Interview: Michael Lewis, chief executive, Eon UK

“I want to personalise energy: collective switching does not drive that dynamic”

Michael Lewis has just come off the stage at the Energy UK annual conference where, as the only representative of the big six suppliers, the Eon UK chief executive found himself in the firing line during a debate on price caps.

It’s a topic that has dominated the six months since Lewis took over the top job at the company in April, stepping into the shoes of predecessor Tony Cocker.

He started his career at Powergen in 1993 after completing an MSc in pollution control at Manchester University, where he had also studied mechanical engineering at undergraduate level.

After an initial spell in technical and environmental roles, he moved into corporate strategy and development at the privatised generation company.

Following Eon’s acquisition of Powergen in 2002, Lewis moved to the German company’s Düsseldorf headquarters in 2004. Then in 2007 he was appointed to the board of Eon’s climate and renewables business as managing director for Europe before being promoted to become its chief operating officer with responsibility for worldwide wind power development, construction and operations. Here, he had a pivotal role in implementing the Energiewende, the German term for the country’s transition from coal-fired power plants to renewable energy.

The big lesson he learned in Germany was how the country has incentivised the uptake of energy efficiency.

“When I bought a house, I had to have it upgraded to the very highest energy standard as a condition of the loan,” he says.

As a result, while the cost per kilowatt-hour of generation has mounted as a result of the Energiewende, consumers’ bills have not risen to the same extent.

And bills have been very much on Lewis’s mind since he moved back to Britain this year after 13 years in Germany. Within a few weeks of each other, the two biggest Westminster parties had promised to cap energy bills in their 2017 election manifestos. Meanwhile the privatised industry, which he entered in the early 90s, could be facing a profound shake-up, with Labour having pledged to bring the sector back into public ownership.

Lewis kept his head low during his first few months in post, while he mulled over how Eon should respond to the fast-changing energy landscape.

He made his splash in September when he announced that the company will no longer automatically roll over its fixed-deal customers onto standard variable tariffs.

He insists that the move is not about getting one step ahead of regulatory moves to control energy bills. “It’s designed to be one step ahead of the competition,” he says. “When I joined a few months ago and looked at what we were doing for those customers [on SVTs] it was relatively limited. This is a real opportunity to change the rules of the game for those customers.

“I took the view having come back from Germany that the SVT has had its day: it’s not the right way to engage with customers. We’ve accepted that the SVT needs to change and we are doing something about it.”

“Arbitrary interventions don’t generally tend to end in good outcomes.”

The move is designed to address what Lewis sees as the real problem in the retail energy market, which isn’t price at all, but engagement.

The Manchester University mechanical engineering graduate insists that price capping is wrong in principle.

“You never quite know where this is going to end. It will probably result in more long-term detriment to customers than short-term gain,” he says, backing up his argument by pointing to the similar conclusions reached by the 2016 Competition and Markets Authority energy market report.

“Once you make an intervention, there could well be unintended consequences that nobody foresaw. Once they play out, it may become difficult to reverse the original intervention, and then you may have to start with another intervention, and then another. Arbitrary interventions don’t generally tend to end in good outcomes.”

One such feared poor outcome is a potentially chilling effect on investment in the sector. Lewis says: “The most important point is that investors don’t like uncertainty. They already have significant uncertainty with the Brexit discussions and this is added uncertainty.”

That concern extends to investment in renewable energy generation, which Lewis has been so intimately involved with over the past decade. “Any uncertainty will impact investors’ views on where is the right place to invest: most basically, it will increase the risk premium,” he points out.

However, Lewis also worries about the broader message that a price cap would send out about investment beyond the energy market.
“It’s the principle of government intervening in a market that apparently works very well that makes investors wonder where else they might intervene. The concern is not the precise details of the cap, but the uncertainty that it generates.”

And price capping is not needed, says Lewis. He argues that there is no lack of competition in an energy market where he admits that Eon alone has lost a million customers over the past 18 months.

“It’s a highly competitive market: the idea that we are sitting complacently on our laurels is simply not true. We are looking all the time about how we can improve our service levels and bring new products to the market.”

The energy market is heading in the “right direction”, he argues. “The CMA’s remedies should be allowed to work, and the things we are doing to get people off the SVT are part of that.”

Although politicians of all stripes appear to be deaf to the industry’s arguments against price capping, the Wolverhampton-born and Cheshire-raised Lewis hasn’t given up hope that Westminster will see sense as customers realise the benefits of more intense competition in the market. “The evidence suggests that this year we will see an increase in switching again,” he says. “If some of our competitors look at what we are doing and follow that lead or do different things to get customers off SVTs, it could make a difference.”

In the meantime, he says that Eon will press ahead with the plans it announced in September.

“If a customer doesn’t want a smart meter that’s fine, but at the moment we have to convince customers to take a smart meter.”

“The foundation stones are in place now, and we are going to work extremely hard to get our customers to engage when they get a smart meter: that’s the right answer to the problem in the market.”

He says the company will seek to move customers onto the fixed-price tariff that is right for them. If they don’t want to choose, they will be placed on a cheaper fixed-price tariff with the caveat that the company will retain a roll-over tariff for customers who really don’t want the hassle of regularly changing their arrangements.

Lewis’s underlying goal is for Eon to gain market share by developing a more personal relationship with its customers.

This puts him at odds with Ofgem chief executive Dermot Nolan’s suggestion, outlined in his keynote speech at the Energy UK conference in October, that collective switching could provide a better deal for disengaged customers. Lewis says: “I want to engage with our customers and make sure they are on the right tariff. I want to personalise energy: collective switching does not drive that dynamic.”

His vision of a more personalised energy market is intimately interlinked with the ramping up of the smart meter roll-out next year and the mass deployment of the more sophisticated SMETS 2 devices.

While acknowledging there have been teething troubles with the roll-out so far, the smart meter enthusiast believes that the devices will “fundamentally change” the energy market.

“It’s astonishing that in 2017 you have huge numbers of estimated bills,” he says. “We wouldn’t accept that in most other spheres of life.”

While customers will benefit from lower and more accurate bills with smart meters, the number of billing queries that companies handle will “drastically reduce”, Lewis predicts. “The long-term benefit is that people take a keener interest in what they are consuming.”

So if they are such a boon, should smart meters be mandatory? Lewis doesn’t go quite that far but believes that customers should be nudged into taking smart meters rather than being forced to.

“There are things government can do to help by making it opt-out rather than opt-in, and by automatically ensuring that when a classic meter comes to end of life it is replaced by a smart meter.

“If a customer doesn’t want a smart meter that’s fine, but at the moment we have to convince customers to take a smart meter. We are convinced it’s the right thing to do, but people are still reluctant because they might have to take half a day off work and they don’t see the benefit, but once we have installed one they get it.

“We can make it happen quicker, and the quicker we make it happen, the quicker customers get benefits.”

Lewis clearly isn’t reluctant to make the case for what he believes is right for the industry and its customers.

This included stepping into the lion’s den at the Labour party conference, where he spoke at a fringe meeting the evening before shadow chancellor of the exchequer John McDonnell stiffened the opposition’s commitment to renationalise the utilities.

He is relaxed about the prospect of councils setting up their own municipal energy suppliers. “Public sector energy companies will offer something different, and we are happy to compete with them,” he says.

As for the broader threat of renationalisation, perhaps the experience of having worked in Germany’s more mixed economy has helped Lewis come to the conclusion that the picture is not completely black and white.

He says: “A combination of private sector capacity and skills is the right way to reach our common goal of having the best and most up-to-date energy and the smartest energy system that benefits consumers and ultimately the UK.”

The challenge for Lewis and the industry as a whole is to make sure that Westminster listens to its case.