Consumer debt in energy Utility Week Consumer Debt Conference - - PowerPoint PPT Presentation

Consumer debt in energy

Utility Week Consumer Debt Conference Birmingham – February 2019

Chris Harris Head of Regulation npower

Why are we looking at credit and debt ?

Changes in the consumer and supplier credit-debt landscape Changes in the energy product landscape Effects on energy affordability

What is the problem to solve

• Debt is inefficient (collection costs, cost of working capital and

risk capital etc.) and thereby a deadweight cost to society and less to spend on welfare

• Bad debt costs are unfair as “good payers” cross subsidise “bad

payers”

• The psychological consequences of being in a situation of

unaffordable debt repayment are devastating

• “The Poor Pay More” – Once in a debt situation, everything

becomes more expensive (interest on debt, reduced access to products, etc.) and the situation can spiral

• Supplier debts to customers have been defaulted on, with the

forced insurance causing unfair costs to other consumers, and the threat of instability of the political-regulatory model of gas and power

Unaffordability Debt Increased arrears Limited access to products The poor pay more Relatively easy access to credit

The effect of credit and debt on affordability

The system can function with no debt

Prepayment Receipt of Bill Direct Debit Up front deposit Maintain account balance or switch paytype Maintain account credit Direct withdrawal from customer bank Pay As You Go Paytype Mechanism to avoid debt Action

So why do we allow debt

• Evening out payment over the year without requiring a positive

account balance/deposit in summer

• Accommodating of higher heating costs during unseasonably

cold spells

• Having some flex to accommodate unexpected non energy

customer expenditure, for example replacement of broken washing machine

• Using energy bills as a day to day buffer for variations on

normal life expenditure (e.g. delay energy bill payment to accommodate the cash flow need for a holiday or sofa)

• Having some flex to accommodate variable income, for example

arising from temporary unemployment, illness, or the gig economy

• Temporary vulnerability, with or without financial vulnerability,

such as lesser focus on bills following bereavement

Using energy payment variation to balance energy cost variations - constant income

Energy costs Energy payments Time (months)

£

Account credit Account debit

Return of direct debit account credit increases average and maximum debt

Energy costs Time (months)

£

Account credit returned Increase in account debit Payment rate shock Payment rates

Using energy payment variation to balance energy cost and non energy cost/payment variations -- constant income

Non energy costs Energy costs Income Time (months) Falling into energy debt Accruing energy credit

£

Energy payment = residual income excluding energy, i.e. income minus non energy

Using energy payment variation to balance energy cost, non energy cost variations and variable income

Time (months)

£

Income Energy cost Energy plus non energy cost

No income

Information to the supplier

• Energy consumption patterns based on meter reads
• Weather
• Payments by customer to supplier, and account balance
• Personal information voluntarily provided by customers including

relating to Vulnerability Indicators, including financial condition and thermal need

• (Sometimes) personal information relating to eligibility for welfare

benefits not currently received

• (For some customers in debt) an Income and Expenditure Statement
• Credit Reference Agency information
• Sometimes – information on dwelling place, occupancy, thermal

characteristics and thermal improvement potential (e.g. insulation)

• Location, demographics

The supplier debt spiral

Mutualise Default

With inadequate regulatory oversight, risk-seeking can be the dominant option for companies

£0 Profitable Loss making 50% likely 50% likely Profit Dividends and bonuses Loss Default costs passed on

The supplier obligation spiral

Obligation exemptions Switch from

• bligated to

exempt Obligations base falls Obligation cost rises

The connection of the spirals

Default Risk seeking Fixed costs not covered Reduced

• bligation base

so higher

• bligations

costs Increase in Standard Variable Tariff Cap Default mutualisation More default Default mutualisation Reduction in Fixed Term Contract prices Increased value

• f exemptions

Switching to exempt or unsustainable suppliers

Conclusions – the issues

• In large part due to fairly relaxed credit control in the UK,

average unsecured indebtedness is increasing and the associated high interest payments for many people is a hit to income that compromises spend on essentials such as energy

• Consumers with challenging finances, especially those in

debt, can be avoided by suppliers offering the cheapest products, and hence these customers get left behind

• The general unfairness in debt is particularly bad in 2019,

with socialised bad debt costs from suppliers and consumers going to the least advantaged

Conclusions – thoughts on solutions

• Avoiding energy debt by early diagnosis and proactive use of

prepayment, and level and adequate direct debit payments

• Use of Credit Reference Agency information to deter taking on

unaffordable debt and enabling access of good payers to supplier products and services

• Multi-agency and individualised approach to the salience of

addressing debt

• Continue to work towards resolution of the tensions in the debate

between data/privacy and consumer protection in an essential service

• Reducing supplier defaults by more active scrutiny and

enforcement

Conclusion

The solutions to consumer credit and debt are not easy, as the debates between greater freedoms and greater protections, and between privacy and intrusion, are finely balanced. As a society we have decisions to make and the utilities are wrapped up in this debate, especially as the energy sector enters its greatest ever transformation. On the energy supplier side, there is similarly a debate, also finely balanced, on how much customer money to hold for the purpose of enabling energy payments phased with income. Addressing the risk of default on money-on-account is a more urgent issue.

Thanks

Chris.Harris@npower.com