Energy Retailers: Addressing the Debt Trilemma

Graham Mathie - 08/01/2024

Can trust be rebuilt in the industry through support of indebted customers, while simultaneously managing operating cost constraints and enhancing financial resilience?

The Challenge

In the retail energy market, debt collection requires a balanced and customer-centric approach. With Clyde Ventures extensive experience in improving collections activities in utilities, we have developed strategies to improve debt recovery while maintaining positive customer relationships by combining effective communication, technological solutions and flexibility.

The solution sounds simple, so why then have Ofgem released debt and arrears data that indicates an industry in the grip of a debt related crisis¹? Key messages from the report:

• A 50% increase in debt and arrears for Q3 2023 when compared with Q3 2022. Rising by £1bn to reach c.£3bn
• The number of smart-PPM self-disconnections for electricity customers rose by 26% in Q2 2023 to 2,074,294 compared to 1,652,501 in Q1 2022
• The last year has seen substantial increases in average arrears, where there is no arrangement to pay reaching £1,214 for electricity and £1,037 for gas in Q3 2023 (up by 31% for electricity, and 51% for gas compared to Q3 2022).

The pandemic and the immediate impact on some consumers income², coupled with the exceptional circumstances of the gas price crisis and nationwide cost of living crisis have contributed to a ‘perfect storm’, leading to real challenges for consumers in paying their energy bills and increasing pressures on suppliers carrying significant increased debts. It is estimated that in period 10a (Q2 2023) debt related costs represented approximately; 6% of typical dual fuel standard credit bills, 1% of typical dual fuel direct debit bills and 0.4% of typical dual fuel prepayment meter (PPM) bills. Currently debt related costs are accounted for within 3 key areas of the price cap:

• Operating Cost Allowance
• EBIT
• Payment Method Uplift

In recognition of unprecedented debt levels, Ofgem has unveiled proposals aimed at safeguarding the energy market and supporting consumers at risk of accumulating unmanageable debt, a suggested adjustment to the price cap of £16. It is up for debate as to whether this cross subsidisation amongst consumers is the correct approach.

The Debt ‘Trilemma’

There is no escaping that debt is a critical problem of today, impacting all stakeholders from consumers to regulators and suppliers. The energy trilemma in it's broadest form is often discussed, at Clyde Ventures we believe the energy trilemma is experienced by consumers in a tangible way through the debt crisis, it is the responsibility of the supplier is to take care of this particular trilemma in the home.

This is intrinsically linked to how suppliers should approach developing their strategy for supporting indebted customers while ensuring their collection processes are fit for purpose both now, and in the future. Approaching debt strategy through the lens of affordability, security and sustainability gives suppliers an opportunity to demonstrate real skill in their handling of indebted customers and it is our belief this can be used as a springboard to rebuild consumer trust in the industry, which will be critical as all stakeholders drive towards realising Net Zero ambitions. It is key that indebted consumers are serviced well and with care, within the restraints around operating costs. To allow for the next stage of helping to reduce costs for consumers, suppliers will be vital to the success of achieving this hence rebuilding trust is crucial. The reality of the debt (or home) trilemma is that these areas can support and enable the success of each other, or handled poorly can promote disablement and ineffectiveness.

Performance Improvement Strategy

In the current climate, building a collections strategy in utilities must look beyond reminder letters, legal considerations and DCA partner selections. To both build consumer trust and maximise recovery there are steps that can be taken across all three pillars of the trilemma to enhance performance and deliver a positive experience for customers in a challenging position.

Affordability

Utility companies face the challenge of driving debt collection in a sector that is known to have data issues, exacerbated by historical billing system migrations and poor collection rates relating to aged debt. To help customers address debt and affordability, suppliers must first understand the true value of their debt books, and the distinctions between can't pay and won't pay. Data is key to devising a successful collections strategy that will maximise returns and inspire faith from consumers.

With our combination of data expertise, thorough understanding of utilities customer and billing data gained over many years, and our operational experience of managing collections and recoveries, Clyde Ventures can help you to unlock the potential of your debt.

Read about how we helped a utilities client unlock a potential £2.3 million of collectable debt here: For Utility companies, understanding the value of your debt is key

Security

Ultimately what is important to consumers can be defined as the ‘comfortable home principle’. The role of the supplier is to help consumers feel secure in their homes, able to use the energy they need to stay warm. Discussing debt and ability to pay can be a real challenge for many people. It is critical that suppliers learn how to ‘hear the silence’ and ensure that there is a level of service flexibility in place that allows customers to make contact in a way they are comfortable. This may involve the introduction (or improvement) of automated payment services or enhanced digital offerings.

Suppliers must be creative in their endeavour to reduce operational costs linked to cost of debt, even when many customers will require conversations to help them.

It is vital that collections teams have not only the knowledge and technical skills to support customers but also are equipped with the skills and freedom to have authentic conversations to get it right - first time. Instilling confidence in your advisors in areas such as:

• Conflict management and negotiation
• Demonstrating empathy
• Vulnerability recognition and handling

will empower collections teams to own those challenging conversations to support customers and deliver operational cost benefits to the business in improved first contact resolution and less ‘bad debt’.

At Clyde Ventures, we provide bespoke conversation design and training that is grounded in language theory. Our approach with a recent utilities client saw 100% of advisors say that they felt confident the training they had received would result in a better experience for customers this winter. We can equip your collections teams with the confidence to support your customers, in the process unlocking value for your business.

Sustainability

Suppliers will be instrumental in realising future opportunities and implementing energy efficiency schemes and incentives to achieve Net Zero. Rebuilding consumer trust in the industry is critical if suppliers are to engage customers to the required levels. Managing indebted customers with empathy and efficiency will go a long way in achieving this. We will explore this topic in more detail in a future blog in this series, with guidance on how to equip your organisation with a vulnerability strategy that utilises data, partnerships and people to ensure those who need it most have access to essential energy services and are treated with fairness and dignity.

Clyde Ventures can help you assess and transform the flexibility of your technology, strength of your strategy and quality of your people training across operational debt management. To hear more about our approach contact Graham Mathie or Ross Bern.