UK Energy Crisis – How customers were supported.
I recently spent time with Sigma Connected colleagues in Australia, presenting at the Australian Energy Week conference. Whilst travelling back I had time to reflect on what I had learnt from my time there and the similarities between the UK and Australian energy market. I left at a time of a pending energy crisis and when the AEMO (Australian Energy Market Operator) suspended trading on the spot market due to escalating prices. Something not seen in Australia in many years.
I felt that sharing what I know about the UK energy crisis would be helpful insight into what could happen in Australia if their crisis worsens.
What caused the UK energy crisis?
Essentially it came down to a sharp increase in wholesale costs driven by both an increase in demand from China and from Europe in a post Covid recovery plus a corresponding reduction in available supply. Gas stocks in the UK were low and Russia slowed exports to Europe along with maintenance of some of their assets both planned and unplanned. The perfect storm hit as we moved into winter and consumer demand started to rise.
Costs for retailers were increasing but because of a price cap on energy process to customers, retailers couldn’t recover this increased cost. The impact of this put a huge financial strain on all UK energy companies whether they were fully hedged or financially strong. Cheap fixed price deals or ‘market contracts’ disappeared almost overnight and customers were left with no alternative but to stay on the price cap.
26 companies failed
Wholesale prices rose rapidly and the cap meant that energy companies couldn’t recover these costs immediately. Competition has long been encouraged in this market and a lot of barriers to entry for new suppliers had been relaxed. There seems to have been a general push by the regulator to see the ‘Big 6’ replaced with lots of smaller suppliers. Amongst these new suppliers some companies were not fully hedged and therefore purchasing from the spot market was not economical. Even those that were fully hedged were impacted as the volume of churn they had predicted was greatly reduced as there were no ‘deals’ available with competitors so customers stayed. This meant they had a shortage of energy and also had to purchase from the spot market.
Many of these suppliers had been selling at below market rates with a view to attracting new customers that they would then keep. But the market is very price sensitive and when the deal ends and another is not available, customers just churn to the cheapest tariff. Whilst we have had a high volume of switching in the UK for many years, it’s typically the same 50% of the population that continue to switch leaving the other 50% disengaged and staying put on Standard Variable tariffs.
How it impacted customers
There were both financial and emotional impacts for customers
Financial – Rising prices over the last 18 months have been significant. The following shows the price cap rises based on ‘average’ consumption:=
April 21 £1,000 $1,700
Oct 21 £1,300 $2,250
Apr 22 £2,000 $3,500
Oct 22 £3,600 $6,100
The cost of the failed suppliers, that is mutualised across all customers, is said to be in the region of £94 ($170) per customer from protection of customer credits and recovery of increased energy costs. One suppler, Bulb, was too big to go through the Supplier of Last Resort (SoLR) process so has been placed into Special Administration’ meaning it is now being propped up by the government and costs have been estimated between £1.7b ($3b) to £3b ($5.2b) to support it through this period. That’s £100 or $170 per customer in the UK that needs to be recovered, most likely through general taxation.
These increasing costs are sure to have a significant impact on the lives of customers. Before the crisis it was estimated that c3m households lived in fuel poverty, after the April 22 increase this rose to 6.3m and following the Oct 22 cap coming into force its estimated that around 8.5m households will fall into fuel poverty.
Worryingly there were 11,500 deaths last winter related to people living in cold homes. With approximately 3 times as many people expected to be living in fuel poverty, then we can expect the deaths to escalate in direct relation.
Emotional – Customers credits have been guaranteed but customers have had to wait for these to be returned. Customers have often seen a price increase when they have been moved as a result of the SoLR process and the whole situation causes worry and distress. Some customers were in the middle of moving home or moving supplier so have an added complication to deal with and in some cases smart meters stopped working in smart mode whilst the transfer of data caught up.
Trustpilot reviews for some suppliers indicate long wait times and often IVR messaging has indicated longer wait times than normal. Customers were just in a state of limbo.
How energy companies responded
Sigma Connected have first-hand experience in the Supplier of Last Resort process supporting 17 different companies in some form since 2018.
There’s a bidding process that normally happens during the week of the first notification, a decision usually over the weekend and the new supplier is appointed the following week. The best way to be prepared for this is utilising a comprehensive set of FAQs as the majority of questions asked by customers are the same and the activity that an agent can actually carry out is quite limited. Sigma has helped energy companies to refine this over time, bringing experience from previous SoLRs to shape the questions and answers likely to be seen.
For those companies that came to Sigma for support we were able to:
- Stand up temporary resource within 3 days of being notified
- Train the teams on systems and FAQ’s and basic hand off processes in half a day
Minimise any IT set up and cost by using Bring Your Own Device
Essentially the message to customers was: ‘your supply is safe; stay put; take a meter reading; don’t cancel your direct debit and give some idea of timescales and next steps.’
- Recruited temporary resource in either UK or South Africa to go through more detailed training
- Established connectivity into core CRM systems
- Trained advisors for more complicated enquires and processing of data relevant to the SoLR
- Skilled advisors in what they could and couldn’t complete at each stage of the SoLR process so they gave customers accurate information
- Prioritised prepayment customers with potential supply issues
This is about a longer-term solution to handle a larger base of customers that was acquired almost overnight.
- In some cases this stayed with Sigma and sometimes the client put arrangements in place to take the work back inhouse which they could accommodate over time.
- Sigma have seen a mix of South Africa and UK being brought online permanently to cope with the increase in customers
- Longer term contracts are established and some movement of work types occurs, allowing the client time to make a more strategic decision on the future of the service
This phase focusses on retention of the customers won as part of the SoLR process. Unfortunately, as the market started to collapse in the UK and process meant an increasing number of deals disappeared off the market, customers were left with staying on the price cap tariff meaning no real incentive to switch.
The government is stepping in to help – a number of customer support packages have already been announced but the general feeling is it will need to do more. Converting this support package in AUS $ is as follows:
- $680 for everyone
- $1,150 cost of living payment which is means tested
- $510 for people of pensionable age
There’s a further $250m going to local government to use in different scenarios they see fit. The UK already has in place a Warm Home Discount scheme, Winter Fuel Payments, Cold Weather Payments.
The most vulnerable could get a total of $2,340 dollars support against a predicted average bill of $6,100 post October 2022.
So could the same happen in Australia?
At the time I visited there was a crisis brewing and worries of increasing prices and potential energy rationing. Looking back that seems to have somewhat avoided turning into a huge crisis even though a small change in prices for customers will impact somewhere.
The UK and Australia have similar market conditions; competition is quite prevalent although the Big 3 still lead in terms of customer numbers; there are 55 companies competing in the market after a period of growth in new entrants who hold an 18% share.
Electricity has seen a significant rise in the number of customers on market contracts compared to standing offers which generally shows an engaged market; gas has 19 new challenger brands servicing c12% of the market; wholesale costs have been on the rise but not as dramatic as the UK and there would be a question around whether all suppliers are suitably hedged or capitalised to deal with volatility in the market.
The Australian version of the price cap is more of a guide than a limit and a further question should be asked about how agile companies are if there are frequent and significant price rises ahead, changes to systems, handling additional customer contact or even managing through the SoLR process should it come to that.
If only we could predict the future we may know how best to react!
What steps could be taken?
I believe a lot of the steps taken in the UK are transferable to Australia should a crisis emerge or, even if it didn’t, as preventative measures
- Stress tests for those companies participating in the market
- Understand who pays when a supplier fails
- Protection of customer credit so not all customers lose out in the event of a failure (the debate in the UK is still ongoing around this)
For your business
- Agility to deal with volatility
- Minimise your debt now
For your customers
- Know your vulnerable customers
- Hardship funds for those most severely impacted
- Self-serve payment arrangements to deflect voice contact
- Look out for those that don’t contact at all, they may be struggling the most
Essentially most of this is just good practice but if the crisis were to escalate its better to be proactive rather than reactive.
For further information or a wider discussion on how we can help your business, contact us below.
|About the authorRob Sawle is Sigma Connected’s Director of Energy Services.|