Home The effects of Covid-19 on the energy sector

What impacts, challenges and opportunities is Covid-19 presenting to the energy retailer?

The KPMG economic research around the impact of Covid-19 has seen UK GDP contraction of 10.3% in 2020. The vaccine outcomes will influence further contraction or recovery, which are expected in 2021. KPMG analysis suggests this could have a further impact by 4 – 8%. The third factor that will impact economic recovery is the Brexit outcome. All of these contributory factors create a very challenging macro-economic environment which will, inevitably, impact the energy sector.

In terms of the global energy market, the IEA are predicting a 5% lower demand due to Covid-19 impacting oil demand further.

On a recent webinar, hosted by Gilmond, Amy Marshall, Director and Smart Energy Specialist at KPMG explains how these economic factors are likely to translate in the UK energy retail market.

There’s a clear distinction between the B2B and the B2C sectors

Overall, the global demand for electricity is down. In the UK we saw a 12% fall between April and June in 2020. Although we’ll see some recovery, the demand will be depressed by the current economic situation.

 Industrial demand over this period was down 17% while domestic demand was down by less than 2%. This is a clear reflection of changing working patterns; more people spending more time at home and industrial demand clearly impacted by business closure. As we see fall-out in the wider economy, KPMG predicts this will mean a slower recovery than the domestic sector.

However, despite the overall domestic demand being less impacted, Amy advises that suppliers should think about how the extent to which demand curves and demand patterns have been either temporarily or fundamentally impacted by the pandemic, which will have a knock-on effect onto forecasting processes, buying policies and hedging policies.

The on-going consolidation in the UK energy retail market will accelerate 

In relation to UK energy retail, we are definitely seeing on-going consolidation which is likely to be accelerated by the pandemic. There hasn’t been a huge amount of fall-out so far and Amy reasons that this is down to three macro factors, which are:

  1. The Government furlough scheme, which has been extended.
  2. Some industry protection schemes, such as payment holidays offered by the distribution network.
  3. The trends in wholesale price has been low and this has provided some protection to the immediate impact of Covid.

However, further consolidation in the UK B2B and B2C UK sub sectors are definitely to be expected. This presents challenges for some businesses, but opportunities for others.

Strong businesses with solid future-proof business models will survive

Amy believes there is a fundamental truth before Covid-19 that will remain a fundamental truth during and beyond the pandemic, which is that strong businesses with solid future-proof business models will survive.

Amy breaks down into three key factors what a strong business in the energy retail market looks like:

1/ Energy retailers who invest in the customer experience and keep the customer at the heart of everything they do.

2/ Businesses who focus very strongly on operational efficiency and maintaining cost to serve.

3/ Those who keep one eye on the future and, specifically, the energy transition. This includes new energy services and having the agility to change your business model.

You might also be interested in a report by KPMG:

Covid-19: A new reality for Energy & Utilities

Rob Gildert, Co-Founder at Gilmond, reflects upon his experience at founding and running both an energy software company and successful energy retailer. He co-founded I-Supply in 2012 before selling it to Vattenfall in 2017, who were attracted to the business because of its low cost to serve and the cultural fit of company values.  He believes the key to a successful business is reflected within your business model; it’s about having a robust plan to build a sustainable business model.  However, Rob warns that cash is king. You need to manage and project your cash position carefully in order to grow sustainably; this is all about understanding what you can and can’t afford to do.

Covid-19 has hit an energy retail market, which is already under financial stress. Wholesale energy prices did decrease originally during the lockdown period and suppliers with open positions may have benefited from that, but such trading strategies are not sustainable as volatilities are always around the corner. Debt management remains a challenge for any energy supplier.  it’s imperative to have an efficient process that reflects both the regulatory requirements and the necessary standards of care. Covid will exacerbate this challenge and ultimately will increase the write offs as the true impact on households with hardships materialises.

Suppliers have been able to delay some costs, such as transportation costs, which can help short-term working capital, but these do come with a charge and cost. There’s been a delay to smart meter and faster switching programmes – but these programmes must ultimately be delivered.

How do energy retailers weather the storm?

1. Focus on customer service excellence.

Many energy retailers have adjusted to a homeworking model for their customer service staff and this has seen an interesting trend. After an initial period of adaptation, various suppliers are reporting that this homeworking model has led to a surprising improvement in core response times and general availability, as homeworkers are able to be more flexible.  Therefore, there has been an improvement in customer service as a direct result of lockdown.

Again, by necessity, there has also been a noteable digital switch. This is something that suppliers have been trying to stimulate with their customer base, in order to remove the reliance from the phone and traditional communication, in order to become more self-sufficient using digital methods. This naturally enhances customer experience and adds value to the consumer. Suppliers should focus on investment in the digital switch and creating excellent digital consumer experiences.

Amy and Rob believe you must focus on greater customer experience and that begins with stronger customer communication. Invest in marketing your brand by building strong brand awareness, customer trust and brand reputation – this will put your company in a strong and resilient position for future growth.

2. Operational efficiency, in particular cost efficiency.

The technology platform that the energy retailer uses is fundamental to maintaining a good cost to serve and a good cost to serve underpins good economic performance. In constrained economic circumstances, suppliers should definitely look to review their technology platforms and consider how they can or are helping them to reduce cost to serve and how the technology will support them as they transition through the energy evolution.

Based on his own experience of running an energy retailer, Rob Gildert believes that the suppliers who win are those who focus on a low-cost operating model to give them the advantage over others. Selling below cost isn’t a strategy that’s sustainable. A company needs to understand its cost base and strive for the lowest cost base. Rob also stresses that getting and keeping as much working capital in the business as possible is key.

You may be interested in “How to really drive down your cost to serve”

On a more granular level, the more specific challenges thrown up by Covid-19 include the change in demand levels and what this does to demand forecasting, hedging and the approach to the balancing market. This shift has the potential to either positively or negatively affect some cost assumptions that suppliers were taking pre-Covid.

On an even more tactical level, suppliers will need to focus on debt management and better commercial practice over the coming months. Through the hardest part of lockdown, Ofgem were very careful to be clear with suppliers that the wellbeing of customers, their connectivity and showing empathy towards constrained personal circumstances were the priority, which meant payment holidays, and other mechanisms that were outside of normal commercial practice, were very much supported by the regulator.

However, we’re now back into a regulatory world where debt management and good commercial best practice is expected by the regulator, but equally retailers must demonstrate empathy to the individual consumer and comply with regulatory guidance that surrounds vulnerable customers. This is quite a balancing act, which the retailer needs to get right.

 3. Seek out the opportunities of the energy evolution

Amy and Rob encourage retail suppliers to take advantages of the great opportunities offered by the smart revolution and the transition.

The smart meter role out will change the way suppliers engage with customers. The customer engagement process will become a more positive experience as smart meters ensure better supplier competence around meter readings and associated billing challenges. As we go through the next five years, we’ll see smarter management of energy by accessing the house, through the smart meter. We’ll see generations moving from centralised to localised energy – even more so than we have thus far. This will enable a further transition from carbon-rich to renewables and there will be a greater awareness of CO2. A mature supplier will seek to become a partner in the home. We’ve only just scratched the surface with solar panels and EV. The smart future presents plentiful opportunity for the energy retailer of tomorrow.

The robust energy supplier is the supplier who is focussing on customer experience and cost efficiency while investing in the future of energy technology.

 Setting the standards in the energy sector

KPMG Nunwood annually survey consumers in order to assess their perception around levels of customer service excellence provided by B2C brands, across all industries. Five years ago, there was never an energy supplier featured in the top 100 brands of excellent customer service. In recent years, Ovo was the first energy retailer to enter into the top 100 brands, followed by Bulb and Octopus Energy. Octopus Energy are the sole utilities provider who remain featured in this report for 2020. Amy believes they’re also the best example of UK innovation and customer service excellence. They’ve managed to build brand presence, trust, high levels of customer service and innovation around both their tariffs and through the depth of their service offering. They’re a strong example of a UK retailer who has got it right in the UK market and are now establishing themselves globally.

Decarbonisation and digitisation 

Covid aside, the energy retail sector is at a turning point. In particular, decarbonisation and digitisation are macro trends that have been affecting the sector for some time. What we’re seeing over the Covid storm is that the decarbonisation journey is globally expected to accelerate, in fact the IEA predicts a 7% decline in global energy related carbon dioxide emissions in 2020. Partly stimulated by government economic recovery packages but partly because it was an unstoppable train before we entered this phase. Technological offerings that have been conceptual for some time are now at a stage of commercial viability. As we see EV uptake starting to accelerate and other platforms that can tie together the mini power plant and the virtual power plant proposition in the domestic world, integrating photovoltaics, storage and EV etc along with innovative and fully-flexible tariffs – these are all now being enabled through smart meters and can fully change the customer experience.

There will be winners and losers

While the future is rather unpredictable for any sector, there is indeed one certainty: There will be winners and there will be losers. With all the challenges Ofgem represents, including price caps and enforcing regulatory compliance that financially hits suppliers… topped with Covid and then Brexit, the energy retailer faces many economic forces and factors. However, turbulent times can bring opportunity for some and the future-proof supplier with a long-term vision, strong customer focus, excellent cash management and a robust technology platform will win.

Here are some reports, courtesy of KPMG, which support this article:

Covid 19: A new reality for Energy & Utiltiies

Green Fiscal Stimulus: Why the UK needs one and how to implement it

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