In a recent blog, I took a look at the issues caused by the current energy crisis and how they are impacting collections. This time I’m looking at the causes and how energy firms can take practical action to respond.
A race to the bottom
The regulator and the government were naturally keen to stimulate competition which was hoped would see lower prices for customers - an admirable vision, but one that needed carefully planning and governance.
But just how effectively was this done? It’s widely suggested that insufficient due diligence was carried out on firms and their directors, prior to being able to set-up as an energy supplier. Was it really as simple as buy a pre-packaged company for a relatively modest sum and start selling energy? Were the checks done on new entrants’ financial standing sufficient? Who was questioning the hedging and pricing strategy to ensure risk was being adequately managed? Who was checking that the new entrant had the systems, processes and most importantly the experience to successfully and sustainably operate in a competitive market whilst protecting their customers? Regardless, I’m sure the regulators will now be undertaking a period of self-reflection.
There were a lot of misconceptions about the energy industry combined with some arrogance from outsiders who believed that running a successful energy retailer couldn’t be that hard - could it? Challenge the incumbent providers with a funky new brand, push digital channels, cut overheads, offer reduced prices and hey-presto… make handsome profits. Nice idea, but not quite. Many of these new entrants have now failed, with thousands of employees losing their jobs and customers left baffled about what that now means for them.
The rise in fuel poverty
Citizens Advice Scotland recently published an article stating that one in four Scottish households were deemed to be fuel poor (defined as those spending >10% of their income on energy1). With fixed prices due to increase significantly in the next few months, we can reasonably expect the number of fuel poor households across the UK to rise.
Ofgem data shows most energy suppliers are currently loss-making2. In all likelihood these losses are likely to grow as more customers struggle to pay their bills, resulting in rising bad debt provisions and write-offs. Even those profitable energy firms may struggle going forward, which in turn may adversely affect their ability to support the genuinely fuel poor. That would be bad news because, despite some occasional bad publicity, most suppliers do a pretty good job helping customers in financial difficulty.
Doubtless more can still be done to use available data to help proactively identify those most in need, whilst firms need to continue to support and train their front-line agents on how to handle difficult and challenging cases.
And at the same time, energy firms will need to focus on preserving their cash position and balance sheet reserves, ensuring that those who can pay, do pay.
Cash is king
The peak of profitability for the energy industry was 2016, when margins were a little under 4.5%. All things considered, that doesn’t leave much scope for rising costs and bad debt provisions. The increase in underlying wholesale energy prices, coupled with an end to the furlough scheme, as well as increasing inflation, is all going to place further significant upward pressure on the cost to serve and a downward trend in margins.
New entrants often focus obsessively on growing their customer base, frequently at the expense of basic financial management, perhaps hoping they would be able to address this later in their evolution, once they were big enough and had ‘scale’. It’s now evident this strategy doesn’t work so well in these tough market conditions. Industry experts are predicting more failures and even some of the larger, more established providers’ balance sheets and cash flow will be stretched to cope with the difficulties that likely lie ahead.
What are the challenges ahead?
Here are just some of the likely challenges in the coming months:
- More energy suppliers ceasing trading
- Large volumes of customers moving suppliers, whether voluntarily or not, but usually paying higher tariffs
- Energy price cap increasing by 12% in October 2021, with a further substantial increase likely in April 2022
- Fixed energy tariffs up by as much as 60%
- Upward pressure on bad debt provisions
- Cost of collecting debt likely to increase
- Increased customer demand putting pressure on internal and external capacity
- Significant Increase in the number of fuel poor
What can be done to mitigate these risks?
There are numerous actions that can, and should, be taken to improve collections, whilst supporting customers in need.
Many firms, not only in the energy sector, are increasing their capacity to speak to customers via their contact centres, whether by recruiting internally or securing third-party services. In order to keep costs low, a number are also assessing their digital channels, with a view to encouraging as many customers as possible to self-serve, especially for more basic interactions.
Given the expectation of more customers likely to be in financial difficulty or suffering from other personal vulnerabilities, a number of firms are putting their agents through additional training, with modules focused on how to identify and support these customers. The best approach is to recognise that agent training is not a one-time exercise.
Other actions include:
- Supplement existing resources with interim expertise and experience to ‘hit the ground running’ and shortcut to better results
- Optimise your current technology stack and reengineer existing processes to remove inefficiencies (including robotic process automation)
- Customer journey reviews to look for opportunities to improve engagement and increase use of digital self-serve
- Portfolio analysis of the debt book to seek to optimise returns (including reactivating written-off accounts) and improving cashflows (including debt sale options)
It’s perhaps a bit obvious to say, but these challenges are not exclusive to the energy sector.
How can Arum help?
Over the past two decades, Arum has completed hundreds of 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
1 https://www.cas.org.uk/news/new-figures-show-1-4-homes-fuel-poor
2 https://www.thetimes.co.uk/article/the-energy-supply-company-del-boys-dreamt-theyd-be-millionaires-tn035vbpm