Net zero demands ‘fundamental reshaping’ of energy retail

Energy retailers must “radically rethink” their approach to consumers, with events of the last year having left the sector’s current model of competition “effectively on life support”.

That is the view of a new report by Energy Systems Catapult (ESC) and Ovo Energy which called for the role of suppliers to evolve in line with the UK’s net zero ambitions.

The report said the transition to a net zero economy will “demand a fundamental reshaping of the retail energy environment”.

It outlined three principles for how suppliers should tackle the energy trilemma of secure, clean and affordable energy: simplicity, trust and holism.

As the main interface with the energy system, the report said retailers must simplify the complexity of the market and build trust with their customers, establishing long-lasting relationships. They must communicate in a way that consumers understand such as by telling them how much it will cost to charge an electric vehicle (EV) per month, rather than per kWh, while being “transparent and responsive” if things go wrong.

Reform of licence conditions surrounding customers’ energy bills should also be considered, including regulations on what can and must be displayed, and in what format, following principles-based regulation to enable innovation.

Suppliers must be conscious of key characteristics that will impact how their customers engage with the energy system such as occupation, family size and health, with a particular focus on the vulnerable. A range of products should be created for these different types of customers and their needs. A “modular” approach, where consumers build their own propositions, could enable trialling of new models and accelerate learning and improvement.

Furthermore, the report said, retailers have a role as “net zero educators” which can provide accurate and trusted information for their customers, helping them to make informed choices.

Subject to data permissions being granted, personal net zero data profiles could be created to build up an accurate picture of a customer’s individual decarbonisation needs which will enable companies to provide appropriate information.

Better use of data and digitalisation could also improve support measures for those in fuel poverty, with the report describing current provisions as “crude and poorly targeted”.

“Enhanced targeting could facilitate moving away from a focus on short term bill reduction towards investment in longer-term and sustainable improvements,” it said.

Commercial models

Elsewhere, the report made the case for the introduction of new revenue models, with a recognition that simply providing energy and billing will no longer be sufficient.

While suppliers have traditionally been incentivised to maximise the amount of energy sold to consumers, “this needs to be turned on its head” in that profit margins are aligned with a reduction in carbon emissions.

Charging a fixed price for a particular outcome such as EV miles or household temperature and incentivising customers to optimise their usage could be a way to do this and the report highlighted that there is a precedent for this in the telecoms and broadband sector.

Furthermore, financing models to enable customers to spread the cost of improvements to their homes will be crucial.

“Energy retailers often lack appetite or ability to take significant credit risk given the current supply licence and price cap regulation. This may lead to retailers partnering with banks/lenders or brokering links between customers and finance providers who will take credit risk,” it added.

The report also outlined the need for partnerships to be built with “multiple actors” across various disciplines and argued that “opportunities abound” for energy retailers to work with innovators and SMEs to bring new products to market and form networks of companies to integrate services coming into the home.

Some propositions may require non-market sources of funding to be commercially viable, such as the installation of energy efficiency products in low-income homes. Partnerships with local authorities and other grant-funding institutions may be necessary to secure stable income streams, it stated.

Meanwhile, retailers will have a key role to play in supporting the adoption of new digital technologies which have the potential to greatly enhance the customer experience with minimal or no effort required by consumers.

Guy Newey, chief executive of ESC, said: “The next phase of the net zero transition is going to require energy retailers that can make that transition as easy and as cheap as possible for customers.

“This presents a once-in-a-generation innovation opportunity for energy suppliers to harness the potential of new digital and clean technologies to create better consumer offerings – whether that is improving household energy efficiency or installing new tech which can protect consumers against future price volatility.”

He added: “Energy suppliers are already starting to revisit the way they do business – the days of customers simply being a number of kWh to bill at the end of a pipe or wire are over.

“Those that will thrive in the future energy system will be those that can provide the energy experience that consumers and society want and need – warm, pollution-free homes, at an affordable price. “

Raman Bhatia, chief executive of Ovo, said: “This year, we have seen the impact of our exposure to volatile fossil fuels on energy prices.

“Whilst we work with government and industry to develop an immediate solution to support households, we must not lose focus on the longer term measures that will create a greener, more flexible energy system including installing energy efficiency measures, decoupling electricity from gas and creating innovative products to help engage our customers with their energy usage.”

Responding to the report, an Energy UK spokesperson said: “Energy suppliers know that they will play a vital role in supporting their customers through the changes that net zero will involve and helping them navigate the many choices and decisions involved.

“It will be a very different sort of relationship and one they would welcome – but making the most of this potential will require a sustainable retail market where suppliers can invest and innovate to make this happen.”

The frictions inherent in balancing net zero, security of supply and affordability are at the core of the agenda for the Utility Week Forum, on 8-9 November in London. Find out more here.