Toto’s survival ever in doubt

Back in January, Tom Nicholas, the operations director of Toto Energy, wrote for Utility Week on the subject of surviving the energy market. Following the announcement of the company’s collapse this week it is worth revisiting.

Among the most prophetic remarks is Nicholas’ comment about the rumour mill within the market, stressing that “I think we must have been ‘going bust on Monday’ for at least a year and a half now”.

He insisted despite these gloomy predictions Toto, which would go on to acquire a tranche of customers from Solarplicity in July, would outgrow its loss-making phase and eventually stand apart from its “loss-leading competitors participating in the race to the bottom”.

Here is an excerpt from the column, which was originally published at the end of January:

“Toto Energy entered the market in January 2017, not so long ago but incredibly a time before price caps, Beasts from the East, suppliers of last resort and capacity market chaos. We started Toto to reach disengaged prepay homes through direct sales, introducing customers to the benefits of smart metering. The introduction of the prepay price cap stemmed our ambitions, there was insufficient margin to offer a significant discount and cover acquisition costs.

“However, our business model transformed and we were soon a whole of market supplier (legacy direct debit, smart direct debit, legacy prepay, smart prepay) growing through a wide range of channels with the objective to building a self-sustaining business. We will post losses in our start-up years but the business is on-track to reach profitability and set us apart from loss-leading competitors participating in the race to the bottom.

“The standard variable price cap isn’t the killer blow that some suppliers have claimed but it does make things more difficult. We thrive on helping disengaged consumers get a better energy deal and the ability of incumbents to say that these customers are on a ‘price protected’ tariff makes it harder. Also, it does cost more to find and engage these disengaged consumers and the price cap does squeeze the financial headroom to make the necessary investment.

“That said, the increasing and unexpected cost of mutualisation and the Safety Net add uncertainty and as more suppliers fail there is increasing pressure on margins for long term fixed tariffs we have already sold. The financial impact of supplier failures in term in mutualisation and Safety Net costs are well covered, less well documented are the less tangible effects that are disproportionately impactful on small suppliers, for instance in customer contact, staff retention, morale and recruitment.

“Industry rumours are rife and flames are fanned by competitors keen to draw customers and staff away – I think we must have been ‘going bust on Monday’ for at least a year and a half now! Top talent candidates drawn to a fast-growing seaside based start-up retract their interest – they’ve read the press on small suppliers and won’t risk relocating families.”

Nicholas went on to talk about the complexities and costs being introduced by the smart meter roll-out.

Here he had strong words about the government’s attitude towards the rollout, particularly around allowing the SMETS1 rollout to continue while SMETS2 was not ready for prepay customers – a situation he described as “a disaster for consumers and suppliers”.

He went on to vent his fury even more vociferously at the incumbent meter asset providers, saying their dominant position was creating an imbalance in the market.

As yet it isn’t clear whether the costs associated with the smart meter rollout were a significant factor in Toto’s demise. What we do know is that Toto was not the first energy supplier to laugh off reports of its own death, and unfortunately it is unlikely to be the last.

In the week that Ofgem proposed tough new rules for suppliers, the feat of surviving the energy market is only set to get more challenging.