The current so-called energy ‘crisis’ is not only a consequence of events over the past few weeks, but also a toxic combination of existing structural industry challenges combined with macro-economic factors.
In this blog, I will look at the issues, their impact on collections, and how Arum can help you weather this ‘perfect storm’.
What issues are the energy industry facing?
Existing low gross margin for core retail businesses
Energy companies have been dealing with unsustainably low prices and slim gross margins owing to new challengers, the predominance of broker-driven business, and a wholesale price increase - the latter driven by a wide range of hedging strategies across suppliers but with unprecedented financial exposure for energy retailers who haven’t hedged that exposure. It’s believed that as things stand taking-on a new standard variable tariff (SVT) customer could now COST an energy supplier £400+… which doesn’t exactly incentivise new customer acquisition.
Price cap
On 1 October 2021, a cap comes into force that is expected to drive prices up by around 13%, with further substantial increases expected on 1 April 2022. Based on the preceding six months’ wholesale prices, the cap could rise much further. This current pressure on prices is probably best illustrated by the recent 50-60% increase in fixed price tariffs.
The Supplier of Last Resort (SoLR) challenge
Larger providers having to integrate failed smaller suppliers will be challenging and place further pressure on already stretched resources. The impact is also likely to be felt by third-party providers to the now-failed suppliers. Existing third-party providers to the SoLR will also have to cope with increased demand, where they don’t currently service those customers.
Resourcing and cost to serve pressures
The impact of price increases and extensive media coverage has led to a significant short-term increase in inbound contact by customers for all suppliers. This is likely to partially abate after the immediate media storm, but the expectation is that many customers will experience ongoing affordability challenges caused in part by the price rises. Headcount in the surviving energy companies will need to rise, at the same time as these businesses were desperate to reduce their cost to serve.
Legacy (and current) impact of COVID
The impacts on consumer affordability throughout COVID have required extensive forbearance, and there have been substantial limitations on collections activity, both voluntarily and regulatory.
Regulatory pressures
Following the rollout of Ofgem’s affordability guidelines in December 2020, and the Breathing Space requirements in May 2021, there is now an even greater focus on customer vulnerability. This increased focus on affordability has (rightfully) required many operational and technology changes.
Macro-economic factors
Whilst the debt tsunami predicted by some (including myself) hasn’t materialised, largely due to extensive government support for businesses and the workforce, there are multiple factors that could impact arrears levels in the next six months, including: Universal Credit (UC) support withdrawal, ending of furlough, National Insurance (NI) increases and higher inflation.
Changing market and brokers
For many suppliers, broker channels have accounted for up to 90% of new customer ‘switching’ acquisition. It is notable that this week, some well-known comparison sites had only two offers listed, as energy firms have withdrawn from the market. Direct offers from suppliers have also been scaled-back or entirely withdrawn, and fewer fixed price deals are available or now at much higher prices. It is likely we will see much more conservative customer acquisition strategies going forward, as firms focus on their bottom-line profitability (or reducing losses) rather than trying to grab market share.
Winter
A colder than average winter could be another tipping-point for consumers and energy suppliers alike.
What will be the impact on collections?
All of these issues will create challenges for energy firms as they manage higher levels of arrears and problem debt. Higher account balances and higher total debt levels will invariably see increases in bad debt provisions and write-offs.
Solutions to reduce the impact of problem debt require operational, technological, strategic, and executional innovations. Organisations will almost certainly have to broaden their digital and self-serve capabilities to handle more transactional activities (such as simple balance enquiries and payments). Many organisations are taking a close look at their legacy systems and processes to see whether they can integrate innovation, such as real-time API interfaces.
The conundrum is how energy suppliers restore their profitability at the same time as handling increasing pressure on bad debt provisions and write-offs, balancing the pressure from regulators and treating customer fairly, and how collections rates can be maintained or increased in this environment.
How can Arum help?
Over the past two decades, we have completed more than 500 projects with our clients to increase cash collections, reduce cost to serve and decrease debt levels. We can help you with:
- Leadership and specialist resources to supplement and complement your teams
- Improving debt recovery processes and strategies working on a results-driven basis
- Identifying and delivering digital initiatives with strong ROIs
- Optimising your technology stack by assessing your legacy systems and identifying the ‘art of the possible’
- Training your agents to improve performance and provide better outcomes for your customers
If you’d like to discuss how we can help you, please feel free to contact me directly via email or connect with me on LinkedIn.
Carlos Osorio
Managing Director
Arum