Growing pains of an independent supplier

The government wants an energy market with more than just six big players. Virtually every couple of months a new challenger emerges, slowly eroding the big six’s market share. In June the independents’ market share topped 12 per cent for the first time. But starting an energy supply business is no easy feat, and achieving scale even harder. “It’s a long tough journey,” according to leading independent supplier First Utility.

These new suppliers are quick to call out loss-leading tariffs and a sticky market as barriers to  growth, but there are many internal operational challenges and outside obligations to overcome as well.  Last week Spark Energy announced three new additions to its senior management team in preparation for meeting the “challenge” of the Energy Company Obligation (ECO).  What other challenges face independents trying to claw out a position in the market, and how are they tackling them?

Funding

The steep road to success starts on day one with funding.  Purchasing in the wholesale market requires significant investment with no return for a considerable period of time.  According to Darren Braham, chief financial officer at First Utility, suppliers can’t get beyond 50-100,000 customers without a solid financial position. Extra Energy’s rapid growth is evidence of this. Managing director of operations Ben Jones says “significant financial strength across the group” and the backing of a German guarantor has allowed unchecked growth over the last 12 months.  Before the turn of the year it was below the ECO threshold, and now boasts 400,000 meter points.

Complexity

The next challenge is simply “dealing with the complexity of the industry” Braham says.  Automation of processes allows growth but minimises costs.  But Braham says many ‘discrete processes’, each not complicated in itself but with “cascading consequences” have to be encountered and understood before this can happen.   First Utility now automates 40-50,000 new customers a month but it has been a long, hard road Braham says, hindered by “a lack of consequence” for suppliers in maintaining the central systems.

Data

All suppliers receive new customer information from central systems during a switch.  But some suppliers are allegedly failing in their obligations to update these systems, leading to inaccurate bills and poor customer service at the receiving supplier.  Independents feel this most acutely because, as Braham says “all our customers have gone through a change of supply process and we are in every single incidence reliant on industry systems.”

Jones agrees that ‘dirty data’ is a significant problem, and one that is not confined to independents.  He warns that all suppliers will start to feel the pinch as switching (hopefully) increases.  “The gain and the loss process will become a bigger and bigger part of every suppliers’ operational business,” so data needs to be good.  He thinks the answer is for suppliers to be thorough in their own systems, but Braham thinks the consequences for suppliers need “toughening up.”

‘Illegal’ meters

While Braham says there are many incidents of lax attitudes to obligations in the industry, another problem inflicting added costs on independents is ‘illegal’ meters.  Both suppliers report still finding meters overdue upgrades or outright replacement, including some that should have had their profile class changed by the middle of last year.  It falls to the new supplier, often an independent, to cover the high costs of replacement. This isn’t right Braham says, and rules should be changed to hold the previous supplier responsible and lessen the burden on independents.

Billing systems

Billing systems are the Achilles ankle of the big six, but independents seem to be able to learn from past mistakes.  Small suppliers could face an early system change as their customer base outgrows the start-up system, but independents are proactively planning graduated change overs to avoid an outright switch, such as that which has brought Scottish Power’s customer service to its knees. First Utility has been gradually moving to a third party, and is now on a system that should be able to support up to 3 million customers.  Other independents, such as Extra Energy, have spotted this as a niche to build their business models around by being technology-first, removing the requirement to ever have to switch or use an external provider.  

ECO

Just as a supplier has overcome these problems and the customer base has started to grow, suppliers are ‘rewarded’ by qualifying for ECO.  ECO adds additional cost and removes the competitive edge for many small suppliers. Some are therefore choosing to stay beneath this perceived barrier.  Those that have decided to push through, such as First Utility say it is “less onerous” than they thought, merely requiring outsourcing to a third party provider.

But some, such as Spark Energy have decided to take a different route.  It has brought in fresh blood, not because ECO is a threat to the business, but because chief executive Chris Gauld wants to turn it into an opportunity to distinguish his business from others in the market.  A constant battle to the lowest tariff is unsustainable and “isn’t necessarily healthy for the market” Gauld says.  He hopes to instead offer the opportunity for customers to lower their energy usage off the back of ECO.

This is the attitude that will turn fresh-faced licensees into proper challengers.  These are not barriers to growth, but opportunities to do it differently, and do it better.  They encourage new business models, such as Extra Energy’s, and innovation to the market.  It may be a “long tough journey” but what comes out the end of it can only be a benefit to the industry.