o Attracting and Retaining Customers in a Disrupting Energy Market May 2017 ______________________________________________________ Contents Executive Summary 3 Energy Market Overview 5 Customer Participation in the Energy Market 9 What Does the Customer Want? 14 Conclusions 21 Disclaimer While Cornwall and Abtran consider the information and opinions given in this report and all other documentation are sound, all parties must rely upon their own skill and judgement when making use of it. Cornwall and Abtran will not assume any liability to anyone for any loss or damage arising out of the provision of this report howsoever caused. The report makes use of information gathered from a variety of sources in the public domain and from confidential research that has not been subject to independent verification. No representation or warranty is given by Cornwall or Abtran as to the accuracy or completeness of the information contained in this report. Cornwall and Abtran make no warranties, whether express, implied, or statutory regarding or relating to the contents of this report and specifically disclaims all implied warranties, including, but not limited to, the implied warranties of merchantable quality and fitness for a particular purpose. Numbers may not add up due to rounding. 2 1 Executive Summary • Consumers have significantly higher fundamental shift for energy companies service expectations than ever before. The and is a trend which they need to respond customer experience benchmark is no to and an area in which they need to longer just competitor energy companies, become proactive. the bar has and will continue to be set by the consumers’ best customer experience - regardless of sector, size or geography. • It’s all about the Data. Understanding a customer’s individual behaviour and requirements allows for the creation of • Existing energy providers who do not have personalized service experiences. This is a laser focus on customer experience will key as organizations seek to connect, not lose out, particularly given the increasing just commercially with their customers, but number of players coming into the market, also emotionally. Ultimately, effective use many of which are bringing with them of data analytics can help drive valuable higher customer experience standards proactive customer engagement. from other sectors. • Technology is an enabler of - not a • Ultimately, the winners in this space will be panacea for - great customer experience. highly-trusted organisations with an People, Process and Culture all have huge unwavering focus on customer-centricity roles to play in the delivery of real and a keen understanding of the power of transformation. The value created by a data to drive a personalised customer “smart” device is in the service it provides experience. to customers, not in the device itself. • When designing service solutions providers • A.I., Automation, Internet of Things (IoT) need to start from the customer’s and Blockchain could be seen as a “perfect perspective. Today’s digitally discerning storm” of disruption across the broader customer wants simplicity, savings and energy landscape. However, the human speed. Energy companies need to touch will remain critical in delivering great constantly assess how easy they are customer experience with a focus on the making it for customers to interact with more complex, emotional customer their services. interactions. • Fundamentally, people’s needs haven’t • Smart Meters have the potential to changed. What has changed is how energy revolutionize how energy companies companies need to deliver on those interact with their customers. “Smart” is customer needs. According to recent research, 41% of millennials interact most frequently with their energy supplier using social media 1. This represents a 1 “The New Energy Consumer: Architecting For The Future”. Accenture 2014. This was a survey of 10,000 participants across 17 countries 3 only getting started. Gartner is predicting that by 2022, the average home could Terminology have more than 500 connected devices. We are also seeing enormous projected This document uses the following terms to growth in Electric Vehicle (EV) adoption describe the groups of suppliers we see with today’s UK figure of 90,000 set to competing in the market reach 1.5mn by 2020. These growth rates • Large suppliers have businesses that present significant opportunities around have been active in the domestic the connected home. energy market since liberalisation and that service many millions of accounts. These companies are British Gas, SSE, • For all the talk of “Engagement”, there E.ON UK, EDF Energy, Scottish Power remains a significant cohort of customers and npower who are not engaging with the market at • all. This is evidenced by the fact that 9mn Medium suppliers are those that have UK households have been on a Large entered the market from cold and built suppliers standard variable tariff for more portfolios in excess of 250,000 than three years. So, in spite of the domestic energy accounts unprecedented number of service • Small suppliers are the companies that providers in the sector, this level of have fewer than 250,000 household disengagement does not point to a fully- energy accounts and stand below the functioning competitive marketplace. current thresholds for participating in energy efficiency schemes • We are seeing the aggregation of ‘home • Small and medium suppliers are services’ with the re-emergence of collectively referred to as SaMS converged or “bundled” offerings. Trust, engendered by great customer experience, is going to be a key driver of this and will ultimately dictate who the winners are. Trust, authenticity, agility and the importance of your brand ‘meaning something’ all need to be viewed as ways in which energy companies can differentiate themselves from their competitors in this rapidly changing environment. 4 2 Energy Market Overview 2.1 Supplier Numbers 2.2 Market Share In terms of the number of suppliers in the domestic Ofgem publishes market share data for the energy sector, competition and choice has never domestic electricity market, as defined by the been greater. By the end of 2016, the number of number of meter points held by each supplier, suppliers in the GB energy market reached its since the start of 2004. As an indicator of market highest level in the post-privatisation era at 66 . concentration, this shows the extent to which a This reflects a notable expansion in the sector over single supplier (or group of suppliers) potentially the course of the past year, with 21 licensed dominates the market 2. Between 2004 and the suppliers being established – eight of which release of the latest set of data (Q3 2016), the arrived in the final quarter. combined market share of the large suppliers has declined from 99% to 85%. “White label” entry, whereby an entity partners with a licensed supplier to undertake many of the Ofgem has made available comparable data for day-to-day supply activities, remains an attractive gas since Q2 2005. A key point to note from this is option for councils and community-based entities. the extent to which the market share of British Gas Likewise, the “supplier in a box” approach – where has fallen in the period under review, from 55% to a pre-accredited supply licence is purchased, 35%. The Large suppliers have seen their share typically integrated with a software package to decline from 100% to 84% over the analysis period. handle customer-facing elements – continues to provide a ready-to-use option that has accelerated entry. In both instances, the new entrant supplier that has acquired the largest market share in electricity (3%) and gas (4%) has been First Utility – the company Figure 1: Licensed GB Energy Suppliers (Source: Cornwall) benefiting from a marketing strategy that stressed 70 their nature as an alternative to the Large suppliers, and also from legislation that reduced 60 switching times. 50 40 The main point to note is the decline of the large suppliers and the growth of the challenger 30 brands. British Gas remains the largest supplier in 20 both gas (35%) and electricity (23%), holding the highest market share of any company, although 10 the Large suppliers remain dominant (84% for gas, 85% for electricity). This second point is of import 0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 given Ofgem’s “possible tacit coordination” Large ("Big Six") Medium Small White Label between suppliers 3 and the high proportion of those customers that are “disengaged” from the energy market. 2 These figures do not adjust for any change in underlying number of to 25mn in 2004. Therefore, the total domestic market has notionally meters assessed, i.e. according to the Office of National Statistics increased by 8.4% since Ofgem started reporting this data there were 27.1mn households in the country in 2016, which compares 3 https://www.ofgem.gov.uk/ofgem- publications/86807/cmamarketreference09072014-pdf 5 Looking at the first point, the large suppliers were Energy and Industrial Strategy Committee cleared by the Competition and Markets Authority indicates that the majority of the customer base of (CMA) of tacit coordination as part of the group’s the large suppliers is on the most expensive tariff investigation into the energy sector, although it did type (the SVT) and has been for several years 5. acknowledge that certain characteristics of the There have been a number of surveys that have domestic supply market that “may be conducive” looked at this subject (see below), with competition to this activity such as similar business structures and customer engagement being interlinked as and exposure to the same cost pressures. discussed in the following sections. Figure 2: Large suppliers Energy Suppliers: Electricity and 2.3 Customer Switching Rates Gas Market Share (Source: Ofgem) 105% Switching is effectively seen as a proxy for the extent to which customers are engaging with the 100% energy market, notionally reflecting the extent to which they are seeking lower cost deals and/or 95% suppliers that can offer them a better service.