Eon CEO calls for mechanism to address bad debt

The overriding focus for the energy sector over the past few weeks has been to find ways to keep the most vulnerable connected - but this will come at a price. Bad debt is an issue that will have to be tackled and Eon Energy chief executive Michael Lewis tells Utility Week he believes retailers must not be burdened with additional costs on behalf of other areas of the sector.

For Michael Lewis the coronavirus pandemic brings significant additional challenges to a company already in the process of absorbing millions of customers from former rival Npower. Yet for the Eon UK chief executive, as for many other industry heads, there is also the looming threat of bad debt, as people who were until recently able to pay their bills without issue find themselves in increasingly vulnerable circumstances.

Lewis’ concerns over bad debt are backed-up by research from Citizens Advice which found 13 per cent of energy customers have fallen behind or expect to fall behind on their energy bill payments due to coronavirus. Furthermore almost half (48 per cent) of pre-payment meter (PPM) customers had struggled to top up their meter as a result of the crisis.

Lewis  argues there should be a mechanism to help suppliers absorb bad debt from consumers and businesses, especially if it exceeds pre-virus energy industry norms. He makes comparisons with how Ofwat has said it will tackle the problem in the water sector, whose position Lewis says is “substantially similar” to the energy sector.

He adds that well-run, sustainable energy companies should be able to offer relief to their customers in the short-term without additional government funding beyond what is already available.

“However over the longer term, should consumer or business debt not be recoverable, and should this be at a level that exceeds pre-Covid-19 energy industry norms, energy suppliers should be able to recover the additional relief they have extended to customers. There should be some sort of guarantee of that additional bad debt in the longer term.

“It’s notable that government is underwriting 80 per cent of any bad debt the banks might suffer through offering Covid-19 business interruption loans, as well as underwriting the one-year interest free element of it. The position of energy suppliers is substantially similar to the banks and also to the water industry, where Ofwat has signalled to water retailers that it will introduce a mechanism to address levels of bad debt exceeding ‘normal’ levels.”

Specifically, Ofwat has proposed deferring up to 40 per cent of wholesale charges until the end of July to provide liquidity to the water retail market as well as capping retailers’ exposure to it to 2 per cent of annual turnover.

Energy retailers, Lewis says, are effectively the revenue collectors for the whole industry. “Should bad debt rise, suppliers should not have to bear the risk of the non-collection of costs that suppliers collect on behalf of other parts of the industry,” he says.

Much of the discourse in energy retail recently has been the type of assistance that the sector should receive, if any, to help mitigate the effects of the virus. Early on suppliers agreed a series of principles with the Department for Business, Energy and Industrial Strategy (BEIS), agreeing that the main priority was to keep the most vulnerable on supply during the pandemic. That said, there have been concerns that any help from the government could be used to support failing businesses.

Several options are thought to have been mooted already including a loan to companies, a future adjustment to the price cap and extending existing customer support schemes but as yet none have been forthcoming. For Lewis however, the priority is clear – ensure any assistance goes to customers and not the suppliers themselves.

“We want to support our customers, at home or in business, and prevent them from being in hardship and unable to pay for the energy they’ve used. It’s clear from much of the evidence we are seeing – increases in Universal Credit applications being just one – that there is real concern right now, and it’s our view that support should be directed towards customers, not energy suppliers.

“It is wrong to say that all energy supply companies should survive this crisis, nor should this situation be used as a reason to prop up the reckless behaviour of some supply companies in the market.”

Vulnerability

With the lockdown comes an unprecedented change in the way we live and work, all underpinned by a reliable energy supply. Lewis recognises this and says the main challenge of keeping customers on supply is as much a logistical issue as it is a financial one.

He explains that from the outset, Eon’s focus on those who needed urgent support meant that every decision stemmed from that. The supplier extended emergency credit for PPM customers from £5 per fuel to £50, provided flexible billing and payment arrangements to reflect changes in circumstances such as those on furlough or shorter hours and the possibility of granting an emergency payment freeze for 30 days to give chance for circumstances to change.

“In the longer term there will be different challenges around how we help customers – businesses especially but residential customers as well – to get back on their feet and start the recovery process,” he adds.

One such avenue of protection of vulnerable customers is the default tariff cap. In August Ofgem will make a recommendation to the secretary of state as to whether the price cap should be lifted. Lewis has been a vocal critic of the cap and says while he is still supportive of removing it, he acknowledges that some form of protection may still be required for the most vulnerable in society.

“I’ve got to say I think it’s unlikely that Ofgem will propose removing the cap when it makes its recommendation to the Secretary of State in August.”

Furlough

Despite the need for the energy sector to keep providing essential services, even giants such as Eon cannot escape the harsh reality of the need to take advantage of the government-backed furlough scheme, joining fellow large players Ovo and Centrica-owned British Gas. Under the scheme the government pays 80 per cent of an employee’s wages, or £2,500. So far Eon has furloughed 3,000 of its 7,500 staff and 1,100 of the 5,000 Npower staff. When asked, Lewis refuses to be drawn on whether more staff will be furloughed but says for now the company has staff available for those customers who desperately need to speak to someone.

“I think we have reached a position where we are available for customers when they absolutely need us and we have made sure colleagues are safe and protected – mainly by working from home or, where necessary, provided with suitable protection for them and our customers. Obviously we will keep monitoring the situation and respond to the best guidance we get from government and health agencies.”

In addition to those furloughed, staff shortages through sickness are also an inevitability of the pandemic and Lewis admits there has been some impact through illness. Fortunately for Eon and its staff, the impacts of sickness have been limited, after the supplier took big decisions early on in the crisis including suspending high risk, non-essential operations such as meter reading and smart installations.

“Nobody would say we are in a perfect place but we are there for our customers and that is a testament to our people and their willingness to do what they can to make this work,” he adds.

Suspending non-essential operations has a wider impact on major industry projects such as the smart meter rollout. Already the programme was massively delayed and had recently been pushed back from a deadline of this year to 2024. For Lewis, however the rollout takes a back seat for now while the industry focuses on coronavirus.

“It’s still our view that smart is the gateway to the future energy world and it is a vital upgrade to our homes, businesses and energy networks. That won’t change for the longer term but clearly right now our focus should be on tackling this pandemic, and part of that is by following social distancing guidelines and not doing anything that might aid the spread of this virus.”