Is the failure of Iresa a turning point for the domestic retail market?

We had confirmation from Ofgem earlier this week that its third use of the Supplier of Last Resort (SoLR) mechanism this year has resulted in Octopus Energy taking over Iresa’s 90,000 household customers.

Octopus Energy has committed to migrate Iresa’s accounts around 21 August. The reasons for the regulator’s appointment, following a competitive process where once again we understand there was considerable interest from suppliers to become the SoLR, will hopefully follow in due course.

We can though surmise why a supplier like Octopus Energy was appointed. First and foremost, Octopus Energy has sufficient scale to assimilate Iresa’s customers without jeopardising its existing customers base of around 250,000 household customers. Indeed, the announcement last month that the company will be providing white-label services to M&S from September clearly indicates that it is comfortable to continue growth at a pace. The supplier is backed by the Octopus Group, which would have significantly bolstered their credentials as an SoLR.

Recent SoLR events, most notably following the failure of GB Energy in November 2016, added another dimension to Ofgem’s appointment considerations. Notably how credit balances of a failed supplier’s customers are preserved and the willingness of a potential SoLR to absorb these and not make use of the mechanism to recoup costs (including other costs incurred as a consequence of taking onboard large numbers of customers at short notice) from the rest of the market via a network charge levy.

The press releases from Ofgem announcing the SoLR for GB Energy, Future Energy (January 2018), and now Iresa all noted how credit balances are protected. Co-operative Energy as SoLR for GB Energy and Octopus Energy both agreed that the cost of credit balances would be ‘partly met’ met as a condition of becoming the SoLR. This was not the case for Green Star Energy becoming the SoLR for Future Energy, but this is likely because the appointment only involved 10,000 customers.

We have observed that many newer entrants (although the practice is used by more established suppliers) will request direct debit payment before delivery. This has obvious cashflow benefits, particularly where a supplier has limited recourse to credit, but the failure of Iresa will surely increase the disquiet from rivals that they (and their customers) are picking up the tab when suppliers with advance payment models fail.

Of course, Iresa’s problems were compounded by poor customer service which led to Ofgem banning the supplier from taking on new customers until it showed marked improvements, which it did not.

So, Octopus Energy has the desired credentials for a SoLR, but what is in it for them? An additional 90,000 customers would significantly increase their customer base, but as Iresa gained customers through consistently offering some of the cheapest tariffs on the market it is reasonable to assume these engaged and price-sensitive customers will look elsewhere, particularly as, unlike the aforementioned SoLR appointments Octopus Energy will be moving Iresa’s customers to its ‘Flexible Octopus’ tariff that is around £75/yr more expensive than Iresa’s variable tariff. But as Octopus Energy prides itself on its high-quality customer service perhaps it hopes that Iresa’s customers will see the value in a paying a little more in exchange for reduced frustration.

The creation of proprietary systems that underpin Octopus Energy’s customer service, with one eye on ensuring it can be a first mover into the ‘smart and flexible’ future, will now be tested once it unearths the data quality of Iresa’s customer accounts. Perhaps Octopus Energy made the case to Ofgem that their technical and data know-how would ensure the least disruption to migrate what is undoubtedly poor-quality data from Iresa to their systems.

The value to Octopus Energy may therefore not be in picking up a significant number of customers on the cheap, but as a means to stress test their IT systems and processes and assess whether customers that have evidently prioritised price over service can be persuaded that the paying a little more for improved service is money well spent.

As a matter of course we will be closely monitoring developments, including the impacts on the wider retail market. Recent SoLR events demonstrate that there is still significant interest from suppliers in acquiring a portfolio of customers, even where the commercial value may not be immediately apparent. The much tougher stance from Ofgem regarding poor customer service, the increasing concerns from suppliers of the advance payment model to help maintain low-cost tariffs, and the obvious stress of lowest-priced suppliers may result in some market correction as those suppliers are forced to change practices and maybe raise prices accordingly. Time will tell.

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