Ovo: Retailers have to be allowed fair returns

Ovo Energy wants to be in the vanguard of delivering new technologies and services to enable net zero. However, the company’s chief financial officer Bill Castell insists that first the energy retail market must be stabilised, to give both investors and consumers confidence. As part of Utility Week’s Countdown to COP campaign, he speaks to James Wallin.

In the space of just over a decade, Ovo Energy has grown from a start-up with big ambitions to Great Britain’s third largest energy supplier.

Its journey is a perfect example of the rapid transformation in a sector that was still dominated by the big six when Ovo signed its first customer in 2009. We now find ourselves in a world where the market share of ‘large’ energy suppliers is expected to dip below 50 per cent as soon as next year.

As well as presenting a threat to the incumbent retailers, Ovo and its peers have forced them to adopt a different approach. Everyone is a disruptor now and the need to be seen as leaders in energy tech and on green credentials is the new battlefield.

However, there are concerns that the ambition of this new breed of energy retailers could be stymied by a regulatory framework that many see as adopting an analogue approach in a digital world.

There is also frustration at the attitude adopted by government when it comes to energy retail. This is illustrated by today’s publication of the energy retail strategy, which was described as “stuck in the past” by Energy UK.

Utility Week sat down with Ovo’s chief financial officer, Bill Castell, before the publication of the retail strategy, or indeed the flurry of other energy policy updates this week. However, there is little evidence from what has emerged this week that one of his principle concerns will be assuaged.

He stresses that, however they may sometimes be portrayed in the tabloids, energy suppliers are not enjoying fat margins. In fact, Ofgem’s latest figures show that the retail margin for a dual-fuel bill stood at a less than whopping -1.33 per cent.

“The sector has to be allowed to make fair returns so that we can innovate and create these exciting new projects that will underpin net zero”, Castell points out.

Ovo Energy itself recorded a £64 million loss in its most recent accounts, to the end of 2019, as revenue grew to over £1 billion. The wider Ovo Group, which also includes Kaluza and its home services business, lost £106 million with revenue sitting at £1.4 billion.

That position does not reflect the acquisition of SSE’s retail arm – a deal that completed at the beginning of January, bringing Ovo’s customer numbers to the five million mark – equivalent to 15 per cent of the market.

We’re still a challenger

Despite this rapid growth, Castell, who joined just after the SSE deal completed, insists that Ovo hasn’t forgotten its roots.

“We’re still the challenger that Stephen Fitzpatrick set up in 2009 and then we have taken on one of the incumbents so we’ve brought together those two mindsets. That allows us to have quite an interesting perspective on lots of different elements of the market, be that price caps or innovation.”

The former CFO at Virgin Media brings his own perspective from other industries that have had to undergo a revolution to stay relevant in changing times. As well as telecomms, Castell spent several years in finance, holding a number of senior roles at Barclays.

Both are highly regulated sectors and Castell believes there are lessons that can be learned for utilities (a word he is, by the way, not that keen on).

“Ofgem has done a great job over the past 10 years in terms of creating competitive markets, focussing on the customer and protecting vulnerable consumers. Now I think it’s about adapting and pivoting towards net zero. Pivoting doesn’t mean A or B, it’s A and B, and probably beyond.

“The UK historically has led the way with renewables. Now it’s a question of the customer being part of this new journey because decarbonisation of the home is going to be fundamental.

“That same customer is a billpayer, a taxpayer and a voter. So, everyone has a vested interest to pivot.

“There are things we can learn from other industries. At Virgin Media there was the Broadband Britain initiative and Ofcom changed their profile to regulation by giving a longer timeframe. BT were allowed to charge competitive prices, but not without a limit on pricing, for the broadband rollout. And they were given at least a ten-year horizon of consistency. So, this judgement is there for 10 years and that allows investment decisions to made over the right time horizons. That system recognises the investment the companies need to put in.”

As an example of a successful model in financial services that could feasibly be introduced in energy, Castell points to capital ratios, which would ensure sufficient underlying capital to support businesses going forward.

He adds: “That’s something the regulator is looking at with its credit balance review. I think more can be done on that just to stabilise the market.”

We have time, but it’s running out

He believes Ofgem must evolve its approach as we move to a world of not just pure energy supply but also energy-as-a-service. However, he does not see this as posing any threat to Ofgem’s core objective of protecting customers.

He says: “You absolutely can have that affordable pricing, look after the vulnerable but add in that time horizon that gives investors the confidence to back net zero.”

But there is no time to lose, he warns, adding that energy retailers need to be unleashed to roll out the products and services that underpin decarbonisation.

“We still have time to do this, but it is running out. When the electric vehicle rollout starts to reach critical mass and half-hourly billing settlements are becoming a reality, we need to already be on the journey and not waking up too late.”

So, where to start on future-proofing the energy retail sector? Castell is supportive of the price cap but urges the government to start seeing the sector as part of the solution, not the problem.

“The price cap went a long way to ensure some historic concerns about the market were addressed. That prevented loyal customers being penalised.

“However, we have to be open about the fact suppliers aren’t making huge margins. The price cap going up reflects the cost of the commodity. It’s up to us to make sure customers understand their bills, what goes into them and when the price cap goes up, what is causing that.”

Castell repeatedly comes back to the point that technology has the power to demystify net zero for customers and present them with simple ways to be greener while saving money. He believes Ovo is perfectly placed to be a leader in this space.

“To combat the climate crisis, there’s such an opportunity for energy tech, as we started off in this area with Kaluza and our platform. The Climate Change Committee recognises that a major investment programme across the country will be required, worth about £50 billion a year from 2030 to 2050. How is that going to be spent and how do we do that efficiently?”

He stresses that while the sector, government and regulator all have a part to play in answering that question, it is only by collaborating towards a common aim that real progress will be possible.

“It’s going to take some thinking and some structuring but the goal of net zero is worth it.”