Imagine an entire industry where the largest six companies made a combined profit of £924m ($1.2bn) last year. Now imagine the industry regulator enforcing a price cap on this entire industry, and reducing profits by around £1bn ($1.3bn). This is exactly what has just happened with the price cap proposal made by energy regulator Ofgem on the energy industry in the UK.
Over 11 million customers will gain, with cuts in their energy bills expected to be around £75 ($98) per year, so this is great news for customers on standard energy tariffs – traditionally the most expensive type of energy bill. However, savings at this level appear to wipe out the entire combined profits of the energy firms. The only silver lining for the energy industry is that the British Prime Minister Theresa May had attempted to give consumers an even greater saving of around £100 ($130) each. Customers on standard tariffs will save cash, but not as much as the government was hoping for.
So is this a reckless move by the regulator that could send shockwaves through the energy industry or have customers been paying too much on standard tariffs for too long? One of the Big Six energy suppliers, SSE, has already issued a profit warning less than a week after the Ofgem announcement on price caps so it is clear that all the major energy companies will have to think carefully about their next move.
The BBC Radio 4 consumer finance show, Money Box, dedicated an entire show to the question of energy bills this week. A guest on the show, Joe Malinowski, founder of price comparison site TheEnergyShop.com, believes that the Ofgem move will cause problems for energy suppliers. He said: “If consumers are going to pick up £1bn of savings then that means this will cost the industry £1bn of revenue, so they will need to find ways to cut costs. That means finding ways to get rid of expensive-to-service customers, and job losses.”
Joe makes an interesting point. How can energy companies deliver a great product and experience for their customers if rising costs are eroding their ability to make a profit and stay in business? If the energy companies want to continue delivering value to their shareholders then business simply cannot continue as normal.
Ofgem is concerned about the quality of the customer experience in this market and customer complaints are taken seriously, so it is not an option for any of the energy companies to allow the customer experience to be degraded. Their only real option is to change the way they are doing business. Across the entire sector, energy companies will need to aggressively deploy technology-led solutions so they can continue to increase profit without watching the customer experience plummet.
Joe Malinowski believes that the energy companies will shed jobs and also selectively shed those customers that are expensive to service, but I believe there will be a couple of other changes to the industry. Automation of business processes will suddenly be taken more seriously and there will be a renewed focus on improving the customer experience. In a tougher trading environment with fewer easy profits, holding on to loyal customers and attracting new ones because you develop a reputation for great service will be more important than ever. This is also where customer analytics will really help energy companies to drill into the data they already have to identify opportunities for greater efficiencies or improved CX.
Improving the customer experience has been on the executive agenda of the smarter energy companies for a few years now, but with this price cap threatening to erode the entire combined profit of the Big Six, holding on to loyal customers takes on a greater importance. They need to double down on projects designed to improve CX. This is no longer just about increasing profits, for some energy companies it may be about their ongoing survival in the industry.
Photo by Brian Talbot licensed under Creative Commons.
