by Matt Rennie, EY Oceania Power & Utilities Leader
While achieving scale has traditionally been the focus for utility retailers, in today’s changing markets, Matt Rennie asks the question: does scale have any relevance for utility retailers any more?
One of the questions I am often asked is whether any of Australia’s energy retailers have hit scale. I wonder if a better question is, should this even be the aim?
Achieving scale – the point at which the heavy costs of IT, product innovation investment, brand investment and mass market infrastructure are justified across a large enough customer base – is a hot topic within the energy industry all over the world. Many believe that scale is reached when a retailer’s customer base hits three to four million customers.
But in a country like Australia, where the three dominant retailers each serve less than 4.5 million customers, it may be time to consider whether this is an unachievable benchmark.
More pointedly, is it one even worth pursuing? In Australia, the regulatory benchmarks for retail costs range between $90-$120 per customer, suggesting scale costs per retailer of around $200 million per annum based on an estimate of three million customers and 70 per cent of overall costs being fixed in terms of systems and human capital.
Recovering these costs through revenue requires retailers to constantly evaluate their customer segments to see where most profits lie and adjust their retention and save campaigns accordingly.
But even when these are done well, with retail margins of between 3 and 5 per cent, retailers can expect a return per customer of between around $100 per annum for an average household customer for as long as they keep the customer, and up to $500 for a small customer in the commercial and industrial market.
At this point, it is worth noting that Australians are quick to switch retailers, with between 15 and 20 per cent of customers nationally switching energy suppliers each year; and we are leading the world in adopting distributed energy resources.
Australia has the highest rate of household solar panel installation in the world at 15 per cent, according to the Energy Supply Association of Australia. As battery storage technologies become more affordable, it is expected that this, combined with solar, will completely transform our electricity supply within ten years.
Many of the companies positioning themselves to supply customers with these new energy technologies and services are not traditional utilities but retailing giants from outside the sector, such as Telstra, and newcomers with innovation and agility that far outpace most energy retailers.
Exploring another retailing model
If retailers are to abandon the quest for scale, what are the alternatives? One option may be to truly change the retailing model, rather than just innovating within its existing parameters.
Adequately defending against the prospect of new entrants from other markets, and moving the battlefield away from cost scale as the main determinant of success, requires retailers to shift vertically, not horizontally, into markets.
They need to compete not with each other, but with the other players in the electricity supply chain. This means investing in assets, platforms and technologies.
It calls upon retailers to move into the realms currently occupied by the network companies, the generators, the customer and perhaps even the system operator.
They will drive and influence changes to industry legislation. Energy retailers can redefine their purpose, using their knowledge of electricity, and of the market, to differentiate themselves and become not the end of the supply chain, but a force within it.
Costs over customer relationships
The biggest downside of the quest for scale is its negative impact on the customer relationship. At a time when energy retailers face a tougher fight to keep customers, they are least equipped to do so.
The constant focus on reducing costs has also reduced the utility-customer relationship, which, in an environment of flattening energy demand, may be one of the biggest levers Australian utilities have to drive revenue.
Twenty years of managing short-term margins has left forming strong, trust-based customer relationships way down most retailers’ agendas. Encouraging customers to “self-serve” has saved utilities money, but limited their opportunities to engage with them.
This, in turn, has downgraded the customer-utility relationship to what the eminent psychiatrist Eric Berne would have described as “parent-child”. Berne’s “transactional analysis” asserts that in all human interactions, people adopt the role of parent, adult or child, depending on the situation.
High-volume, low-complexity interactions – such as when you call your utility’s call centre – sees you as the client adopt a critical parent role, while the service provider become an obedient child.
Compare that to going to see your surgeon before a complex procedure. Your respect for his or her expertise and the high stakes involved mean you will diligently follow instructions and won’t complain if you are kept in the waiting room a little longer than you’d like.
Respect is sometimes a function of complexity
I’m not suggesting that the provision of energy and related services will ever be seen as brain surgery, but utilities must start moving towards redefining the customer relationship to one more akin to adult-adult.
This will be essential if their investment in new technology, such as smart metering, and the behind-the-meter services it enables, is to yield returns.
Retailing these products and services requires significantly longer call centre touchpoints and the ability to solve problems for the customer rather than refer them to other parts of the supply chain.
The complexity of these offerings means customers will come to rely on the advice of the utility and the nature of these discussions could help shift the relationship to one that is more like a partnership. This new dynamic may provide a faster springboard to a future electricity business model.
Making such a fundamental change in the customer-utility dynamic will not be easy and could be a race against time.
But questioning the narrow focus on scale and instead redefining the customer relationship to offer complex, more profitable products based on disruptive technology may be energy retailers’ best option to successfully compete in what promises to be the very different energy market of Australia’s future.
The views expressed in this article are the views of the authors, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.