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Challenges For The Utility Sector: Our Outlook For 2021

03 December 2020

2020 has been a challenging year for all of us, but even more so for those in the Utilities sector.

We caught up with our resident Utilities expert Sandy Duckett for his forecast of the new year ahead.

Q) How would you reflect on the past year for utility retailers? 

It’s been an extremely tough year for water and energy retailers. Their profitability is at an all-time low with many making quite significant losses which has resulted in a number of insolvencies

We've also witnessed quite a number of distressed sales because of pressure on the cash flow so it’s extremely challenging for them. Bad debt provisions are increasing quickly and are forecast to exceed £1 billion across the energy and water sector in 2021.

Utility retailers have been quick to respond to the financial challenges faced by their customers by providing additional support which is commendable and something that often goes unnoticed in the media coverage.

How many retailers are giving customers payment holidays?

Are supermarkets allowing customers to pay for their groceries at some future point and accepting the risk that those customers don’t or can’t pay when the debt is due. It’s a really challenging market for energy and water retailers!

Q) What are the specific challenges you feel utility retailers are facing?

The wider public doesn't really hold utility providers in high regard and yet if people spend their time looking at the websites of these utility retailers, I think they'd be very surprised about how much support they offer to vulnerable customers.

Those vulnerable customers are increasing in numbers and these will include some people that we wouldn’t typically view as vulnerable. There is going to be an increasing number of vulnerable customers as fuel and water poverty increases through 2021 and probably beyond.

The pace is unprecedented, due to COVID-19 and utilities have to respond accordingly. I’ve mentioned bad debt and the costs of bad debt provision, which is soaring.

I think we'll continue to see this continue with business premises due to an increasing number of vacant properties. It’s evident from what we view on television and read in the media every day how many businesses are under pressure.

Over the last 12 months, in retail alone, around 200,000 jobs have been lost. These losses drive up bad debt costs as does the resultant unemployment.

I've seen a lot of businesses stop trading and just this week we have heard of Debenhams and Arcadia with 25,000 jobs being lost. It is extremely challenging, and I can’t recall a time when it's been more challenging for utility retailers

Also, over the Christmas period there's been some changes from Ofgem, the independent energy regulator, which is potentially adding a little more pressure on the utility sector.

Q) What's your view on the changes due to come on the 15th of December?

I think it's really positive for Ofgem to recognise that the risk of bad debt is increasing. They are considering applying a £21 surcharge per household.

However, while this will cover some of the additional bad debt it's highly likely that bad debt will increase by more than £21 per household and therefore, I don’t think the additional £21 surcharge will fully cover the increased costs.

Utilities are also coming under more and more pressure to use forbearance when it comes to pursuing the debt. Energy UK has already signed up 15 utilities to their Vulnerability Pledge.

If someone is in financial difficulty utilities are being asked to allow them more time to pay which will adversely impact cashflow and ultimately, I believe will lead to higher bad debt write-offs in the future and probably more utility retailers ceasing to trade.

What I would ask for or like to see happening is increased collaboration between the energy sector, water sector, regulators and the third sector to ensure that learnings are shared. Whilst vulnerable customers need to be helped there needs to also be a focus on ensuring that customers who can pay but choose not to pay are encouraged to pay for the services they’ve enjoyed.

Do other retailers allow their products and services to be consumed without receiving payment? Recovering debt from all customers who can pay will mitigate the risk of bad debt continuing to escalate and hopefully keep more people in employment.

Q) Do you believe that we'll see more Mergers and Acquisitions as a result in 2021?

Yeah, undoubtedly. I think that will continue to be the case

This will lead to a reduction in competition, which is obviously not something that regulators will want to see as it restricts consumers options to switch.

I think we'll see an increase in insolvencies and administrations and also distressed sales where the directors of those companies recognize that they are facing challenging times and they look to sell to avoid insolvency.

Q) Against that backdrop, what advice would you offer to those working in the utility space?

Undoubtedly over the next 12 to 24 months we are going to see higher levels of unemployment, businesses faced with fluctuating income, individuals faced with fluctuating incomes and I think utilities need to develop tariffs for customers who have to cope with fluctuating incomes. I would call them the Uber generation.

I would also encourage both the utilities and their customers to embrace open banking and open accounting because that then allows the utility companies to link payments to those fluctuating incomes. Such a strategy is likely to lead to better medium to longer term outcomes for both individuals and businesses including fewer bad debt write-offs, increased loyalty from customers, lower customer attrition, contact and complaints.

I think that would be positive for everyone because we want businesses to stay afloat and continue trading because they provide employment and if we can provide employment those customers are then better equipped to pay their bills and it also helps retention rates because if the customer sees utility companies supporting them then they are more likely to remain customers of those utilities in the future.

It’s worth pointing out that 97%+ of customers pay their bills, albeit some need more encouragement than others. So, whilst bad debt is a huge issue most customers are trustworthy and pay their bills.

The second thing is that utility companies continue to do all they can to support customers that face financial difficulty and have the right conversations with those customers and increase their understanding of the challenges that customers are facing.

Having the right conversations and seeking the right outcomes for customers, increases customer satisfaction and also reduces attrition. Customers who take the time to contact utilities are typically customers who are prepared to pay their debts, but some are looking for help so let’s ensure that help is provided. We know that attrition is a huge issue for utilities and also acquiring customers is very costly, so you just don't want to lose them.

The third and final point is utility firms need to continue to identify the root causes of unwanted contact. This is where the customer is making contact not because they want to because they need to.

Utilities won’t have many customers who get up in the morning and get excited about phoning their utility company. Invest time in understanding why customers are calling you? Research shows that around 75% of those calls are related to billing issues.

We need to focus in the utilities sector on eliminating the root causes of defects which are driving up contact, generating complaints, increasing cost to serve and bad debt expense - that's where utilities need to focus because that will serve everyone well and hopefully, we'll start to see utilities getting back to sensible profitability levels which allow them to trade.

To find out more, speak to Sandy Duckett on Linkedin or read about our debt collection solutions for energy and water retailers.