Will we ever see another council-backed energy supplier?

From day one council-backed energy retailers have faced questions over their viability. Following high-profile losses, upheaval on company boards and now the appointment of advisors at two such suppliers, are we seeing the dying embers of this particular experiment?

When Robin Hood Energy became the first council-backed energy supplier in September 2015, its mission was simple – to  give people a “cheaper, more helpful alternative to the big six”.

Even at its birth, there were questions about whether councils should be exposing themselves to such a volatile market. But, according to the Nottingham City councillor in charge of the project, this equation was also pretty straightforward.

“(In) broad terms, when you buy the energy and sell it, you make some sort of return on the sale, so if you can’t sell enough you don’t buy as much”, Alan Clark explained at the time.

Fast forward five turbulent years, the authority has been forced to appoint advisors to try to salvage something from the situation – with Utility Week revealing the news in the same week Bristol Energy also announced it was taking professional advice.

The pair make up two thirds of the independent council suppliers in the UK, with Warrington Borough Council recently purchasing a 50 per cent stake in Together Energy for £18 million.

The appointment of Deloitte in the case of Nottingham City Council-backed Robin Hood comes off the back of a £23 million loss for the 2018/19 financial year, and the suspension of chief executive Gail Scholes and chief finance officer Robert Bain. Furthermore Bristol, which has appointed Ernst and Young, reported a loss of £10.1 million last year, slightly better than the year previously. It does not expect to be in the black until 2021.

Industry sources say that a bid to sell Robin Hood, inevitably codenamed Project Sherwood, is underway and that an extensive memorandum had been sent out to potential investors. A source tells Utility Week that there is speculation that Octopus Energy is in the running. Octopus declined to comment when approached, however.

Elsewhere, other companies were sunk before they even began trading. Named for Nelson’s famed flagship, Portsmouth City Council’s ill-fated Victory Energy was scrapped before becoming operational in 2018 at a cost of at least £2.5 million. Council bosses attempted to find a buyer but to no avail.

Questions are being asked about the future viability of such supplier business models and whether local authorities would be better adopting a white label model.

Andrew Perry, energy principal at Oliver Wyman, believes the rationale for council-backed energy suppliers stems from the belief that energy companies are giving customers bad deals. In reality, he says, most businesses in the current market are loss-making. He argues that there is more opportunity to be had in white label agreements, especially taking advantage of digital customer service platforms.

He says: “There’s a greater opportunity for white labelling now. The supply business is based on its technology backbone, this is really the foundation. It is now much easier to leverage third party operating platforms from independent software providers or indeed other suppliers. If there’s a great digital platform, suppliers can utilise that and add customer service infrastructure on top of it. Or even outsource the customer service.”

“I think what happened with a number of these organisations is they have misread how the market would develop and it has changed significantly in the past five years with new suppliers coming in and the price cap,” he adds.

White label agreements do seem the easier option for councils as such agreements allow them to outsource the billing systems to existing suppliers. Octopus has white label agreements with three local authorities – Qwest Energy for Cheshire West and Chester, Roar Power for Norwich and the East of England and London Power. Robin Hood Energy has no less than 10 such agreements with other local authorities.

Robin Hood Energy white label agreements

There is also the issue with the type of customer council-backed retailers aim for. Ted Hopcroft, energy and utilities expert at PA Consulting, tells Utility Week that he believes council-backed retailers have the added pressure of attracting more financially vulnerable customers and are therefore already at a disadvantage.

“Both Bristol and Robin Hood have done positive things around helping vulnerable customers, such as those on pre-payment meters (PPM). However, the customers who are most attracted to your brands are probably your least profitable customers. It’s probably going to take more time and effort to service those customers, so there’s a real challenge for the council and what they’d like to achieve against whether they are going to actually make any money out of it.”

Coronavirus

Over the past two months the financial pressures of coronavirus on the UK economy have caused more people to fall into the “vulnerable customer” bracket than would have otherwise. Some estimates have English local authorities taking a £5 billion hit in total thanks to the virus. While no supplier is immune to the financial implications, Hopcroft predicts the virus will hit council-backed suppliers even harder.

“You would expect it would increase the risk on small suppliers because, particularly with a council-backed supplier, if they have got more vulnerable customers, more pre-payment meter customers, then they may be more likely to be facing debt shortfalls and trying to sustain their customer base through a very difficult time.”

Further challenges may arise over the branding of such suppliers.

Hopcroft adds: “Energy retail is not an easy business and I think if you look at the struggles that those two companies have had, that brings that out in terms of viability. You need a strong brand to get out there and get through. If you are branding locally to maximise your potential locally then you are automatically inhibiting yourself on more nationwide issues. You need critical mass and then you need to build up from that.”

Branding may be a key factor, but according to the most recent statistics from Robin Hood and Bristol Energy, the majority of customers in the case of both suppliers lie outside of their respective cities. In the case of Robin Hood, out of around 120,000 customers just under 10 per cent (11,000) are Nottingham residents. For Bristol meanwhile, out of its 104,600 domestic customers, around 11,500 are Bristol residents. That said, both clearly do not have the same scale as fellow challengers Bulb and Octopus, for example.

While the picture may seem bleak in light of the present circumstances, there are those who still see the council-backed model as havng a future. Paul Richards, chief executive of Clydebank-based Together Energy, says his firm was attracted to Warrington Borough Council because of its investment in renewable generation, something which he believes is pivotal to the survival of the publicly-owned model. Richards says that working within lots of areas within the energy supply chain allows the challenger brand to become more competitive with “the big boys”.

He adds: “I think the difference between where we’re at with Warrington and where Robin Hood and Bristol are at is Warrington understood that they have a role to play in investing in upstream for climate emergencies. They have been pretty forward thinking in that respect, I think Bristol are probably getting there now with the City Leap project but you need to be investing in upstream, midstream and downstream simultaneously, I don’t think you can do one before the other.

“We were just at breakeven when we were looking for investment, we just hit scale at the same time as they were bringing solar power onto the market, we were at the same stage in maturity on our journeys so it made sense for us to come together.”

The future

Despite the difficulties, recent investments in local authority-backed retailers show there is still some appetite for both types of model, whether that’s from an organic approach or in the form of a white label agreement. Is there then a future for these suppliers?

Former Energy UK boss Lawrence Slade believes municipal-owned suppliers need to look beyond pure retail and instead add additional services. Specifically, he believes there are opportunities to be found within the property portfolios of local authorities.

He tells Utility Week: “If a local authority has got significant property holdings then there’s lots of things they could potentially do with partners that could help their community – purchasing energy, clubbing together with things like community battery storage linked with solar, community charging points and so on –  it’s how it’s all financed that is the critical element. If you look at a pure retail model, the margins are very small. I think all companies are wanting to add additional services in so that they have got a little more flex in terms of the margins they are getting, and there’s definitely a role for private capital as long as the policy and regulations are in place to protect consumers.”

Hopcroft agrees and cites initiatives such as the Greater Manchester Big Clean Switch, an initiative where councils have teamed up to encourage residents to sign up to 100 per cent renewable energy deals, as well as Octopus-supplied London Power which plans to fund zero-carbon initiatives.

“They are interesting ways about how you can use your local presence and model for front end services, while effectively outsourcing everything else through the back end,” he adds.

Clearly there are still benefits for local authorities in partnering with energy firms but the scars of Robin Hood and Bristol are testament to the challenges of councils throwing themselves wholeheartedly into this most complex and uncertain market.