Gaining the advantage in a changing energy industry

Posted: 22nd February 2017

The energy sector is currently going through a period of extensive change. We have mentioned previously Ofgem’s imminent move to principles-based regulation and the roll-out of smart meters and the benefits these can bring.

As well as this, Ofgem is consulting on the standards of conduct for suppliers in the retail energy market. They have also recently invited expressions of interest from energy sector players in a potential regulatory sandbox.

It’s clear we are continuing to move towards an energy industry where customer outcomes, access to information and product suitability are the prime focus. With this increased emphasis on the customer, some firms may find themselves having to think differently about the nature of regulation.

If firms focus their attention on how they deliver their products and services, customer choice is limited by what those firms choose to deliver. Conversely, when the priority shifts to considering the best outcomes for customers, it changes the way firms think about how to design and deliver their products and services.

Looking at the Standards of Conduct consultation, Ofgem is seeking to give some tangible substance to otherwise vague concepts such as ‘treating customers fairly’ and enabling customers to make ‘informed choices’.

However, the less-prescriptive nature of principles-based regulation means that firms should not expect this added substance to come in the form of step-by-step guidance. The principles themselves provide firms with a compass to navigate by. So, instead of asking whether regulation requires firms to disclose ‘x’ or ‘y’ to customers, firms should now ask themselves: ‘What would I, as a customer, want to know?’

Here, we explore how firms can use this new approach to their advantage and stay ahead in an increasingly competitive marketplace.

putting yourself in customers’ shoes

The example of smart meters

Let’s take smart meters as an example of how this paradigm shift might work in practice.

When it comes to smart meters, there is a potentially endless range of possibilities for charging customers in ways that suit a range of different circumstances and needs.

Innovation in tariff design is likely to gather pace as the roll-out of smart meters nears completion, giving more tariff options for customers to choose from, depending on how and when they use their energy. This has got to be great for customers. Some providers have already come up with ingenious ways to offer their smart meter customers free or cheaper electricity at certain times of the day or week. This kind of innovation is bound to generate interest among consumers.

Of course, with a greater variety of choice comes the risk of increased complexity and confusion for customers. Some customers may feel that they don’t have time to agonise over which energy tariff will work best for them in practice.

So how can firms help customers make informed choices and receive good and fair outcomes? Well, thinking in a customer-focused and principles-based way will provide firms with the guidance they need. Important factors include the clarity of communications and the support your firm provides; both before and after the customer has signed up for a particular tariff.

Ensuring effective communication and support

Communications should be clear about how a given tariff works so that customers can make informed decisions about what is best for them. They should be able to understand from the communication whether the tariff would suit their lifestyle and, equally importantly, if there are any features which are unsuitable for them.

Communication, however, is only part of the story.

In a principles-based world, firms would have considered the types of customers for whom various tariffs were suitable or unsuitable even before the design phase. Each type of tariff would have a defined (or implicit) target market. It would be fair to those customers for energy suppliers to monitor actual usage against the tariff objective and get in touch with them if it appears that the customer is not getting the intended benefit of the tariff they signed up to.

Take the example of a tiered energy billing tariff, where electricity is charged at different rates per kWh during the day or night; this may increase choice, but it could work against customers’ interests if those customers find themselves using electricity more than before during the higher-charged period for any reason (a change of working hours, for example).

So, to be fair to customers, the ingenuity behind smart tariffs needs to be counter-balanced by A; a degree of simplicity that customers can easily understand and remember and work with, and B; some additional support that helps customers get the best from their supplier. It’s also important that customers do not feel locked into a tariff if they subsequently find their tariff is not working well for them.

Billing should also provide customers with assurance that they are being billed for the energy they use in the way they were led to expect. Clarity is key here; there should be no nasty surprises for customers once they have signed up to a particular tariff.

If the regulator observed all of this in action upon a visit to your firm, they would likely be of the opinion that you have the best interests of customers at the heart of your business. The following areas should be assessed in order for a firm to assure themselves they are treating customers fairly:

• Culture
• Products and services
• Clarity of information
• Advice or informed choice
• Customer expectations
• Barriers to entry / access

If you test and report on each of these areas, you will have visibility of whether you are indeed treating your customers fairly, and will obtain evidence to present to the regulator.

A WORD ON innovation

We can also throw into the mix of regulatory change ‘Innovation Link’, which is informally being referred to as a ‘regulatory sandbox’. Ofgem has invited comment on it recently via an open letter to energy innovators, describing it as “a ‘one stop shop’ offering support on energy regulation to businesses looking to introduce innovative or significantly different propositions to the energy sector.”

The concept of a regulatory sandbox has been modelled by the FCA’s Project Innovate for the financial services sector. Broadly speaking, it allows firms to be creative and put fresh ideas before the regulator in a safe environment without risk to customers (poor outcomes) or the firm (regulatory censure).

This initiative shows that the energy regulator wants to be proactive in the way it works with energy suppliers and to encourage competition and innovation in the energy sector for the ultimate benefit of consumers.

The closing date for responses to the consultation on Standards of Conduct for suppliers in the retail energy market is the 13th March 2017. The deadline for responses to the idea of a regulatory sandbox is the 17th March 2017.

The future in firms’ hands

Although it presents challenges, principles-based regulation shouldn’t be cause for concern as long as every level of your firm is proactive in understanding the principles it must work to.

Firms’ products must originate directly from the needs of customers; technology should play a more central role in ensuring the delivery of good outcomes; firms may need to be more flexible in applying their terms due to this and, finally, they must retain evidence of the work they are performing to protect and enhance the experience they are delivering to customers.

Being on the front foot in this area can create a competitive advantage for firms. By enhancing customer engagement and taking proactive steps to innovate around known industry issues, firms can ultimately generate customer advocacy and the commercial benefits that a greater level of consumer trust delivers.