The utilities landscape: trust, green energy and debt

Traditional utility firms are finding themselves at a crossroads in 2020. One path leads down the road of tradition - with outdated legacy systems, face-to-face collections, and antiquated customer service solutions. The other follows close behind the retail banking industry into a digital future where the customer is put at the forefront of every major decision. The latter path is the one with real legs and it is one the industry looks ready to tread, but before the utility sector can make a significant change, it needs to sort out its image problem.

Perhaps the major problem facing the industry is the issue of trust or lack thereof. Consumer trust in the energy sector is at an all-time low, due in no small part to rising costs. There have been concerted efforts from many corners of the industry to create more transparent billing, brand campaigns, and customer support. However, even though there have been improvements, with 76% of UK consumers in 2018 happy with their supplier, compared to 72% in 2014, the problem persists. This is largely due to mounting regulatory pressure to provide a quality customer experience.

The sector is also a well-worn political target, of course, that has in the recent past had to weather everything from household energy bill caps to the cessation of sustainable energy subsidies, not to mention a regulatory backdrop that is always changing. The real core of the industry, however, rests with the suppliers and their relationships with their customers, and those customers are becoming disenfranchised. If those customers’ perceptions are going to be turned around, then what is really needed is a fundamental change.

Ultimately, while change has been slower to affect the utility industry than it has in the world of banking, with seven out of ten people in the UK now banking online, that change is coming and it’s being catalyzed not only by increasing consumer demand for digital reliability and convenience but by challengers too.

Great green challengers

Environmental issues are at the top of the agenda for the utility sector right now and the general consensus is that not enough is being done. Former environment secretary Michael Gove recently called on the CEOs of numerous water and sewerage firms to “prove that they take their environmental obligations seriously” and condoning their collective environmental performance as “simply unacceptable.”

In this regard, challenger companies have a significant advantage. They are not only more nimble, as they are not weighed down by legacy systems and consumer perceptions, but they are also leagues ahead when it comes to customer service too. Indeed, in a Simply Switch survey of UK energy companies, the relatively young and renewable-focused company Octopus Energy topped the list of favorable companies, and the other four companies in the top five were also young brands with a heavy renewable focus. Legacy companies British Gas and nPower, meanwhile, ranked amongst the worst in the country.

It’s not just prices and eco-friendliness at play here either. While these new challengers are setting out of the gate with digital solutions and customer-centricity at their core, older firms don’t have that luxury. Instead, they are labored with disjointed customer service solutions across multiple channels and fragmented processes spread across complex infrastructures that make it almost impossible to provide a seamless experience. There is something they could be learning from these young upstarts, though, as well as from the retail banking sector, which has been more eager to jump on the digital bandwagon.

Digital opportunities

In a market where digitization is very much the norm rather than the exception, utility companies need to start following their close cousins in the financial sector into the bold digital future. These companies should try to look past the digital revolution as an immediate threat and instead see it for what it is - a wonderful opportunity to compete with nimble challenger brands.

For the power industry, in particular, renewables, distributed generation, and smart grids are triggering new business models based around digital solutions. With the UK government encouraging smarter measuring systems and renewable solutions and the Internet of Things promising bold new options for the digitally-minded consumer, utility firms are left with an ultimatum - adapt and thrive, or ignore the threat and slowly fade into redundancy.

Traditional utility companies need to move now if they wish to retain and expand their customer bases. It doesn’t need to be one instant, overall sea change, but a series of quick moves that improve efficiency and expand into deeper digital opportunities further down the road. What better place to begin this digital transformation than debt collections?

The debt issue

We all need energy, water, and gas. They are fundamental cornerstones of modern living and are, as such, things that can be taken for granted. Indeed, many of us are quite content to simply set our direct debits and ignore them until something goes wrong.

With global concern over rising energy prices, utility companies are often at the receiving end of a lot of antipathy - which in many cases they simply don’t deserve. It doesn’t help that bad debt in the UK energy sector has been steadily rising since the start of the century. PwC has revealed a 60% rise in bad debt levels across the energy sector over the last five years, with water not far behind with an increase of 44%. In fact, GoCompare.com has revealed that 1.4 million people in the UK alone are currently in debt to a utility company.

For one UK energy supplier, bad debts have been a particular burden. Shares in Yu Group, which supplies gas and electricity to the UK’s corporate sector, fell by 80% in October 2018 as a result of mounting bad debts and accounting concerns. The company predicts that it won’t return to profitability until the end of this year.

There are, of course, recovery issues that are specific to the utility industry. Unlike credit card debt, for example, utility debt is much a more passive thing. Indeed, it could be argued that many utility debts are catalyzed more by customer inaction than anything else. Around 30% to 40% of total customer debt is over 90 days old and most of this is often either written off or offloaded to a collections agency. Bad debt and write-offs are so common, in fact, that many suppliers have built provisions for them into their operating overheads.

The answer could be to look at the advances made in the retail banking market when it comes to offering convenient, customer-centric high-tech solutions for everything from communication to collections. According to Stephen Tebbett, director in PwC’s working capital team specializing in utilities and industries: “If utility firms are to successfully tackle bad debt, it’s crucial that they invest in a high tech and tailored approach to collections – a move that will not only reap much better returns but strengthen customer relationships and boost stakeholder trust.”

Will this strategy prove disruptive and costly? Perhaps, but ultimately, any extra costs accredited to a more tech-enabled, multi-channel collections strategy will be mitigated by the decrease in non-payments and the increase in customer retention and satisfaction.

The digital utility

To compete with the great green and digital-forward competitors looking to steal their thunder (and their customers), utility firms need to fundamentally change the way they look after their customers. It means utility firms putting as much effort into ensuring that it is easier for customers to stay current as they do in the collection and recovery of arrears.

The widespread smart meter rollout, which aims to get a smart meter in every home by 2020, is a great start. The improved accuracy of meter readings not only puts an end to estimated bills but allows the supplier to monitor customer patterns and manage customer accounts accordingly. Even this, however, has been met with setbacks due to technical issues. It is, however, evidence that the industry is ready to meet the increasingly digital demands of the average consumer and it’s about time some of that forward-thinking was applied to debt collections processes.

Instigating collections strategies that are more dynamic and flexible is a great start. If these solutions can easily support multiple automated billing, payment, collections, and recovery paths for different customers they will lead to not only an improvement in collections rates but an end to needlessly expensive letters, doorstop collections, and litigations that go nowhere. It all points to a more positive experience for the customer and the supplier and a future where utility companies can compete with their younger, more environmentally conscious rivals. It also points to a future where the upward trend in bad debts is well and truly broken.