Times are dangerous for UK energy entrepreneurs, but according to a newcomer to the sector, there is an opportunity to challenge the premise that gas and electricity supply must be a low-margin industry.
First the bad news. Thanks to a surge in wholesale gas prices, the UK retail energy sector is in a state of advanced chaos. Two energy providers – serving a total of 830,000 customers – closed their doors this week and the industry expects more – perhaps many more – to follow.
Why is this important? Well, the process has been slow, but since Margaret Thatcher’s government set out to privatize utilities earlier in the 1980s, the UK retail energy market has become not only increasingly competitive, but also a hotbed of entrepreneurial activity. Today – at least for now – consumers can choose from around 70 suppliers, ranging from large legacy companies to small new entrants. Often the key differentiator is the price.
The price problem
And that’s a big part of the problem. The sharp increase in wholesale prices has made the cheap prices offered by many suppliers unsustainable. In the absence of government assistance – which has been ruled out – there will likely be a considerable number of victims.
So, is this a good deal? Well, price is not necessarily the only differentiator and what we have already seen is the rise of companies, such as Octopus Energy and Ovo, which are placing renewable energy production sources at the heart of their offer. But the fact remains that it is still – for a very large part – a market characterized by consumers looking for cheaper offers.
So this week was an interesting time to talk to Stefan Cooksammy and Neil Cockerill, the co-founders of Rainbow Energy.
Designed as both an energy supplier and a technology company, Rainbow is poised to enter the market with a green energy offering. To be more precise, it offers its customers electricity that comes 100% from renewable production while promising to compensate for the gas it supplies. This is nothing new – there are other specialist green suppliers out there – but on top of that, it keeps customers loyal. This will be done through a system of loyalty points which will be converted into shares. Ultimately, customers will own 25% of the business.
Diverse thinking (or lack thereof)
Cooksammy sees real opportunities in the energy supply industry. But there is a caveat. “There is a real lack of diversity of thought in the sector,” he says.
The price is important but Rainbow is looking to create a larger offer. Green electricity is an attraction for many consumers and this – coupled with the sharing system – should help with retention. The founders also paid attention to customer service. Cockerill cites the practice of call centers. “Rather than letting customers queue for an agent, we introduced a reservation system. Customers book an hour and we call them, ”he says.
On the sidelines
Is this sufficient in an industry where margins can be very slim at the best of times?
Cooksammy and Cockerill come from financial services. Cockerill sees a parallel with the energy market. “In financial services, the margins have been squeezed,” he says. The same is true for energy, but one of the premises behind Rainbow is that it doesn’t have to be. “We think the margins will increase,” he adds.
In the current climate, this is a statement that could raise eyebrows. So what are the determining factors? Well, according to Cooksammy and Cockerill, changing ways of working will play a role in shaping the consumer / household side of the market. “More and more people are working from home and will charge their cars at home,” says Cockerill.
And in addition to increased consumer demand, there are also opportunities for product cross-selling, aided and encouraged by the data Rainbow collects on its customers. ”
But it is for the future. In the here and now, there is an industrial crisis to deal with. The company’s transition 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 away from fixed price contracts that have caught up with some players.
“This crisis has shown the importance of a prudent hedging strategy and the dangers of offering fixed-term tariffs without purchasing energy forward. For this reason, Rainbow has decided to focus on variable rates. “We expect energy prices to come down in the first 12 months of trading and if so, variable tariffs will be the best outcome for our customers,” Cooksammy and Cockerill told me by e. -mail a few days after the main interview.
As it stands, the UK energy supply sector looks set to empty. Businesses will go to the wall. Will this create new opportunities for those who can build resilience, retain consumers and differentiate themselves on factors other than price? It’s something we’ll have to wait to see.