Energy suppliers face ‘death spirals’

The poorest in society are paying more for their utilities as cost pressures bite, says Npower head of regulation

“There absolutely is a theoretical risk of numerous death spirals happening in the utilities sector,” Npower’s head of regulation has told Utility Week.

As more engaged and statistically more affluent energy customers increasingly switch away from large suppliers, Chris Harris said supplier cost to serve per customer could be driven upwards, leaving the poor paying more for their energy and ballooning bad debt in the sector. Eventually, this could lead to a major supplier bankruptcy he reasoned.

“This is something that needs to be looked at,” insisted Harris.

“Ofgem’s evidence in its Social Obligations Report shows that the incumbent customer demographic is including more customers who are in debt or arrears. That is not indicative of their customer service. It is indicative of their demographic.”

This means that suppliers face “death spirals” similar to those speculated about for energy networks should a large proportion of customers move off grid while the costs of running the system increase.

Harris explained: “Larger suppliers have various obligations that they are not exempt from. If [their customer numbers] shrink and their social obligation costs stay the same, their costs go up per customer.

“Then they lose more customers because they are forced to put their prices up, and the spiral goes on.”

Since “no one’s gone bust” Harris assured that “clearly everyone is responding to that risk”.

He observed: “All of the companies – incumbents and new entrants – are responding to a very very severe cost challenge by reducing costs and simplifying business models, by reducing cost to serve.”

“There is a real race to reduce cost to serve. We are all becoming more and more lean.”

Nevertheless, Harris warned that a situation which drives towards large suppliers providing a high cost service exclusively to the worst off “doesn’t help anyone at all”.

“Somehow or another that can’t happen. It is not right for it to happen”, he said.

Harris made his comments following a presentation at Utility Week’s Consumer Debt Conference in Birmingham yesterday.

In his presentation, he expressed general concern about a trend for “the poor paying more” for goods and services across the economy.

There is “a relationship between debt and access to products and services,” said Harris and he acknowledged that in economists’ reports on this phenomenon “utility tariffs are called out very highly in terms of the amount that the poor pay more for their daily lives.”

This problem for the industry is causing “injustice” and is the result of “information asymmetry” said Harris.