The Government has taken a bold lead of late in committing the UK to deep and challenging cuts to our carbon emissions.
And it is the energy supply industry that will be the agent for change – both physically, in the investments that need to be made, and also in delivering larger bills to consumers.
Energy is never out of the headlines these days and Ernst & Young research confirms that our domestic gas and electricity bills will, indeed, rise substantially – by at least 20% in real terms by 2020 – in order for utility companies to meet the costs of implementing climate-change mitigation measures and the low-carbon agenda.
As the UK energy industry continues to wrestle with the challenge of delivering measures to mitigate climate change, we believe that there are a number of strategic implications for the Government, the energy industry and consumers which will require prompt attention.
First, Government and energy suppliers must work hand in hand in order to:
Better communicate to domestic consumers the need for energy-efficiency initiatives. This will mean better educating the public about the scope for savings that can be unlocked through demand reduction and energy efficiency.
Encourage consistent and sustainable behavioural change so that domestic customers truly embrace the challenge of reducing their energy consumption.
Deliver a full roll-out of smart metering by 2020. This means Government setting the framework and agreed standards which will enable the industry to set about delivering the programme.
Second, energy retail competition will continue to be driven by price. Opportunities to differentiate may come through deepening relationships with customers based on the insights from smart metering and offering new energy service propositions. These will help customers improve their energy efficiency and mitigate the upfront costs of energy-efficiency initiatives.
Third, adding major amounts of low-carbon generation capacity in a relatively short space of time will put the supply chain for the energy industry under significant stress. Putting a clear policy framework in place and implementing the provisions of the draft Planning Bill in full will be crucial if the challenge posed by the 2020 targets is to be met.
So what will tomorrow’s energy suppliers look like?
Price competitiveness is key today for energy suppliers and will remain so going forward. However, the winners tomorrow will be those who can strategically keep prices low and demonstrate innovation and organisational agility – all without destroying enterprise value.
In the competitive domestic energy market, energy suppliers must seek opportunities to differentiate themselves over and above the base differentiator of price. They will have to deliver continued and sustainable excellence in customer service built on a solid platform of “getting the basics right”. Proposition innovation will be critical, especially those that capture the advantages of investments in smart metering.
In the current climate, Government and the energy suppliers will have to work together to ensure that domestic customers truly embrace the challenge of reducing their energy consumption.
More specifically, and to help that process, Government and energy suppliers are going to have to co-operate if a full roll-out of smart metering is to be delivered before 2020 and the benefits fully unlocked. This is also the case if the hoped-for benefits of smart metering are to be fully unlocked.
Government must set the framework and agreed standards for smart metering as soon as possible; the industry can then begin to set about delivering the programme.
The nationwide roll-out of smart metering before 2020 will provide a major opportunity for proposition innovation by energy suppliers. Real-time pricing data in relation to domestic customers opens up possibilities for far more tailored tariffs than they have traditionally been able to provide.
Be in no doubt, this will involve working together to achieve those necessary energy savings.
But we believe that the full benefits of energy efficiency will only be unlocked if energy suppliers adjust the models through which they currently engage with customers. They have to make energy efficiency as easy as possible for individuals to understand and implement.
In particular, energy efficiency will require significant and additional discretionary expenditure by individuals. The prospect exists for suppliers to take the bold move of helping to mitigate these upfront capital costs likely to be faced by their domestic customers.
Energy suppliers that are able to provide a range of options to customers in relation to energy-efficiency measures may create a crucial competitive advantage. A bold supplier may look to tackle rising prices by creating new customer propositions to help domestic customers manage down their energy consumption. This would mean moving from today’s model of “energy product push” to one of “energy service pull”.
“Knowing” the customer will become even more important than it is today, with the winners being those who can leverage this insight to enhance propositions and lock in customers. This will provide a means by which energy suppliers can hope to differentiate themselves from their competitors and hence manage customer churn.
Of course, there is the need for an attractive market, and the pursuit of British Energy by French-owned EDF Energy has once again raised questions as to what extent ownership in the utilities sector matters, particularly in the context of an industry that is expected to deliver significant change.
What is clear is that, to date, our energy suppliers (whether foreign-owned or not) have not failed to respond to investment needs on behalf of energy consumers in the UK.
However, the onus now falls on Government to ensure that Great Britain’s liberalised market remains an attractive place for them to do business.
As utilities emerge that are increasingly operating on a pan-European basis, they will begin to evaluate investment opportunities across all the countries in which they own businesses.
If it becomes too difficult to do business in the British market, energy suppliers will look at alternative investment opportunities elsewhere – whether they are foreign-owned or not.
It is for this reason that so much is seen to be riding on the planning and energy bills currently being debated in parliament.
Clearly understood ground rules and a level playing field are going to be crucial in attracting the investment that will be needed if energy suppliers are to embrace the opportunities outlined above and if the UK is to meet its emissions reduction targets.
Neville Cobb is a member of Ernst & Young’s renewable energy team
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