- Trends & Technology
To be or not to be – the dilemma confronting British energy providers
As a Principal Consultant at innogy Consulting UK, I of course like to keep an eye on developments in the British energy market and especially the downstream which has been our core business. A question currently comes to mind in particular: “to be or not to be”. This famous quote from Shakespeare quite accurately captures the dilemma the six big British energy providers (Big 6) are facing. Numerous articles on the status quo have been written in recent past, but they all agree on one thing: the growing competition as a result of the extremely lean, digital attackers, and a price cap set by the UK government have caused the margins of the Big 6 to shrink considerably – with dramatic consequences.
The lucky ones are on wafer-thin margins and those less fortunate, are in the red zone. If this is not enough, the issue of nationalisation of the utility companies remains a populist political debate. In this climate, there seems to be only one winner: the lean, agile digital providers whose market share has risen from 0 to almost 25 percent in the past five years (2014–2019).
Cost pressure and agile competition
Let’s get straight down to numbers to paint a picture here. The Big 6 have a cost to serve their customers in the range of £100-£120/customer. For the smaller digital providers, this is approximately half at just £50–£60. The consequence: the successful agile competitors remain profitable despite price caps. The break-even point per customer is on average £80–£90. To remain competitive, the big providers have to keep pace with the cost structure of the digital competition.
But where should they start? It’s quite clear: with the biggest cost components. These are, firstly the products (commodity in this case), secondly the IT platforms for customer support and, thirdly the business model. So, what is it that the lean digital providers have done right and what are the Big 6 still missing? It’s important to note that the purchasing prices of the commodity haven’t changed much in the past 10 years in real terms. How about the remaining two components?
What’s needed is a new business model
A look at the IT platforms reveals: the Big 6 are holding on to old methods. They’re doing so, for example, by still focusing on a very complex end-to-end process that’s based on traditional ERP systems such as Oracle and SAP. A possible simplification and automation of their processes supported by cloud-based platforms, such as those used by agile digital providers today, has not been utilised to date. This is compounded by the fact that the Big 6 have had to accommodate a very large staff in order to maintain the extravagant customer journey they’ve created. This leads to enormous operating costs, which, in this day and age, are simply not competitive.
A further challenge comes from the British regulating authority (Ofgem): it exerts pressure on the energy providers to improve on their customer experience. In order to be able to allow customers to more quickly and easily switch providers – as required – the Big 6 would have to make further investments. They would have to modernise their stagnant and slow-responding IT infrastructure in order to satisfy the most recent demands. The digital competitors on the other hand don’t have to put any investments into their already agile IT to provide customers a simple and agreeable switch-over service and to be able to respond to Ofgem’s demands.
Tomorrow’s already a thing of the past
As opposed to agile and highly competitive consumer products or banking, the energy providers have always been slow when it comes to modernisation and change. That was totally acceptable in times when it was relatively easy to keep up with the competition. The pace of change has, however, gained significant momentum since then. And this is a trend that won’t change in the foreseeable future. So, those who want to keep up have to realise that tomorrow is already a thing of the past. The Big 6’s idea of selling additional energy-related products to their admittedly large customer base seems like a mere drop in the ocean and isn’t going to change the underlying problem: their current business model is quite simply no longer suitable.
To add, this picture is nearly synonymous outside the UK in most other matured markets. But that’s a whole other discussion. For the present, in order to survive, the adage for the UK Big 6 – and even energy providers in other European countries – quite clearly has to be: “Embrace change and be or continue as-is and not to be”.
As a Principal Consultant at innogy Consulting UK, I of course like to keep an eye on developments in the British energy market and especially the downstream which has been our core business. A question currently comes to mind in particular: “to be or not to be”. This famous quote from Shakespeare quite accurately captures the dilemma the six big British energy providers (Big 6) are facing. Numerous articles on the status quo have been written in recent past, but they all agree on one thing: the growing competition as a result of the extremely lean, digital attackers, and a price cap set by the UK government have caused the margins of the Big 6 to shrink considerably – with dramatic consequences.
The lucky ones are on wafer-thin margins and those less fortunate, are in the red zone. If this is not enough, the issue of nationalisation of the utility companies remains a populist political debate. In this climate, there seems to be only one winner: the lean, agile digital providers whose market share has risen from 0 to almost 25 percent in the past five years (2014–2019).
Cost pressure and agile competition
Let’s get straight down to numbers to paint a picture here. The Big 6 have a cost to serve their customers in the range of £100-£120/customer. For the smaller digital providers, this is approximately half at just £50–£60. The consequence: the successful agile competitors remain profitable despite price caps. The break-even point per customer is on average £80–£90. To remain competitive, the big providers have to keep pace with the cost structure of the digital competition.
But where should they start? It’s quite clear: with the biggest cost components. These are, firstly the products (commodity in this case), secondly the IT platforms for customer support and, thirdly the business model. So, what is it that the lean digital providers have done right and what are the Big 6 still missing? It’s important to note that the purchasing prices of the commodity haven’t changed much in the past 10 years in real terms. How about the remaining two components?
What’s needed is a new business model
A look at the IT platforms reveals: the Big 6 are holding on to old methods. They’re doing so, for example, by still focusing on a very complex end-to-end process that’s based on traditional ERP systems such as Oracle and SAP. A possible simplification and automation of their processes supported by cloud-based platforms, such as those used by agile digital providers today, has not been utilised to date. This is compounded by the fact that the Big 6 have had to accommodate a very large staff in order to maintain the extravagant customer journey they’ve created. This leads to enormous operating costs, which, in this day and age, are simply not competitive.
A further challenge comes from the British regulating authority (Ofgem): it exerts pressure on the energy providers to improve on their customer experience. In order to be able to allow customers to more quickly and easily switch providers – as required – the Big 6 would have to make further investments. They would have to modernise their stagnant and slow-responding IT infrastructure in order to satisfy the most recent demands. The digital competitors on the other hand don’t have to put any investments into their already agile IT to provide customers a simple and agreeable switch-over service and to be able to respond to Ofgem’s demands.
Tomorrow’s already a thing of the past
As opposed to agile and highly competitive consumer products or banking, the energy providers have always been slow when it comes to modernisation and change. That was totally acceptable in times when it was relatively easy to keep up with the competition. The pace of change has, however, gained significant momentum since then. And this is a trend that won’t change in the foreseeable future. So, those who want to keep up have to realise that tomorrow is already a thing of the past. The Big 6’s idea of selling additional energy-related products to their admittedly large customer base seems like a mere drop in the ocean and isn’t going to change the underlying problem: their current business model is quite simply no longer suitable.
To add, this picture is nearly synonymous outside the UK in most other matured markets. But that’s a whole other discussion. For the present, in order to survive, the adage for the UK Big 6 – and even energy providers in other European countries – quite clearly has to be: “Embrace change and be or continue as-is and not to be”.
