5 Drivers Determining The Future of The Energy Sector
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5 Drivers Determining The Future of The Energy Sector

03 July 2019

Climate change, customers, regulation, technology, skills and workforce. Those are the five pillars Utility Week believes underpin the future of utilities, leading to the radical transformation of the sector by 2050.

It’s a view echoed by the regulator, Ofgem, which refers to “digitalisation, decarbonisation and decentralisation” as the major drivers of change in the energy market all of which are “likely to change the way consumers interact with their energy suppliers”. The regulator is already taking steps to ensure that consumers benefit from these changes and to limit any negative impacts, but how will these impact suppliers?

Data as a differentiator

As of today, “customers expect multi-channel delivery, seamless service and faultless billing” says Utility Week but there remain issues “with trust and transparency”; an issue that can only be addressed through better, more effective customer communication.

Ofgem has been monitoring communication practices for some time through the monthly and quarterly reports submitted by suppliers. This customer service data is collated and categorised to show the level of service provided, how suppliers deal with complaints, and their proactiveness in helping customers deal with debt, and is now shaping the market by informing switching decisions.

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In April 2019, Energy UK reported that 668,371 customers switched supplier, the highest number ever recorded, up 34% from the same time the previous year, indicating that we are now far more comfortable with switching and recent surveys support the idea that customer service now trumps price in the decision making process. However, switching was found to be second only to billing when it came to the complaints escalated to the Energy Ombudsman in 2018 while the complaints process itself remains problematic: last year ten suppliers were ordered to come up with complaint handling improvement plans.

Communicating with customers

Complaints are just one aspect of customer communications identified as ripe for reform.  When Energy UK produced the ‘Rules of Engagement’ report on behalf of Ofgem two years ago, it surmised that customers need to contact their supplier in order to pay, seek assistance, complain, report an emergency, find a suitable tariff, and to be aware of and understand their contractual obligations, rights, changes and events. The report findings led Ofgem to issue its domestic supplier-customer communications rulebook reforms in December 2018 which saw the rationalisation of requirements and the introduction of five enforceable principles as follows:

  1. Continuing to make informed tariff and consumption choices – ensuring consumers have access to the information on their current tariff
  2. Comparing and switching tariff and supplier – ensuring consumers know how to access information on competitive offerings and how to switch supplier
  3. Assistance and advice information – to provide effective service support
  4. Provision of relevant billing information – ensuring access to bills and statements of accounts
  5. Contract changes information – the provision of notifications on price increases, disadvantageous unilateral variations and end of fixed term contracts

These principles should help to clarify the information suppliers need to make available but the resulting customer service data also needs to be liberated.

There need to be improvements in the “data quality and access to data” to achieve “competition and innovation” suggested Martin Cave, Chairman of Ofgem, at Utility Week Live in June. But the sector is a long way from achieving this, with a recent Ofgem report stating: “Companies need to be making better use of new and existing data and record it accurately… to enable a smarter, fairer and more flexible energy system.”

Looking ahead, Energy UK warns that “simply monitoring monthly figures to measure engagement is likely to become an exercise in futility”: its real-time data that will hold the key and will enable suppliers to add value to propositions or reach out to specific populations. With this in mind, the government has set up the Energy Data Taskforce to improve data availability and transparency.

Technology – enabler or excluder?

A key source of that data will be smart devices which could be used to “allow suppliers to more proactively support their customers when usage changes (for example periods of low usage or self-disconnection)” suggests Ofgem. Such data will also pave the way for personalised service plans and “could fundamentally change how companies supply energy, how consumers engage with it, and how society views the energy system and benefits from it”, according to Energy UK.

For this to happen, the supplier must be able to “extract intelligent insight and action from the information they hold” suggests Utility Week. Indeed, a speaker at the Utility Week Live event surmised that technology “will be the defining factor in the success or failure of any utility in the transition to a low carbon, customer-centric future”, implying that it’s the ability of the supplier to translate data into actionable intelligence that will determine its survival.

But there’s a flipside to this technological innovation. Martin Cave is equally concerned it could see some consumers left behind and that steps must now be put in place to protect their interests, particularly with respect to vulnerable consumers. These are defined as consumers with personal circumstances and characteristics that combine with aspects of the market leaving them less likely to be able to protect/represent their interests and more likely to suffer harm.

Meghna Tewari, Head of Vulnerability and Consumer Policy at Ofgem, cites some examples of how such users may become disadvantaged as technology advances. She says they “may self-ration their energy as usage is more visible [with smart meters] or might not have access to more competitive tariffs like time-of-use tariffs due to their specific circumstances or inability to move their consumption. Furthermore, some technologies that may help to reduce bills may be out of reach due to initial upfront investment costs (such as solar panels)”.

So what can be done to ensure inclusivity? To begin with, Ofgem has ensured the costs of servicing these customers is proportionately shared through network pricing controls. This sets a baseline return which is expected to see consumers benefit from the lowest ever capital rate under RIIO-2. Ofgem will also incentivise suppliers to take vulnerability into account and will provide dedicated funding for projects that aim to benefit these users.

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There’s also plenty of scope to use technology to improve not just supply but customer service. Speaking about complaints and customer satisfaction at Utility Week Live, Octopus Energy’s Director of Operations, Jon Paull, suggested we will see the automation of ‘run of the mill’ complaint handling processes which should improve response and resolution. This will free up resource, allowing CSRs to focus on more complex complaints and to become more proactive in customer engagement. Together, this combination will see personalised interaction applied where it is needed most, ensuring that vulnerable users are prioritised.

Approaches to tackling vulnerability

Ofgem has also launched its ‘Consumer Vulnerability Strategy 2025’, the successor to its first vulnerability strategy published in 2013. The new consultation, which closes on 8th August, aims to explore “how costs are being distributed across different groups of consumers and the emergence of potential consumer risks” and has five key focus areas:

  1.  Improving identification of vulnerability and smart use of data. Suppliers must regularly maintain and proactively update the data they hold on their customers, including their Priority Services Register Licence conditions require suppliers and electricity distribution companies “to maintain a PSR [but] PSR data is not always up to date” so “suppliers must take all reasonable steps to promote their PSRs and proactively identify customers who might benefit from additional support services”. They should also provide evidence of improvement to support consumers to self-identify. Plus they should seek to better use data across regulated sectors to enable more holistic and targeted support for consumers in vulnerable situations
  2. Supporting those struggling with their bills through better support for consumers. Suppliers should identify those pre-pay customers at risk of self-disconnection and try to decrease this. They should also help those in payment difficulty, such as by putting them on an affordable payment plan and aim to reduce debt levels (currently 1.2million electricity accounts are in debt to their supplier).
  3. Driving significant improvement in customer service. Suppliers need to embrace a corporate culture that focuses efforts on identifying and supporting vulnerable customers and put systems in place to target and tailor their customer service. New entrants to the market must also be able to deliver adequate levels of customer service. Consumers eligible for priority services should be identified and receive services in a timely way. Benchmarking data must also be made available to enable consumers to make an informed decision when they switch based on customer care levels.
  4. Encouraging positive and inclusive innovation. Suppliers should design products and services to meet the needs of a wide range of consumers and demonstrate innovative measures to support vulnerable consumers.
  5. Working with partners to tackle issues that cut across multiple sectors. Suppliers should join up with other organisations and share information to bring about greater understanding of and foster better experiences for vulnerable customers.

Ofgem will announce the results of the consultation by the end of the year. It also expects to create an analytical framework to assess vulnerable users, open a consultation on The Future Energy Market, and, to formalise its Ability to Pay principles. However, Energy UK argues that the strategy doesn’t go far enough, calling for the regulator to “revisit social tariffs” for low-income vulnerable households after the default price cap ends and for the government to establish a state-funded energy efficiency scheme similar to that run in Scotland and Wales.

Energy UK unveiled its own answers to the vulnerability issue in a report published by the Commission for Customers in Vulnerable Circumstances a month earlier.

In common with Ofgem, this recognised: the need for a range of communication channels including free phone numbers and the preservation of paper-based systems; for the industry to work together to promote the PSR and to tackle the problem of self-disconnect; to ensure that ‘smart’ energy also works for and benefits these customers; access to affordable energy and assistance in managing costs in the short and longer term; and, for suppliers and support organisations such as charities to work together.

But the Energy UK report also differed in that it recommended a Code of Conduct for suppliers, the strengthening of the Ofcom licensing regime, systematic training for all front line staff on how to provide support, and a “Vulnerability Champion” on the board of each supplier. Its findings will now be enshrined in a Vulnerability Charter.

Does regulation need reform?

So to bring us back to those five pillars. Yes, a decarbonised, more diverse energy infrastructure, customer support offered by skilled staff, and technology that provides a wealth of data will all be essential for enabling change but what of how the market is regulated? There’s a need to ensure supplier obligations do not act as a barrier to innovation, for regulatory frameworks to support cross sector bundling, and to tackle regulatory uncertainty. This could mean it won’t just be the energy sector seeing reform; we may also need a multi-utility regulator.

Ofgem admits that regulation of a rapidly changing energy market is problematic and that this “raises the question of which regulated entity is better placed to provide protections for the most vulnerable consumers” but it hints that there could be “an opportunity to examine the role suppliers, networks and other energy system participants should play going forward against the backdrop of energy market transformation”.

Energy UK makes no bones about the fact it favours a move away from frameworks towards “a functional, principles-based approach to licensing where the regulator defines certain activities [and] if you are a participant in them, you are subject to their licensing aspects”; a move that may well encourage more market entrants, with the prospect of multiple energy providers servicing one home in the future.

Preparing for change

Regulation certainly has a critical role to play in ensuring energy continues to be offered affordably and fairly to prevent marginalisation, anti-competitive practices, and to pave the way for a sustainable and competitive market. It will need to be flexible enough to support the anticipated changes. But to protect and grow market share, energy providers need to look now at how they are protecting their customers.

Suppliers need to ensure that any investment in digital and smart technology isn’t at the expense of personal contact. It’s vital that technology acts as an enabler, not an excluder, and that utilities still have the human resource to dedicate to customer care. Engagement is going to become increasingly important as a differentiator so suppliers need to ensure communication channels are open and that information flows freely so that they have the customer data they need to deliver the highest standard of personalised customer care.

Equiniti Hazell Carr has 20 years experience in supporting utility companies. To find out more about how we help energy providers, call us on 0118 951 3971.