The energy sector needs to recharge, reshape, and renew

With energy suppliers operating in unprecedented volatility, and energy costs piling pressure on domestic and business consumers alike, what does the future of energy supply look like in the UK? Gary Miles, chief executive of Gentrack, explores what the latest government interventions mean for energy retail and why it’s crucial that the industry acts now to address the challenges of today and tomorrow.

Even for an industry often characterised by volatility and political intervention, the past 12 months have been extreme. Throughout Gentrack’s 30+ years of utility experience, modernising and transforming many energy companies globally, this period ranks as the most turbulent.

Between September 2021 and August 2022 wholesale gas forward delivery contracts skyrocketed from 80p/therm to 592p/therm, sending electricity prices spiralling upwards in parallel. The knock-on impact to domestic and business customers was enormous so it was a sound move for government to take action to support energy consumers. At the time of writing this, wholesale costs have eased off, however forward contract prices remain high in comparison to this time last year. This is of course reflected in retail prices and the £2,500 government-supported Energy Price Guarantee remains the best price available.

Clarity is essential to success

The cost-of-living crisis and record energy prices are front and centre of the public consciousness. As a result, public awareness of the measures announced by government, such as the Energy Bill Relief Scheme for businesses and Energy Price Guarantee for domestic users, is high.

However, lack of clarity on the exact nature of the support has led to confusion. For businesses, the legislation to enact support has not yet been completed, despite an October 1st start date, and like the domestic scheme is currently only due to run for six months. For domestic consumers, senior politicians were incorrectly highlighting £2,500 as an absolute cap, and now the new Chancellor has proposed further significant changes, limiting the support to the coming winter. With only short-term support, it is hard for retailers to package long-term compelling price proposals to reflect the relief the industry needs from current high wholesale prices. Uncertainty on the measures and rapid changes to policy reflects poorly on the industry and impacts the retailer brands who take front line positions with British consumers and industry.

The climate challenge can’t be ignored

The recent drop in gas wholesale prices and improved reserves shows the system has resilience and we should not panic too much by reverting to carbon sources. The government should look at regulation and financial aid that has long-term carbon reduction impact such as subsidising solar and battery bundles, the mandating of smart meters, time of use tariffing and accelerating market wide half hour settlement.

In Australia, the regulatory environment and financial subsidies have helped to encourage a major uptake of clean energy propositions. In the state of Victoria for example, mandated smart meters have led to 95% penetration, while we have just implemented 5-minute settlement across our Australian customer base. Our B2B retailer and gentailer customers are augmenting their offerings with PPAs from private solar, wind and hydro solutions to provide more flexibility and attractive pricing for Australian industry. We are working with major B2C retailers to support their roll-out of solar and battery solutions across the country. More and more houses are benefiting from solar feed-in-tariffs, becoming increasingly self-reliant for their energy and more insulated from recent and forecasted tariff increases.

Early on, the UK made brave decisions to deregulate the market and invest in sustainable energy sources. These decisions have given birth to a vibrant cleantech industry that can lead the world in the march to net zero. We must not lose sight of this now but rather foster innovation and accelerate regulatory propositions to advance the industry while protecting competition.

Choice and competition must remain at the fore

Due primarily to a price cap set well below the wholesale prices of the last year, 30 UK energy suppliers went insolvent since the start of 2021. Several of them were challenger brands pushing digital solutions, cleantech innovation and more choices for customers.

Alongside the government’s support packages for consumers, we look forward to progressive policies and regulation which encourage those business models and innovative products and services which can really move the needle in terms of delivering total experience and sustainable solutions to customers and provide a new platform on which energy retailers can compete.

The remaining suppliers who transform will compete most effectively

Major company transformations may feel daunting, but they also present a strategic opportunity and existential priority. Energy retailers still using legacy systems risk being left behind in the transition to the sustainable era and increasingly vulnerable to market volatility, whereas those leading the transition have some incredible opportunities:

1. To rapidly bring innovative solutions to market, such as Solar and Battery bundles, Virtual Power Plants, Vehicle to Grid, Demand Response, Broadband bundling, and Bill Anything.
2. To provide compelling price packages to customers, such as Gross Margin Analysis, Flexible Pricing Capabilities, Risk Management, Point of Sale Forecasting, and Power Purchase Agreements.
3. To dramatically decrease Cost-to-Serve (CTS) and operate the same size portfolio with less FTE, while increasing positive Customer Experience. These can be achieved simultaneously through advanced automation, deployment of digital brands and multi-brands and leveraging data and analytics to make smart decisions to highlight just a few approaches.

In our experience, transformations can bring an improvement of 30% reduction in CTS, and in addition, through transforming onto modern flexible solutions, the leading energy suppliers will be in a strong position to adapt to the challenges of an ever-changing market and capitalise on these cutting-edge initiatives.

Our research predicts that worldwide 400 million utility meter points will recontract to alternate CIS (Customer Information System) suppliers by 2025/26 which equates to around 200 energy and water retailers. The good news is that due to the competitive nature of the UK market, the retailers here have more experience in transformations than many countries in the world, who will look to the UK as the leader in this field. It is now up to all of us to make the UK the cleantech leader in the sustainable era.