Aggregators and the Retail Energy Market

Transcription

1 Aggregators and the Retail Energy Market Exploring the impact of Aggregators on the Retail Energy Market October 2012 AUTHORS: David Mackay & Chris Brown

2 Aggregators and the Retail Energy Market Aggregators and the Retail Energy Market Exploring the impact of Aggregators on the Retail Energy Market Victoria leads the world as the only Super Hot retail market for energy in the world, according to vassaett a global energy think tank. Victoria also claims the title of most active energy market of all time with average switching levels of 28% over the past six years. With the Carbon tax adding another 10% to bills in the coming year, on top of large network increases and other green initiatives, this situation looks like continuing. Given this situation, it is no wonder that aggregators are increasingly targeting the energy industry. In addition, the complex pricing on offer makes comparisons difficult to decipher, increasing the market demand for aggregation. Aggregators however are not the only option for consumers seeking a better deal; government comparison sites offer a similar independent service that includes all operators and not just those prepared to offer finder fees and commissions. Furthermore, too much of a focus on price may miss the mark in terms of customer need. Who has been increasing my bill? The NSW energy regular IPART provides a breakdown of electricity price increases (Exhibit 1) over the period 2007 to 2012, indicating a sustained increase of 15% p.a. over the past 5 years. This has driven a doubling of the average consumer bill over the past 5 years (nominally), while wholesale charges have remained relatively flat. Increases in network charges have driven most of the change, with green charges including the carbon tax making up most of the rest. Network charges have increased due to the desire to maintain supply and reliability throughout the year, including peak summer loading, and from the renewal of assets that are now nearing end-of-life. Green initiatives are designed to help Australia reduce its dependence on fossil fuels, and ultimately meet our greenhouse gas reduction targets under the clean energy future policy. The extent to which these expenses and socalled gold-plated networks can be justified is certainly debateable. However, consumers are the first to complain in the event of a brown-out or black-out, and increases in both are unlikely to dissipate. Exhibit 1: Changes to retail electrical bill (NSW) Exhibit 1: Changes to retail electrical bill (NSW) $1,100 $140 Total bill Wholesale 2007/08 $167 $76 Carbon tax Other green $654 Network costs Source: IPART, Average NSW electricity bill increase contribution (nominal, inc. GST) $94 $2,230 Retail Total bill 2012/13 2

3 Aggregators and the Retail Energy Market A case of don t shoot the messenger Retailers, while not the direct cause of either of these increases, have borne the brunt of customer discontent over the continued level and pace of price rises. High levels of churn indicate an active working market with strong competition but also highlight the level of disgruntled, or confused, consumers concerned about getting more value for money and actively seeking a better deal. To attract this pool of actively switching customers, energy retailers are offering discounts and lower prices. The biggest operators should enjoy the lowest per customer cost base - with their overheads spread over a larger customer pool and vertical integration to protect against peak energy pricing. Yet the most aggressive pricing in the market is from nimble second and third tier operators seeking market share. The result in the Victorian and South Australian markets, the most competitive in Australia, has been a sizeable shift in market share away from the larger and more established incumbents. Where are customers going to find a better deal? Customers seeking a new contract have a wealth of choices available from different energy retailers. Their challenge is that they are resource rich and time poor, and in most cases lack the time or inclination to compare offers in detail. This is especially true given the differences in pricing across supply charges, usage rates, discounts, green options and bundling alternatives. The result is the emergence of a number of intermediaries offering help to the concerned consumer. While all sites and services may claim to be the best, there are differing levels of independence, interaction and most importantly, payment mechanisms. Brokers are most active in the business market, offering bespoke services to large users where they negotiate the best deal across a range of suppliers. Brokers tend to charge customers directly for their services and claim independence, or accept a commission from the retailer. Brokers offer a more personalised service, but tend to have the highest costs which preclude them from most of the retail market. Energy Watch is perhaps the best-known example of a broker. Buying Groups are starting to emerge in the Australian retail market, where a collective negotiates on behalf of its members for the best rates between all retailers, with One Big Switch perhaps the best known example. Buying groups tend to be run as non-for-profit entities (co-ops), with members charged a fee to cover any overheads. Buying groups are independent, but the best deal for the group may not necessarily be the best deal for an individual. Government Comparison Sites are mandatory in each state, with each retailer expected to provide a full description of their pricing to allow for comparison. Government comparison sites are also free and offer independence, however their ability to provide true comparison is a function of sophistication of the rate comparison model - particularly when dealing with an unknown load profile and ensuring all potential discounts are identified and applied. Government comparison sites are oriented around providing information but are limited in their consumer orientation. Aggregators provide similar services to the government comparison site, allowing consumers to compare different offerings. Where aggregators differ however is their motivation to find a better deal for the consumer. Aggregators are typically rewarded only when a switch occurs, either in the form of finder fee or commission, and thus are always on the hunt for new and better deals. As with aggregators operating in other markets such as private health, car insurance and airline flights, aggregators are very active marketers, promoting their brand and service. Aggregators are sales oriented as opposed to information oriented. With new and prospective laws curbing the role of door-to-door salespeople and late night cold callers, the battle front for new customers has shifted online. If other markets are any guide, aggregators will play a major role. In the private health insurance market, aggregators have made significant inroads in a short time, with 20% of new customers forecast to be sourced through online aggregators by

4 Aggregators and the Retail Energy Market When do aggregators thrive? Aggregators thrive in markets when there is hidden value on offer to a given customer (Exhibit 2). This value can take the form of more relevant product for less unit cost, or simply, more for less. Markets that offer the most opportunity for locating hidden value for a given customer have the following characteristics. Commodity product with no or little differentiation between suppliers Complex pricing that makes it difficult to compare products and understand differences Low touch where the purchase is transactional and online sales channels dominate, resulting in limited direct interaction and relationship building Low switching costs where customers have limited cost when switching suppliers Exhibit 2: Where aggregators thrive Low switching costs The retail energy market meets every one of these criteria. Aggregators typically succeed because they offer the customer lower prices usually for less product, removing unneeded or low value inclusion. What might not be so clear to consumers is the inherent trade off between product and price in these cases. Hidden value can also take the form of more product features for a particular customer. Where have the customers gone? While offering opportunities to gain new customers, aggregators encourage commoditisation and do not discriminate; they will just as quickly target your customers, as your competitors customers. At most risk is the loyal customer on a basic product plan with limited features (Exhibit 3). With the price increases of late they may feel they are not getting value for money and have been taken advantage of. Offering additional features to these customers is critical to keeping them happy and away from the commodity corner where competition on price is highest and where aggregators are the most active. Additional features create value by providing solutions beyond the pure commodity. This in turn builds a stronger more long term relationship built on value and meeting each customer s particular needs. Low touch Hidden value (more for less) Commodity product With the advent of residential photovoltaic solar power, heat pumps and smart meters, the best products may lower individual power requirements in the short term, but secure a grateful customer over the long term. Complex pricing Source: SPP concept 4

5 Low Product Features Low cost add-ons Differentiation Service based solutions High Aggregators and the Retail Energy Market Should energy retailers embrace or reject aggregators? We have seen from adjacent markets that the onset of aggregators in the retail energy market is inevitable. The key questions for energy retailers are whether or not they actively pursue aggregation as a sales channel, and how they defend their existing membership base from fierce aggregator marketing. SPP can assist energy retailers to prepare their aggregator response strategies, including: Analysing customer value developing a strong understanding of customer lifetime value and determining the profitability of different types of customers Leverage their service infrastructure (internal and outsourced) - to deliver higher quality leads, retain customers, and avoid bad debts Assessing the impact of aggregators on market share forecasting the impact of aggregators on market share under scenarios of participating and abstaining from aggregator markets Developing response plans coming up with clear strategies for defending against market share erosion through tiered branding, channel development, customer service, and product innovation Exhibit 3: Defending against aggregators Exhibit 3: Defending against Aggregators Value Challenge Enhanced features (extended service relationship) Extended Service Model Commodity Corner Price pressure (high switching potential) At Risk Customers Low Source: SPP concept Customer Value (over lifetime) High 5

6 About SPP We are a general management consultant firm focussed on ensuring our clients and partner organisations gain the benefit of a structured, tailored, and evidence-based approach to solving complex business problems. Established in 2005, SPP has delivered successful outcomes for a broad range of commercial and government sector clients. As a result, we have strong relationships with many businesses, from Top 50 listed companies through to small enterprises. About the authors David Mackay Associate David leads SPP s Utilities practice. He assists organisations in developing and realising business growth strategies from early stage new ventures to major corporations. Prior to SPP, David has held responsibilities encompassing business development and bid management, project and operational management, and strategy development and implementation for organisations such as Atos, Fujitsu and Toll Holdings. Chris Brown Senior Engagement Manager Chris is an experienced senior manager with a broad range of experience across Sales, Pricing and Finance. Chris has held responsibilities encompassing business development, project management and strategy development for organisations such as Pacific Brands, Fosters and Jetstar. Chris has also worked for Booz & Co and Accenture in the past. Strategic Project Partners Level 41, 120 Collins Street Melbourne, Victoria 3000 David Mackay m t e david.mackay@spp.com.au Insig ht Influen ce Impa ct 6