These are dangerous times for Britain’s energy entrepreneurs but according to one newcomer to the sector, there is an opportunity to challenge the premise that gas and electricity supply has to be a low-margin industry.
First the bad news. Thanks to a spike in wholesale gas prices, Britain’s retail energy sector is in an advanced state of chaos. Two energy suppliers – serving a combined 830,000 customers – went out of business this week and the industry is expecting more – perhaps many more – to follow.
Why does this matter? Well, it’s been a slow process but ever since the government of Margaret Thatcher set about privatising previously publicly owned utilities back in the 1980s, Britain’s retail energy market has become not only increasingly competitive but also a hotbed of entrepreneurial activity. Today – for the time being at least – consumers can choose from around 70 suppliers, ranging from large corporate incumbents to small newcomers. Often the key differentiator is price.
The Price Problem
And that’s a big part of the problem. The steep rise in wholesale prices has made the cheap prices offered by many suppliers unstainable. In the absence of government help – which has been ruled out – there are likely to be considerable numbers of casualties.
So is this a good business to be in? Well, price isn’t necessarily the only differentiator and what we’ve already seen is the rise of companies, such as Octopus Energy and Ovo that put renewable power generation sources at the heart of their offer. But the fact remains that this still – for a very large part – a market characterized by consumers looking for cheaper deals.
So this week marked an interesting time to speak to Stefan Cooksammy and Neil Cockerill, the co-founders of Rainbow Energy.
Styled as both an energy supplier and a tech company, Rainbow is on the verge of coming to the market with a green energy offer. To be more precise it is offering customers electricity sourced 100 percent from renewable generation while also promising to offset the gas it supplies. This is not new – there are other specialist green suppliers- but in addition, it is incentivising customers to stay loyal. This will be done through a system of loyalty points that will convert into shares. Ultimately, customers will own 25 percent of the company.
Diverse Thinking (Or The Lack Of It)
Cooksammy sees real opportunities in the energy supply sector. But there is a caveat. “There is a real lack of diversity of thinking in the sector,” he says.
Price is important but Rainbow is seeking to create a broader offer. Green power is an attraction to many consumers and this – coupled with the share scheme – should be an aid to retention. The founders have also been paying attention to customer service. Cockerill cites call-center practice. “Rather than have customers queuing for an operative we have introduced a booking, system. Customers book a time and we call them,” he says.
On the Margin
Is this enough in a sector where margins can be wafer thin at the best of times?
Cooksammy and Cockerill have come into energy from financial services. Cockerill sees a parallel with the energy market. “In financial services, the margins have been driven down,” he says. The same is true of energy but one premise behind Rainbow is that this doesn’t have to be the case. “We think margins will increase,” he adds.
In the current climate, it’s an assertion that could raise eyebrows. So what are the driving factors? Well, in the view of Cooksammy and Cockerill, changing work patterns will play a part in shaping the consumer/household side of the market. “More and more people are working from home and they will be charging their cars at home,” says Cockerill.
And in addition to increased consumer demand, there are also opportunities for cross-selling of products, aided and abetted by the data Rainbow collects on its customers.”
But that’s for the future. In the here and now, there is an industry crisis to manage. The transition of the company from pilot mode to full launch may be delayed until it becomes clear what is happening in the market. Longer-term the company will stay clear of the fixed-term price contracts that have been catching out some players.
“This crisis has shown the importance of a prudent hedging strategy and the dangers of offering fixed-term tariffs without forward buying energy. For this reason, Rainbow has decided to place a focus on variable tariffs. “We expect energy prices to fall in the first 12 months of trading and if that is the case, variable tariffs will be the best outcome for our customers,” Cooksammy and Cockerill told me by email a few days after the main interview.
As things stand, the UK energy supply sector looks set for a clear-out. Companies will go to the wall. Will that create new opportunities for those who can build in resilience, win consumer loyalty and differentiate on factors other than price? That’s something we’ll have to wait to see.