers who have done so this year, to more than four-and-a-half million. A third (32 per cent) of those switching sup- plier in October moved to small and mid-tier suppliers. T he big six are oen in the headlines, but Centrica has taken it to a new level over the past few weeks. On 20 November the company announced a strategy overhaul including measures to scrap its standard variable tariff (see feature, p24). It is not the first energy company to put forward such a proposal, but it is by far the biggest. Hard on the heels of this news, on 23 November, came the revelation that the company's UK retail firm British Gas had shed nearly 6 per cent of its entire household customer base – 823,000 customer accounts – in just three months, spooking investors and causing its share price to plunge to a 14-year low (see facing page). Clearly, the effects of scrapping the stand- ard variable tariff will not set in immediately. With its share price still suffering badly, can Centrica weather this storm?

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