Energy in your pocket

Jason Simpson says power companies should look to the customer-centred business models of the telecoms sector – including more widespread use of pay-as-you-go energy.

Every stage of the energy value chain now seems politicised and liable to intervention. Upstream, government commitment to different energy sources fluctuates with debates over both global warming and obedience to the European Union. Downstream, the moral case to protect at-risk customers from higher energy prices is presented with increasing force. Power companies are ever more exposed to wholesale prices – which are driven by geopolitical and political circumstances beyond their control – yet are regularly obliged to apologise to customers. With a year until the UK election, energy has become a political football.

Technology is also a driver of change: in generation, distribution, and for end-users. Smart meters will allow suppliers to better understand demand and bill more effectively. Yet the broader questions of demand reduction, consumer savings and grid flexibility are still being addressed. Their resolution will be dependent on broader cross-sector themes such as big data, “the internet of things” and the connected home.

Consumer-focused smart-energy solutions are increasingly being developed outside the energy sector. Some – like AlertMe – are bought by energy utilities. Others, like Nest, are finding homes outside the sector. Incumbent energy suppliers, meanwhile, find themselves competing with smaller, more agile firms able to take advantage of new regulatory frameworks.

Increased price sensitivity is driving record numbers of complaints by energy customers, mostly related to charges, tariffs or billing. Allied to deregulation and the growth in smart grids, this sensitivity creates the right conditions for digital energy players to disrupt the market, particularly if they can deliver better value and greater transparency for customers.

Digital disruption is not new. The telecoms sector faced just such issues with the arrival of the internet. More recent years have seen the arrival of Google, Skype, Spotify and Dropbox. These “over the top” players use existing networks to disintermediate customers from their suppliers, while also offering them savings. Similar changes have affected sectors as disparate as financial services, retail and airline travel – all of which have seen radically increased competition as digitally-enabled consumers are able to access the best deals. How should energy companies prepare for similar change? Should they take a defensive stance or embrace new business models? Will first movers be at an advantage or do they risk losing control of their customers while undermining profitability?

There are positive lessons from the telecoms market as well as warnings. One is the ability to identify solutions that are fit for purpose and transfer them between markets. “Pay as you go” was introduced in the 1990s to bring mobile telephony to those unable to enter into a contract due to their young age or low credit rating. But the advent of this new model coincided with the introduction of mobile phones to many developing markets – especially Africa and Asia – and was soon adapted to them.

It has since driven explosive growth in mobile phone usage around the world, accounting for 77 per cent of Sim cards globally and 96 per cent in Africa. As a direct result of this type of adaptability, mobile phone coverage now outstrips energy coverage. Of the 1.3 billion people globally now estimated to be “off grid”, 411 million are already “on net”. As a result, Accenture Development Partnerships – the not-for-profit arm of the professional services firm – sees prepayment models as a resource to improve access to energy, which is one of its key development aims for the coming period.

“Mobile payment systems have proved themselves in many developing markets, with the footprint of mobile networks now covering many hard-to-reach customers,” says Gib Bulloch, global managing director of Accenture Development Partnerships. “Given this reach, we see synergies between the energy and mobile telecoms industries, with energy enterprises leveraging mobile telecoms networks to deliver increased energy access.”

These crossover benefits may not be confined to the emerging markets. In developed markets, pay-as-you-go telephony has outgrown its original market niche of minors and the credit-impaired. Just under half of Sim cards in the UK are now prepaid, with customers attracted by transparency and ease of budgeting. Yet while pay-as-you-go mobile phones have entered the mainstream, prepay energy has remained the preserve of low-income households and the credit-impaired.

Only 13 per cent of the UK energy market is prepay but this figure is growing rapidly. Yet investment in this part of the market is severely lagging such growth. Most systems are still card or key-based – as a legacy of coin-operated systems – and involve trips to a local point of sale to top up. Furthermore, a 2013 Accenture report found that only 3 per cent of the 283 energy tariffs in the UK were available to prepay customers, while prepayment tariffs are also the most expensive. The implication is that savings from increased competition are not reaching this section of the market.

Experience from telecoms suggests that prepay energy could be turned into a mainstream source of competitive advantage, because it combines ease of payment with greater control and transparency. Growing a mobile-enabled prepay market would include developing ancillary benefits such as the availability of more tariffs, real-time access to government supports, and, ultimately, the availability of short-term credit of the sort that is now emerging for mobile-phone prepayment.

The utility benefits from better cashflow and lower credit risk, while avoiding the disconnection of post-pay customers who default on payment. And given the maturity of pay-as-you-go mobile platforms, it is likely that technology would be available for adaption or white labelling, ensuring the customer relationship remains with the utility.

Pay-as-you-go energy is one area where the newly-formed Mobile Energy Association (MEA) will be facilitating dialogue between telecoms and energy companies.