Electricity Market Reform: what was missing?

The UK government's draft Energy Bill was introduced into the House of Commons on November 29 to a predictably mixed reception. Included as expected are CfDs, carbon price support, an emissions performance standard (EPS), and a capacity mechanism. The single, government owned counterparty to pay out the CfDs, along with the announcement of an increase in the Levy Control Framework (LCF) funding will in particular be considered in a positive light by low carbon investors.

But what was missing?

Apart from demand-side reduction measures, which the government has decided it needs to (at last) consult on, there is no de-carbonization target. This is the most noticeable omission in the bill, and has raised the most reaction. On one hand, the absence of a target is likely to have a negative impact on investor confidence, and on the other hand, confidence will be buoyed by the explicit increase of the LCF cap.

A large portion of the trebled levy cap could go to renewable generation as opposed to new nuclear, which is already facing final investment decision delays in Somerset.  This is the crux of the problem, which should be of vital concern to electricity consumers. The increase in bills is highly uncertain and will depend on the amount of gas in the energy mix and how much energy efficiency can be realized. 

2016 will indeed be a crucial time for low carbon power. The main question that secondary legislation and debate should clear up is how much of the funding will be allocated to wind projects that will operate well beyond 2030, and how much will go to nuclear projects that will not be online before 2020.

In the absence of a de-carbonization target, the debate and secondary legislation must reassure low-carbon investors that funding and support will continue past 2020 through to 2030, avoiding any fears of asset stranding should renewables targets be met before 2020.  

The thirst for precise details will remain during the course of 2013, and will be critical to complete the picture so that the goal of low carbon, cost effective, and secure electricity remains plausible.  At present, only the last goal will be met effectively. 

Further analysis is provided on the EMR on Datamonitor’s Knowledge Centre. 

http://www.datamonitor.com/kc/utilities/

Written by Yasmin Valji

Analyst in Datamonitor's Energy Team

Follow Yasmin on Twitter: @YasminV_DMEN 

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Want to know how to improve utility B2B customer satisfaction? Read on...

Datamonitor's Energy Buyer Research has found that utility customers have complex needs that extend well beyond receiving a low price from their supplier. In fact, customers that thought their supplier had the lowest price reported significantly reduced satisfaction scores than customers that felt their supplier tended to their separate procurement, billing, or account management needs. 

Datamonitor's Energy Buyer Research was conducted between April and August 2012 and involved the individuals responsible for buying gas or power in over 750 businesses across the UK. These were split into small- and medium-sized enterprises (SMEs) and major energy users (MEUs), with a spending threshold of £50,000 per annum separating them. 

SME customers that thought their supplier offered them the lowest price available reported a procurement satisfaction score that was 0.1 rating points below the market average, showing that customers do not respond well to a supplier that offers a low price but neglects to support the customer throughout the contract's duration. MEU customers that thought their supplier offered the lowest price behaved very similarly, giving a procurement satisfaction score that was almost half a rating point lower than the best performing strategy.

To improve SME customer satisfaction the most, it is clear that customers require speed from their supplier. Providing fast query resolution in the procurement and account management processes had the highest customer satisfaction scores. In terms of billing, SME customers reported the highest customer satisfaction when their queries about bills were resolved quickly. This is because smaller customers do not generally have the resources (in terms of personnel or time) to rectify errors or chase resolutions to queries, and thus rely more on support from their supplier.

MEU customers require something slightly different from their suppliers to increase satisfaction scores. The provision of a flexible product gave the highest procurement satisfaction rating, as MEU customers call for products that are adapted to fit their usage profiles, which are likely to change. Online access to bills/usage produced the customers that were most satisfied with their utility's billing process, allowing realtime tracking of costs to effectively manage cash flow. 

In addition, MEU customers that believed they had a personal relationship with their supplier had the highest account management satisfaction scores. A personal relationship is defined as having a single point of contact (a dedicated account manager) that is knowledgeable about their client and takes a proactive rather than a reactive approach to service. This can be a complicated strategy to employ, as staff need to have higher levels of training and dedication to perform a more specialist and niche role, but the benefits to satisfaction and customer retention are significant for larger (and probably higher margin) customers.

Although it is clear what the most effective strategies are in terms of increasing customer satisfaction, these do not take into account the cost of implementing each strategy. To draw a conclusion of which strategies are the most effective in terms of ratings from customers and cost to implement (both in terms of financial cost and resource cost), Datamonitor has applied a rating between zero and one. A rating of zero to implement a strategy indicates that it is very low cost, while a rating of one indicates it is very high cost. When compared to how high above the market average score for satisfaction the strategy is using a dual axis graph, it highlights which is the most effective strategy overall.

For SME customers, having internal processes to allow fast query resolution for SME customers produces customer satisfaction furthest above the market average; however, it is the fourth most expensive strategy to implement, requiring greater staffing levels, robust communication channels, and a host of extra services available to customers (such as maintenance teams) at short notice. On the other hand, these systems can also be used to answer queries effectively in the procurement process, which also gives a score well above the procurement market average, offsetting the cost required to focus on this strategy.

As discussed, for MEU customers, the most effective strategy in terms of the biggest increase in relation to the market is encouraging a personal relationship with customers during the account management process; however, this is relatively expensive with a rating of 0.6 given the extra staff required and the training needed to make sure key account managers are knowledgeable about their customers. In terms of the most effective strategy for the lowest cost to implement, this was again providing a fast response time to account management queries. This makes it a very effective strategy to implement for suppliers that have a broad customer base as it can be utilised for both SME and MEU customers, further offsetting the cost implications. 

Written by Tom Haddon
Analyst within Datamonitor's Energy Team
Follow Tom on Twitter: @TomH_DMEN

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