For most of us, our energy supply isn’t the most exciting service we pay for. So long as we can heat our homes and boil the kettle for a fair price, we’re happy. Electricity and gas are commodity goods, so regardless of who your supplier is, you will (hopefully) achieve the same results. In the past, this uniformity meant that suppliers could differentiate on two grounds alone: price and customer service.
The market is ever-changing and shows that this approach won’t work for the Customer of Tomorrow. Alongside the longer term view of the customer, energy retailers are currently grappling with the impact that Covid-19 restrictions are having on their businesses, including varying demand patterns and an increased regulatory focus on supporting vulnerable customers. This being said, we currently aren’t predicting further significant shifts in the future domestic consumer model specifically due to COVID-19.
The sweet spot for energy suppliers will be developing an approach that adapts to meet customers’ changing engagement and consumption behaviours. This is easier said than done set against a backdrop of increasingly common mid-tier supplier failures1, new regulation by Ofgem (the energy price cap2 and faster switching3), and disruptive green technologies.
So, what does this mean for the Domestic Energy Customer of Tomorrow, and looking further afield, the Customer of the Day After Tomorrow?
The Customer of Tomorrow:
Over the next 2-3 years, energy customers will be empowered to switch more easily, increasingly ‘voting with their feet’ for cheaper and greener tariffs. Additionally, the growing prevalence of connected homes and smart meters will arm customers with improved understanding and management of their consumption, in turn raising the customer’s expectation of proactive engagement from their suppliers with tailored offerings.
Flipping the switch
The Customer of Tomorrow will be switching more quickly and frequently. Over 6.3 million UK customers switched electricity suppliers in 2019, a record year4. There were two key drivers for this:
Firstly, the Internet has cemented itself as a tool to educate and empower customers, allowing them to research energy deals and take advantage of price comparison websites and Third Party Intermediaries including switching services and energy brokers.
Secondly, while failures of small and medium suppliers are more common today, the number of active suppliers has still quintupled in the past ten years5 with an unprecedented number of new entrants joining the market. Naturally, this has brought about a variety of new product offerings and increased competition in pricing.
In a bid to boost competition in the industry and improve customer outcomes, Ofgem is running a programme to overhaul the speed and reliability of Switching in the retail energy market. The Faster Switching programme aims to reduce failed switches but also reduce the time take to switch from 2-3 weeks to 24 hours6. Set to launch in 2021, Faster Switching will eliminate millions of customers’ main barriers to switching. Combined with automated switching services such as WeFlip and Flipper, this will change the competitive landscape in the industry. The Customer of Tomorrow will have a reduced sense of loyalty and be better armed to switch to a better deal for them.
Empowered by data
Gone are the days of companies getting most of the benefits of having our data. One of Ofgem’s strategies to tackle adverse conditions in the market is to empower energy customers with their own data. This makes sense, given evidence suggesting that energy and utilities will be one of the top industries to benefit from the advent of Big Data. Live consumption data will empower more flexible supply and demand management.
The roll-out of smart meters in all UK households has heralded the passing of the data baton back to the consumer. Consumers now have access to detailed data on their energy consumption habits, combined with the ‘Internet of Things’ through enabled household smart gadgets. They are able to pro-actively track their spending and consumption. Inaccurate ‘estimated bills’ will be a thing of the past.
Suppliers need to prepare for a world where a data-savvy customer is the norm. The technological tools at the customer’s disposal will give them more confidence about how they consume energy. In the future, when smart meter adoption is complete, all customers can take advantage of accurate consumption data that they can feed into price comparison and automated-switching services. This will allow customers to have a precise idea of how much they could save on their bills, and switch with more confidence and ease. Additionally, as the rollout of smart meters begins to increase customer awareness of household carbon impacts, we are likely to see a reduction in energy consumption per capita7. The increase in the number of green tariffs in the market illustrates the rise of sustainability as a key buying consideration for customers.
The Customer of the Day After Tomorrow:
So, what's next for the energy market? Over the next 5-10 years, we will see a rise in energy ‘prosumers’ - customers who take advantage of domestic-generation and battery technology to reduce their reliance on the grid and trade back excess units of energy during peak times. Additionally, as the climate crisis intensifies, decarbonisation of household heating will become a key regulatory and customer-driven consideration.
The rise of the prosumer and decentralised energy systems
Driven by a desire to both reduce reliance on greenhouse gas emitting suppliers and to generate cost savings, an increasing number of customers will look at ways of becoming ‘prosumers’. The basic prosumer model takes advantage of domestic-generation through ‘behind-the-meter’ solar and wind generation. This is underpinned by battery technology including standalone lithium-ion units or electric vehicles. The growing adoption of smart metering, IoT home devices, and battery storage solutions8 are key technological drivers for this model of energy consumption and production.
The prosumer can bypass the drawbacks associated with the intermittency of solar and wind generation through active demand management and the storage of energy, reducing their burden on the network while spreading their consumption over periods of lower costs. Additionally, the prosumer can generate additional revenue through the trade-back of excess units of energy to the grid.
However, while the capital investment cost of domestic electricity generation has decreased, the close of the feed-in tariff scheme in 2019 has made this prosumer model difficult to justify economically. Unless the government resurrects the feed-in-tariff model, it is likely that customers will explore other prosumer models in a post-subsidy landscape.
An example of an alternative model is the Local Energy Company. LECs make use of local generation to offer communities local bespoke time-of-use tariffs. Another alternative model is the peer-to-peer model, where groups of prosumers use a third-party platform to facilitate the trade of energy with each other. Both of these models will still involve (limited) interaction with existing suppliers, and it will be the role of the regulator and suppliers to help support and foster these decentralised models. Ofgem and the Department for Business, Energy and Industrial Strategy have requested network operators facilitate a move to a more flexible market, with industry network players articulate how they plan to transition into this new environment.9
Clean home heating
The decarbonisation of domestic heating is a key pillar of the UK’s strategy to meet the Paris Climate Agreement’s 2°c target, given that heating buildings is believed to account for 20% of the UK’s total carbon emissions.10 Under the Future Homes Standards, the government will prohibit the installation of natural gas boilers in new properties from 2025. This is ambitious, given that a record 1.67 million boilers were sold in the UK in 2019.11 What will the new normal look like?
Electrification of domestic heating seems like the logical next step given the progress made to decarbonise of electricity generation in the UK. In practice, for new homes, this would involve a move towards heat pumps. These systems absorb heat from the air or ground outside a home. Coupled with improved insulation standards, this will ensure that any heat generated is better contained within the property. Heat pump fitouts are a bit more straightforward when it comes to new builds, however for the 27 million existing households in the UK, retrofitting would be a costly endeavour, expected by the National Grid to cost up to £26,000 per household. Additionally, electrification of all UK home heating systems would increase demand on the system and potentially introduce system volatility. As a more expensive source per KWh than gas, electricity would also introduce fuel poverty concerns for vulnerable customers across the UK.
Alternatives to full heat electrification involve the diversification of the existing methane gas supply. Future customers, led by the UK’s energy strategy, may increasingly move to bio-methane gas supplies or even adapting their existing gas boilers to support hydrogen supply in their fuel-mix. New boilers have been required to cope with up to 23% hydrogen in the gas mix since 1996, but any increase to this would involve an inexpensive modification. As green credentials become an increasingly prevalent factor in consumer buying decisions, it’s clear that over and above wanting ‘greener’ tariffs, customers will expect innovative service offerings that support the installation or retrofitting of green domestic heating systems and their ongoing maintenance.
So, what does this mean for Energy Suppliers?
The reality of the retail energy sector is that suppliers are often led by new policy or technological realities. This might be the introduction of regulatory change to carbon strategy, customer switching or data access. Disruption also comes in the form of new market entrants including third party switching services and manufacturers of off-grid infrastructure, batteries and EV. Suppliers may find themselves scrambling to keep up.
Understanding the future energy customer and how suppliers can interact with them at every touchpoint will set suppliers apart. Successful suppliers will:
- Monitor and benchmark innovative market entrants in the switching, smart and domestic ‘green’ infrastructure space to understand how new offerings might impact business as usual.
- Put customer insight and behaviour at the heart of innovation to discover future services for future needs. Suppliers should also consider partnering strategically to meet evolving consumer needs.
- Empower customers, informing them about how they can gain more control of their domestic energy consumption, and looking to the future, what future prosumer models may be right for them.
Moorhouse has a proven track record of turning customer strategy into action for major private and public sector organisations. Whether it’s identifying emerging customer trends, optimising the customer journey, or developing business models that meet customer needs – we help our clients understand and serve the Customer of Tomorrow.
To discuss how your organisation can meet the needs of its Customer of Tomorrow, please contact Ed Charlish or James Easterbrook.
For more information please email firstname.lastname@example.org