Utility Week

8 | 23RD - 29TH MARCH 2018 | UTILITY WEEK Interview Beasley says this was less of a prob- lem four or five years ago, when there were only 20 suppliers in the mar- ket, but now there are more than 60, with more joining every month. With this extra competition comes extra difficulties. "Let's say for rounded numbers that we have £100 million turnover and 250,000 customers. Then you trip over the trigger and it adds about £4 million to your cost base – not a triv- ial amount of money. You effectively take 4 percentage points off your gross profit. You need to accelerate very fast through there – you need to be at about 400,000 customers just to get back to where you started," he explains. And it is very hard to hit this sort of number with "60 or 70 competitors behind you who are not paying it and they all drag you back". Beasley says the company could have cut its margins and spent more on acquisition to retain its customer number levels, "but it wasn't worth it considering the extra costs that would have brought from Eco and WHD". "Two hundred and fiy thousand cliff-edge trigger for inclusion in WHD and Eco is in fact a massive growth constraint in the current market," he says. Beasley says when new entrants such as Ovo and First Utility went through the 250,000-customer barrier four or five years ago it was easier, so they got through the growth period with a significant capability of making that margin. "Some of the social costs we're seeing are causing a significant break to growth. It is a huge overhead. We end up almost having to pay out a WHD to people by (in the non-core group) guessing who they are and then being marked aerwards by the Department of Work and Pen- sions (DWP) saying: no, you got that one wrong." So how do you correct this issue? Beasley says: "My personal view would be: if you need the WHD, it should be at a lower value of customer numbers and it should be managed centrally by the people who are best positioned to managed it, which would be the DWP fundamentally." Beasley believes WHD payments are something that should be placed in general taxation to avoid the costs "hitting poorer people harder". "We get a situation where there is somebody living in one house next door to somebody who is claiming the WHD. This house might only be slightly better off, but their electricity bill gets hit by the costs." Another concern Beasley has with the WHD is to do with the levelisation costs smaller suppliers have to pay to larger suppliers. "Because of the nature of small sup- pliers, they have a lower proportion of WHD customers than others. Because proportionally, larger suppliers have the biggest group because they've been around longer, we have to make a levelisation payment to them." This, he says, is an "unintended consequence of what looks like a sensible plan". "We're all low-margin businesses, and for us these things become very impor- tant. Like a lot of small businesses, we make most of our money from investors and we pay investment-grade rates for the money we have. Certain costs we pay into the industry go to asset-based companies that are better placed to be able to borrow than we are and can borrow at much lower rates than we can." Both the WHD and Eco are up for consultation this year and Beasley hopes the way they work will change, but Beasley says that if "there is a way to grow profit- ably, we will" regardless of whether they are reformed. "The challenge is trying to create a business that can maintain itself through thick and thin and grow safely," he says. Flow Energy's parent company, Flow Group, had big plans for its boiler busi- ness but, sadly, its vision was never real- ised. Beasley explains that the business struggled with the technology and had insufficient work- ing capital to realise its ambitions. "As we made public last year, we stopped manufacture of the boilers in the UK and instead shied commercialisation focus to the European market." Since then, Beasley says hopefully, Flow has been looking at "other options" for the boiler. "The reason why manufacturers are generally very large organisations is that they need to be," he says. "It takes an enormous amount of working capital to build and maintain a mass market product, and we as a small Aim-listed company, struggled to do that." The company tried to raise money for the boiler busi- ness – which in 2016 generated revenue of £349,000, against development costs of £690,000 in the same year – but found a lack of appetite. There was, however, inter- est from some investors who wanted to "flip the thing on its head" and invest in, rather than sell, the retail energy part. Beasley admits the company did "a bit of a U-turn", and has "shied focus" away from the micro-CHP busi- ness since the US investment came in. He is sad to have lost the company's unique selling point and maintains that it was a "good concept". He says "bringing together various technologies in a local- ised prosumer environment is certainly something which needs to happen" but concedes that market rules need to change to facilitate it properly. Many codes still relate to the days of giant coal-fired power stations, and Beasley insists the entire structure of the energy market "needs to be looked at in the context of a more modern distrib- uted network with increased renewables". "There are places for organisations looking to bring together technologies that can be greater than the sum of their parts by using storage and generation technologies within communities. Perhaps even more than in single homes, you could start to see the growth of localised bal- ancing markets. "We had hopes through micro-CHP to play in that space and we conceptually would have generated at peak times of stress on the grid. It was a natural peak- lopping mechanism to be able to do that. Sadly, it didn't work out, but the concept of having that sort of technol- ogy, whatever it may be, working correctly with the effect it has on the grid is something that will come. I think now maybe more related to battery storage than internal generation mechanisms. "We've got a long way still to go on solar, but maybe one day we'll see all houses pre-tiled with solar panels. There's a huge amount of stuff still to develop in that space and there is a possibility that some small suppliers will still have a role to play in that if they're more techno- logical suppliers. There have been a good few attempts at different business models – it's a question of eventu- ally getting it to a point of cheap rollout of technology at scale, which works within people's life cycles. There are people who will engage fully, but there are people – just like myself – who will say: I will engage if the equipment I buy deals with it all for me." Beasley hopes Flow will "still be part of this market" in the future. "It takes an enormous amount of working capital to build and maintain a mass market product, and we as a small Aim-listed company, struggled to do that."

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