Risks and rewards

Companies mulling over the possibility of becoming independent energy suppliers should have a clear strategy and the right wholesale partner, according to Phil Ivers.

Look at any energy price comparison website and you’ll see a growing list of independent energy suppliers. They’re either focused purely on the energy market or they’re bigger non-energy brands adding energy as a new service for customers – usually as a new revenue stream and to build customer loyalty.

Many have been doing a great job competing in the market. Recent Which? data shows that independents such as Ecotricity and Good Energy are high in the best providers list and traditional big six players like Npower and British Gas are near the bottom.

However, success is by no means a certainty. GB Energy Supply was the first high-profile independent supplier casualty in the market when it ceased trading on 26 November 2016, a failure that was ascribed to the fact that energy prices are now rising, making people more risk averse about their options.

With independent suppliers in the market including supermarkets, housing associations, charities and councils, it’s an increasingly crowded market vying for finite custom. It may appear that any business can make money or build custom from selling energy. However, while it is relatively easy to set up, forward planning and market analysis is critical. For companies either looking to join the market or already in it, there are opportunities and risks to consider.

First, on the opportunities side, setting up is relatively quick and easy. There are many IT companies on the market that offer the software and services needed to get established in compliance with regulation.

However, it’s important to assess your market opportunity. The number of independent suppliers is on the rise, and any organisation with a large and established customer base has the potential. It’s important that your brand is associated with good service; moving into energy to overcome failing business activities could be a risk. Consumers will have less loyalty to your brand and will therefore be less likely to make the switch to you. If your brand is about making savings, good value or great service, supplying energy could be a great fit.

What is vital is to have a clear strategy that sets out why you’re doing it and how it ties in with what you do. For retailers this may be about adding value to existing loyalty schemes. For a mobile phone company, it could be about building loyalty through another touch point because customers can switch network provider so easily these days. For a local authority or housing association, it’s much more likely to be part of its social value policy. For those businesses setting up simply as a pure energy supplier, it’s vital to build loyalty by offering the customer something extra – money-saving tools or advice on energy management or renewables.

A critical success factor is having cash and credit – factor in that you may experience rapid growth and need to buy a large volume of energy before selling it and receiving payment from customers. Generally, banks and other investors will support a strong business plan and growth potential, providing the necessary credit lines.

However, your ability to hedge the market in terms of trading is also key to ensuring you manage costs. This is where the backing of the right wholesale provider comes in. Finding an energy company with deep market knowledge, and products that will be needed to trade effectively, is key when energy prices change daily and are affected by many trends.

Technology is also important. Competition is increasing, and it can pay to enter the market when there’s something new to offer. You may, for instance, be able to move quicker than incumbents in offering the latest smart meter or home energy technology.

While there are good reasons to enter the market, there are risks, as recent incidents have shown. Perhaps the most pertinent is the rise in energy prices. Consistently low prices over a relatively long period compelled many companies to join the market. Now prices have started to rise, some could get caught out because they lack the required credit or wholesale agreements to purchase sufficient energy to meet customer demand. It’s vital therefore to ensure your provider or financier will offer flexibility on credit terms.

A secondary issue caused by price fluctuations is suppliers being forced to sell energy for less than they paid for it and being bound by 28-day contract terms before being able to bring tariffs in line with market prices. This highlights a need for some cash flexibility too, but also working with a wholesale provider that has the market knowledge and tools required to help you hedge.

To avoid these risks, it’s vital that potential independent energy suppliers find the right wholesale provider for them. Key considerations should be the solidity of the provider’s own business, the credit and terms they are willing to provide, their insight into the market and track record in gaining the right prices and the level of technology adopted to make buying and selling energy as simple as possible.