Can FOMO drive a utilities sector revolution?

Fewer than one in ten consumers want service innovation from their utilities according to new consumer research. But many utilities have hung their hats on a shift into high value solution provision as an escape route from unsustainable market norms and the pressures of the climate emergency. Can fear of missing out on strategic goals drive the market changes needed to flip consumer sentiment? Utility Week explores the challenge.

UK utilities are going to miss out on their slice of a mouthwatering pie, deeply filled with value-add service opportunities. That is the first-glance takeaway from a consumer research initiative recently conducted by Utility Week in association with the consultancy Charles River Associates.

The survey, which canvassed views from over 1,000 UK adults, found that just 10% of respondents want to see service provision coming from their utilities. Instead, the resounding message was that the public feel energy and water companies need to work much harder on their knitting and get their basics right.

For the large majority, this means focusing on affordability of services, with maintenance of secure supplies and efficient operation of infrastructure also featuring as key priorities in consumer eyes (see key findings list below). Even work on decarbonisation took a back seat in the survey, with just a fifth saying that they see sustainability as being something utilities should be focused on in the current economic climate.

While there’s no doubt these responses are a direct reflection of the harsh realities of a cost of living crisis, they nonetheless represent a blow to companies – especially in the energy sector – who have bet heavily on service innovation to open up a new lease of life for them in a net zero future.

Through offering solutions which promote long-term relationships with customers, they see an alternative reality ahead. One in which they can be highly valued enablers of affordable, comfortable, environmental sustainable and all-round smart living – by financing the installation of low carbon technologies and leveraging usage data to help consumers play in a flexible, zero carbon grid, for example.

In the same future, according to senior industry figures who have spoken to Utility Week about their strategies, they would expect to enjoy the desirable side effects of greater cash flow stability, diversified revenue streams and reduced business costs associated with grizzly issues like customer churn. It would be everything today’s market is not.

Key research findings:

Utility Week’s research canvassed the views of over 1,000 UK adults and was conducted in October 2022. Here are some of our key findings.

• Fewer than 1 in 10 want to see their energy company deliver new services (7%). Meanwhile, 12.5% want water companies to provide services, for example supporting water reuse and recycling.
• Price stability is the most important thing utilities can deliver for consumers (voted most important factor by 77% for energy and 58% for water)
• Around one fifth of consumers feel sustainability and advancing towards net zero should be priorities for utilities businesses today
• 72% say they would be willing to reduce consumption of energy/water to help manage their bills while 67% said they would consider changing their usage habits in response to price signals
• Less than a third (27%) acknowledge that it is hard for utilities to deliver on sustainability and net zero goals while keeping prices stable
• 42% believe energy and water utilities should be renationalised (just 12% are opposed to renationalisation)
• Around a third of consumers say it is unacceptable for private investors or pension funds to own/invest in utilities
• Of those that are aware of Ofgem and Ofwat, two thirds believe they are not doing enough to support consumers

Leaping off from these findings, Utility Week and Charles River Associates plan to publish a major report in early 2023 looking at the challenge of rebuilding utilities markets for a net zero future enabled by enduring, value-add relationships between consumers and their energy and water providers.

This vision is no mirage. Globally, “energy as a service” for industrial and commercial end users has an estimated market value of around US $70.5 billion according to various market research organisations. By the end of the decade, that value is expected to at least double with figures in the region of US $148bn being widely quoted. With model now proven for I&C consumers, the domestic market stands ripe for transformation.

Similar though less talked-about opportunities exist in the water sector. There, companies are struggling with the antagonistic challenges of growing population, increasingly scarce water supplies, spiraling treatment costs and over-stretched capacity in the sewerage network. The problems posed by all these challenges could be significantly soothed if service innovation were able to flow, supported by more accurate usage data and the installation of kit for “water neutral” homes.

Wobbly legitimacy

But UK consumers have clearly not received the memo that service innovation from utilities is their key to a brighter tomorrow. Why? A key issue, according to expert commentators is the industry’s continued failure to secure legitimacy in the eyes of its customers – a problem which is growing with every day that the cost of living crisis deepens and consumer sensitivity to the cost of their most basic daily necessities increases.

Utility Week’s consumer research shows that just one third of consumers believe utilities have legitimate ownership structures, with the rest saying it is unacceptable for energy or water companies to be owned or invested in by private investors and pensions funds. Furthermore, consumers mistrust the institutions which govern utilities. The survey showed that, of those respondents who are aware of Ofgem and Ofwat, 64% and 69% respectively felt that these regulators are not doing enough to protect consumer interests.

Given such widespread dissatisfaction with the status quo, it was therefore no surprise to see the door left wide open for the idea of renationalising utilities. Just 12% of respondent were opposed to this idea.

This is symptomatic of an environment in which “the post-privatisation model” for utilities is looking “wobblier” than it has at any point in its history, according to John Penrose MP, a speaker at the recent Utility Week Forum in London.

Penrose, who last year led an influential review into the effectiveness of utilities regulation, blamed this shakiness on relentless “sounding off” in Whitehall about the performance of utilities and a rising political inclination to reassert “state control” over utilities via “ever increasing levels of regulation”.

Providing closing remarks at the same conference, former Ofwat chair Jonson Cox, who also sits on the board of energy supplier Ovo Energy as a non-executive director spoke at length about the legitimacy challenge facing utilities.

Making it plain he was speaking in a personal capacity, Cox aired his view that public calls for market intervention or nationalisation were an expression of “anger and frustration” with utilities for repeated failures in areas where, he intimated, the public rightly expected them to be stronger. Amongst these, he pointed not only to high profile operational issues, such as leakage and pollution in the case of water, but also to perceived failures of transparency, skill and resolve in leadership.

While there is no doubt, he said, that utilities attempting to navigate the vying pressures of long term sustainability, reliability and affordability have a tough job. He candidly observed that “decision makers are paid to resolve these trade offs”.

In characteristically straight-talking style, Cox warned that if utilities shied away from the questions being asked about their legitimacy, then public frustration would boil over, triggering “irrational” political interventions in the market.

Hope ahead

Such portentous words are nothing new. Veterans of the UK utilities industry will be well used to discussions about the causes of low consumer trust in the sector and the need to forge a new deal with customers – hence Utility Week’s New Deal Campaign of 2019 which culminated in a high profile debate featuring leaders such as Eon boss Michael Lewis, Northern PowerGrid CEO Phil Jones, the eminent chairman of the Committee on Climate change, Lord Deben and, once again, Jonson Cox, then chair of Ofwat.

Back then, leaders clearly recognised the need to re-draw utilities’ social contract with consumers for a future including monumental investment for net zero and a transition to smart, digital services founded on dynamic use of data – both asset and consumer.

What has changed since then is that climate threats have become more intense and consumer willingness to shoulder any costs associated with mitigating them have diminished thanks to the squeeze put on domestic finances first by the pandemic and then by the cost of living crisis triggered by the war in Ukraine.

In our October 2022 survey, less than a quarter of respondents said they would be willing to pay for utilities to make strides towards net zero. And there was a lack of sympathy with the idea that  getting to net zero should lead to increased costs for consumers. Less than a third (27%) said they agree it is tough for utilities to make sustainability investments while keeping bills low.

But while it may seem depressingly as though utilities’ battle to build legitimacy is only getting harder, there are some who look at Utility Week’s new research findings and find hope.

Speaking to Utility Week, Deepak Ravindran, chief executive of Kraken Technologies – the technology company spawned by the energy industry prodigy Octopus Energy – says the industry may be on the brink of a significant step forwards thanks to widespread transformations of customer engagement platforms in the sector.

Historically, Ravindran observes that energy and water providers have lacked a “strong platform” for flexible customer engagement, resulting in inconsistent experiences, frustration and rigidity in service delivery modes. In this world, he says, “it is very difficult to see” why customers would want anything other than a commodity supply service from their utilities.

But replatforming moves in energy – and soon water too – mean customer engagement is about to move into a new era according to Ravindran, and this will “open the door” to provision of value added services.

“What Octopus has found is that with the right platform in place, people are actually open and willing to engage with new services,” he says. Pointing to examples Ravindran references the enthusiastic response of customers to the launch of the Octopus Fan Club as well as the results of its last “Winter Workout” which challenged consumers to reduce their gas consumption at key times. The experiment engaged 300,000 customers and achieved a net reduction in consumption of 12.5% over 12 weeks.

“These examples and others that I could talk about show that you can fundamentally change the economics of energy if you have the right technology and the right engagement in place,” observes Ravindran.

Another strategy leader working for a  major energy supplier agrees that legacy failures on the basics of customer experience have undermined the introduction of higher value propositions in energy. Put simply, they say “people don’t like to buy stuff from people they don’t trust”, so where customers have been burned by poor service or confusing product information in the past, they are twice shy of engaging further.

However, where strong engagement has been achieved, customers were generally open to conversations about services which might help them manage their energy usage more effectively. Our commentator says, “the lack of interest in service provision [shown in the survey] is not really reflected in our daily conversations with customers. The reality is that in the current economic climate a key service we can offer is to help customers lower their bills.

“That might not have been what people were thinking of when they chose to say they were uninterested in services from utilities. I think what is more telling, and more hopeful, is that 72 per cent of consumers told you they are willing to reduce their energy use to help manage their bills and that another big chunk said they would be willing to change their habits if we given them the right price signals. That’s what we need to focus on.”

Jess Cook, project development manager at National Energy Action also thinks that consumers may not have been clear about what kind of new service provision they were being asked to imagine from their utility when responding to the survey. And, she points out, in the midst of an affordability crisis, there would have been a good deal of caution about seeming to endorse the creation of multiple new “up-sell opportunities” for utilities.

“I think a lot of people may have immediately thought that a new service from their utility would lead to added cost for them at some point,” she observes.

But, like our anonymous energy leader, Cook agrees that the more significant findings are around willingness to change behaviours and reduce consumption given the right support. “We need to be careful not to issue blanket message on demand reduction,” she cautions, “because people on the breadline who are already self-rationing do not need to be encourage to use less – quite the opposite. But if we get the messaging right then there’s undoubtedly a huge moment of opportunity for the industry right now given that consumers are hyper aware of their bills. They’ve never been so alert to how much energy they’re using – and to issues like the impact that hot water usage has on their consumption.”

So it seems that with the right technology and right messaging in place, the time is ripe to engage consumers with services that are targeted at driving down bills and cutting usage. But what of the more capital intensive offers being lined up to make net zero living a reality – like solar panels linked to domestic battery storage, heat pumps and electric vehicles?

Rebuilding requires tearing up

Here, the challenge is more complicated according to our energy strategy leader. “Affordability is clearly a big factor here. For a massive tranche of the population, they’re just not in any state to be making those kinds of investments, and they’re not minded to – trying to make ends meet is exhausting and more and more people will be in that position where they just don’t have the bandwidth to consider options for improving the sustainability and efficiency of their home.

“That said, there will still be a proportion of society that the smart homes proposition will become increasingly attractive to – and that will be sizeable, with room for us to drive growth through making choices easier for people and through customer finance offers. I think that the idea that suppliers will increasingly have to have the strength to help customers source funding for capital projects will be key in the future and a real source of competitive differentiation.”

Three grand challenges for market transformation:

Simon Ede and Tilmann Hensel-Roth of Charles Rivers Associates set out the necessary enablers for a solutions-based utilities market revolution here. In brief, they include:

• Tackle the perception of utilities as limited value-add players. Re-engineer market conditions to drive for enduring customer relationships which can accommodate more complex, high value products and services
• Design for inclusiveness to ensure market advances can be enjoyed by all consumers across the socio-economic spectrum
• Strike a new regulatory deal which reflects altered market ambitions and a new ecosystem of actors in the delivery of products and services

Read the article in full for more insight.

But there are challenges for suppliers trying to do this at scale, adds our source. “The big question is how do we build those enduring relationships with customers so that we can enter into those kinds of long term agreements?…Any significant form of capital investment needs to be allowed a longer payback period. But there is still very much a feeling that long term contracts are anti-competitive and not in the interests of the consumer.

“We need to address that. And fundamentally it comes down to Ofgem having a much clearer view of what role suppliers should be performing and regulating in a way which is relevant to that view.”

Our commentator sums up, “If that role is [for suppliers] to be enablers of the net zero transition, then some big changes are needed to the way the market works and the way it is regulated.” As a rider, he airs the view that Ofgem may not be in a position to see through these changes, labelling it a “discredited brand”.

In water, where the long term relationship with customers is a given, NEA’s Cook says capital investments for a more sustainable, efficient water network are held back by a lack of joined up thinking.

Speaking excitedly about rising interest in water harvesting for the UK market, Cooks says trials suggest it could reduce mains water usage by as much as 50%. This would have immense knock on benefits for water companies who would see strains on wastewater networks and water treatment facilities substantially reduced. The savings on energy alone could stretch to many millions and Cook even suggests that water harvesting could help water companies whittle down mounting bad debt and bolster financial resilience. “People don’t tend to think of the benefits of demand reduction in a very joined up way,” she observes, “and that means we’re not really appreciating the size of the opportunity that is involved or building a good business case for the investment.”

At least some blame for this persistently siloed outlook must be laid at the door of the regulator, says Cook, who believes Ofwat should take a stronger lead on coordinating water company actions which would directly help customers – especially on affordability. She says NEA has been disappointed not to have seen a similar emergency response to the cost of living crisis as the one which took place at the start of the Coronavirus pandemic. “We would have hoped by now to see all of the companies drawn together in the same way as they did back then to agree a set of minimum services for all customers and to issue similar reassurances around pausing of collections or offers of payment holidays. We are in a worse economic position now than we were at the beginning of the pandemic and we should by now have seen something more collective.” Without this, Cooks says it unsurprising that confidence in regulators is so low in Utility Week’s survey results.

Back at Kraken, Ravindran also believes there is a need for some fundamental changes to regulation in order to open up service innovation – across both energy and water.

He rejects a commonly held view in energy circles that a market where driving a low unit cost of energy is a key point of competition is incompatible with value-added services. Instead, he says this shows “a lack of imagination” and is indicative of not having “the right technology and the right talent in the market”.

However, he does suggest that current market structures have raised barriers to a free flow of talent and technological innovation. “I think what has been lacking to some extent is proper market competition. This will always bring technology and talent to bear and will bring investors,” he says.

“Regulation should manage the rules of the market in a way which is relevant to its context,” he continues. But increasingly it seems that the remits of both Ofgem and Ofwat have diverged from the developing context in which companies are operating.

“If you look at water and the huge challenge around scarcity, I think the regulator has not fundamentally understood the drivers for what will inevitably need to change – for the fact that there will be a need to bring new investors, new capital, new technology into that sector. If you have a market in its current image, where you have investors that are milking the assets rather than driving for better customer experience. You’re never going to get better behaviour out of that.

“Regulators, by necessity, must follow policy which brings – which forces – innovation and new talent to enter the industry. If we can’t do that, it will be very difficult…regulators never seem to think of industry challenges from a talent perspective.”

Getting to a different state of affairs, says Ravindran, will “not come without pain”. He sums up “Rebuilding always has to come with some element of tearing up.”

The extent of the demolition work required, the design of what should come after and the opportunities that a new operating environment should enable are questions to be explored in detail by Utility Week and Charles River Associates in a major report to be published in early 2023 entitled “Rebuilding Utilities”.