Double Digits?

Pass through of reductions in wholesale costs to the end consumer has hit the news again this week, with consumer groups and industry parties calling for “Big 6” suppliers to pass on “double digit savings” to their customers.

With such a “PR win” on the table, we look into why the “Big 6” struggle to pass the dramatic reduction in wholesale costs through to their customers.

The current levels of price reduction seen within the “Big 6” sits around the 3% mark, but with wholesale prices falling more than 10% the difference between the two has been put under the spotlight. A recent report published this week is looking at the impact this price disparity is having on households in the UK that spend more than 10% of their household income on energy. Assuming a direct pass through of the drop in wholesale prices of 10%, it’s been argued that over a million households could be better off.

So why the gap?

Part of the problem is that energy isn’t a tangible commodity – unlike the discounters in the FMCG space, you can’t buy off-brand energy at a cheaper price. So it’s not what you buy that counts, but when and how you buy it, and even that has its problems. Hedging and trading strategies are a long play, meaning reaction times are often slow. Commodity costs aside, most other industry costs are relatively static and proportionate to the size of the suppler, meaning there’s little control over those costs either.

Operational costs, however, are one aspect of a suppliers cost base that are within their direct control.

Due to the complex nature of energy settlements, there is an immediate 2% (Power) and 4% (Gas) opportunity against turnover for suppliers to access through tighter control and management of the industry reconciliation processes. Whilst not simple to master, these processes carry a significant FTE burden and associated cost when not optimised.

There are also opportunities to optimise the way in which energy is purchased through intelligent modelling and trading forecasts, but again the scope to influence this aspect of cost is within the 2%-3% bracket.

Given that the current savings passed through to customers by the “Big 6” are likely accounted for through the accuracy and scale of their commodity forecasting and purchasing, there is still significant scope to explore operational and industry engagement process and efficiencies.

This suggests that any chance of passing significant savings through to end consumers approaching or actually at the 10% mark relies on thinking about things differently, learning from some of the more flexible new entrants and having a true desire to win the PR battle.