Picking winners Valuation drivers in energy supply 26 September - - PowerPoint PPT Presentation

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Picking winners

Valuation drivers in energy supply

26 September 2018

Gareth Miller, Chief executive Cornwall Insight

www.cornwall-insight.com

Today’s agenda

Experts Themes Anna Moss The bigger picture Tom Goswell and Jacob Briggs Why have suppliers grown? Ed Reed Managing a supply portfolio Jon Smith (Shell Energy Europe) Evaluating risk management and trading Ben Hall Outsourcing in a competitive market Charlotte Farmer Externalities: policy costs and price caps Peter Atherton (Cornwall Insight associate) An investor perspective Robert Buckley Winners and losers: what have we learned so far

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Who we are

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C B A DATA ANALYSIS RESEARCH INSIGHTS D Independent experts across borders and markets Trusted by customers for our unrivalled insight

www.cornwall-insight.com

4

Our retail market insight

Market share surveys

• Domestic & business since 2005

Sector intelligence

• Supplier insight services
• Data analysis

Pricing and commercials

• Domestic and SME price reports
• Route to market analysis
• Business plan development

Training course

• October 2017

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• Power generators and project

developers

• Energy suppliers
• Regulators, policy-makers and

industry bodies

• Legal and financial institutions
• Brokers, intermediaries and end

users

• New market entrants

Our customers

Customers for our energy retail market intelligence include Cornwall Insight has customers from all areas of the retail energy market. We are proud to be trusted advisors to

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Web address: www.sli.do Event name: #pickingwinners Let us know a bit about you

• Role
• View on retail energy industry investability

A) Increasing B) Static C) Decreasing If you want to join the discussion around the event on social media #pickingwinners Visit our website www.cornwall-insight.com

Join our event on Slido

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Sli.do How do you perceive the retail energy market in three words?

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The bigger picture

Anna Moss, Retail team lead

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• Growing a successful energy retail

business

• Values, delivery, knowledge,

capital

• External challenges multiply as barriers

to entry reduce

• Factors for investment
• Timing, value, investment partner,

continuity

Picking winners Valuation drivers in energy supply

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On their marks …

Domestic supplier entry by route

1 2 3 4 5 6 7 8 9 10 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Fully licensed New white labels

All active energy suppliers

Source: Cornwall Insight Source: Cornwall Insight

138 137 129 121 109 100 93 81 75 72 68 50 100 150 Q318 Q218 Q118 Q417 Q317 Q217 Q117 Q416 Q316 Q216 Q116

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… get set …

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Values Delivery

Propositions

• 98% customers with incumbents in 2013
• Opportunity for new systems/ routes to

market

• Opportunity for cross-sell of energy

related products

• Now lower costs of entry with cost to

serve advantage

• Still need to build a brand

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0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Domestic energy SME elec SME gas

… go

12 Source: Cornwall Insight energy market share surveys

Competitors to the large suppliers: share of meters

End of 2013 Large suppliers raise variable prices and SaMS make use of whole of market requirement July 2018 SaMS grow to >25% domestic share from varied routes to market 2017-18 Increasing role of brokers in encouraging switching in SME market End of 2016 Large suppliers respond to rising pressure of new entrants

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Profits and losses

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• 70%
• 60%
• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% Large suppliers Domestic small suppliers Domestic medium suppliers Business suppliers EBIT margin

EBIT margin in 2017 by company type, average and range for selected energy suppliers

Source: Cornwall Insight analysis of company financial results

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Track record

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50 100 150 200 250 300

Flow Energy/ Co-operative Energy Iresa/Octopus Energy GB Energy/ Co-operative Energy Affect/ Octopus LOCO2/ Solarplicity First Utility/Shell Isupply/Vattenfall Bulb/Magnetar and DST Ovo Energy/ Mayfair Equity Telecom Plus (Utility Warehouse)/Utility Warehouse

Cost per account (£)

Recent energy domestic energy supplier transactions (cost per domestic customer account, £) Distress Trade Investment

Source: Cornwall Insight, company and media reports

2013 £210mn 2015 £30mn (15%) 2018 £60mn (24.5%) 2017 £?0mn 2017 £240mn 2018 £?mn 2016 £25mn 2018 £?mn 2018 £10mn 2016 £?mn Timing: Value:

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Obstacle race

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More tech More information Data protection Smaller customers Homogenised product?

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Setting course

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Proposition Routes to market Systems People 0-6 months 6-12 months 12-18 months 18+ months Grow Evolve Test Design

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• Many routes to becoming an energy supplier
• Specialisation more likely to mean profit
• Ability to execute vision and values
• Mass domestic market is not profitable. Why?
• Most visible activity in domestic supply but business markets have yielded
• pportunities earlier and encouraged specialisation
• Most transactions to date have been trade sales, activity is increasing

Key takeaways

17

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Sli.do Have we reached peak supplier?

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Why have suppliers grown?

Tom Goswell and Jacob Briggs

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• Scale—how many such customers?
• Complexity—how do they like to buy?
• Credit—how do they pay?
• Accessibility—how can I reach them?

Segmentation

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What do they want to buy? Who are they? Where are they located? How do they want to pay? What else do they want? How do you contact them?

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SME Infrastructure I&C

Credit Number Accessibility Complexity

Mapping—B2B

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I&C

• Smaller customer numbers but

higher volumes and complexity in I&C

• Personalisation is key to win

business

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Scale

SME

• Scalability in systems and service

crucial in the SME market

• Automation is key to improve

efficiency SME electricity SME gas I&C electricity I&C gas Contracts 1.52mn 575,000 22,000 20,000 Meters 1.72mn 633,000 782,000 251,000 Volume 64TWh 1.3bn th 138TWh 7.1bn th

Source: Cornwall Insight business energy market share surveys 2018

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Complexity

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Length of contract Complexity of contract Customer expertise Customer inertia

Source: Cornwall Insight

Variable

(no fixed term)

Fully fixed contract Pass through

(wholesale price fixed)

Flexible

(buy energy in increments – for businesses that manage daily consumption) Premium

(green, DSR)

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• A supplier consolidates the credit

risk of its customers

• Care needed to ensure payment:
• Deposits
• Segmentation and

benchmarking of customer base

• Contractual terms
• Concentration limits
• Prepayment meters

Credit

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Accessibility

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• Engagement and expertise vary

widely

• Much higher in I&C than

SME

• Third party intermediaries (TPIs)

fill the gap, but:

• Interpretation and

reputation

• Whose customer?
• Personal contact key for very

large users:

• Understand the buyer and

when they buy Most important sales channels for B2B energy suppliers

Source: Cornwall Insight survey of supplier satisfaction with TPIs 2018 1 2 3 4 5 TPIs Renewals Direct sale/ contact from customer via telephone Direct sale/ contact from customer via

• nline

Other Score 5 = most important, 1 = least important Median Mean

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Case studies – Opus Energy and Smartest Energy

26 1 2 3 4 5 6 7 8 9 50,000 100,000 150,000 200,000 250,000 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Electricity volume (TWh) Electricity meters Opus Energy (meters) SmartestEnergy (TWh)

Sales growth for SmartestEnergy and Opus Energy

Source: Cornwall Insight business energy market share surveys various

Drax buys Opus Energy Opus Energy breaks into top six electricity suppliers SmartestEnergy reaches 1% market share SmartestEnergy breaks into top 10 electricity suppliers John Lewis Partnership supply contract DSR launch Opus Energy breaks into top 10 gas suppliers

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"Anxious Avoiders" "Hassle Haters" "Savvy Searchers"

Credit Scale Accessibility Value added

Market mapping—B2C

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New entry is continuously evolving

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0% 5% 10% 15% 20% 25% 30% 10 20 30 40 50 60 70 80 2010 2011 2012 2013 2014 2015 2016 2017 2018* Large suppliers SaMS SaMS energy share

Suppliers in the market and SaMS collective share

Source: Cornwall Insight domestic market share survey, 2018

• Waves of market entry:

1. The originals

• 2. Do it yourself
• 3. Off the shelf
• 4. White label
• Competition is not just

large to small suppliers

• Exits now as well as

entrants 1 2 3 4

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Credit

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0% 10% 20% 30% 40% 50% 60% 70% Electricity Gas Credit Direct Debit Prepayment

Proportion of customers

• n each payment type

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Tariff costs Wholesale costs Network costs Policy costs Metering uplift Indirect costs Headroom

Building a tariff

• Customers can be segmented by payment type
• Carry costs and characteristics that can impact on value, costs, and behaviours

Source: BEIS Source: Cornwall Insight third party charges report, 2018

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Home moves PCWs (online and telephone) Referrals including cashback Telesales Face-to-face

Accessibility

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Share of switching by sales channel and cost of acquisition

• Different ways to access

different types of customers

• Each channel carries

different balance of costs and rewards

• Technology playing role

across the market, from

• pening new routes to

revitalising existing ones

Source: Cornwall Insight domestic energy sales channels report 2018

Lower £ Higher £

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Value added

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Green supply Technology Low-cost Other markets Community

• Segmentation allows diversification
• Specialisms within different areas of added value leading to suppliers

segmenting customers and competing within market niches

• Value added segment key source of future value and threats in the market

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Value added

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0.0% 0.2% 0.4% 0.6% 0.8% 1.0% Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16

Energy market share (%) Smart prepayment "Deep" green Community focussed Price discounting Competitively priced green

Levelised growth rates by domestic supplier archetype

Source: Cornwall Insight domestic market share survey, 2018

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• Understanding customer needs is key to designing the proposition and

routes to market

• Business market highly segmented, brand worth more in domestic
• What is the USP? Does the supply co. have one?
• Critical to understand sales channels and align propositions and marketing

with them

• Understand who the customer believes is the key counterparty
• Long-term growth requires consistent application of strategy

Key takeaways

33

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Sli.do Is energy a homogenous product?

34

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Managing a supply portfolio

Ed Reed, Head of research

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Scale and / or diversify Profitability and investment Entry and growth

Retail energy supply—the plan

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• Backing for at least

3 years cashflow

• Prove business case

and deliver growth

• Build internal

expertise/ management

• Be lucky:
• Avoid external

market shocks

• Confirm or replan

strategy

• Secure further

investment

• Upgrade systems
• Build brand
• Improve service

contracts

• More favourable

wholesale arrangements

• Longer-term

strategy horizon

• Opportunity for

greater diversification (overseas/ new products/ new services)

• IPO/exit

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• Disengaged…
• But continuing efforts to

‘unstick the sticky’

• Sufficient service
• Pit-falls avoided
• Price is good enough
• Margin to cheapest
• Tied into a bundled offer/ brand
• Successful value add

Managing customers—theory

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• Engaged
• supplier messaging
• 95+% of switching is on price
• Insufficient service
• Competitors offer something new/

attractive

• External events – e.g. political/

media intervention Why do customers stay? Why do customers leave?

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Managing customers—practice

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18.9% 25.2% 14.4% 18.0% 15.0% 19.7% 10% 15% 20% 25% 30% Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218

Electricity account churn (%)

SaMS Churn Large Supplier Churn Total Churn

Source: Cornwall Insight

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[Graph on complaint stats overlaid with intel on when new IT systems were installed]

Service and systems

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Complaints received per 100,000 customers by the large suppliers

Source: Ofgem

npower: New SAP billing system install commenced 2011. Poor service results in £26mn fine in December 2015 EDF: SAP billing system install commenced 2010. Poor complaint handling led to £3mn redress action in August 2014 Scottish Power : £200mn SAP billing system ‘a project that lasted close to 5 years’. £18m fine for poor customer service in April 2016 BG: £40mn billing system for business and household customers implemented in tranches in 2014. £9.5mn fine in January 2017 E.On: April 2015 Paid £7.75mn redress following investigation into exit fess and overcharging SSE: Announced in 2017 it was not going to take forward plans to upgrade billing system with one-eye on npower merger

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Increasing customer retention

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Creating a brand Working on retention Importance of service

• Sell long
• Renewal tariffs
• Loyalty schemes
• Gamification

£850 £900 £950 £1,000 £1,050 £1,100 £1,150 £1,200 Dual Fuel Saver Oct19 Comparable acquisition product Easy Online Renewal Plus Oct19 Comparable acquisition product Single to dual fuel Dual fuel renewal

Typical dual fuel bill (£/year)

EDF Energy retention and acquisition tariffs August 2018

Source: Cornwall Insight

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SSE and npower—scale counts again

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SSE’s retail business priorities 2018

Challenges Strategic priorities

• Intense competition
• Attracting and retaining more

customers

• Increasing operating costs
• Reducing our cost to serve and

driving efficiencies

• Regulatory intervention
• Delivering smart meters in a

safe, cost-effective and customer-centric way

• Evolving customer

expectations

• Building on our customer-

centric culture

Source: Cornwall Insight domestic energy market share survey Q417

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Strategic parameters

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Strategy Internal and external considerations – can it be executed?

Internal factors External factors

• Good management
• Tight financial control
• Good operational practices
• Understanding current and future

customers

• Brand development
• Investing in staff and systems
• Competitor analysis
• Horizon scanning
• Regulatory change
• Political/ policy intervention
• Technology change
• Commodity markets
• Competitors
• Macroeconomics
• Electricity market is set to grow,

but gas market is likely to shrink

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Future opportunities and challenges

2018 2019 2020 2020s Wholesale & Transmission Retail & Distribution

Capacity Market More price caps New Nuclear Coal Closure Single European Market? Electrification

• f heat &

transport Smart meter roll-out complete ssFiTs Close DSR accounts for 50% of balancing New Interconnectors Grid Storage DSOs implemented HH settlement for mass market? Faster switching PAR 1 Imbalance Renewables at 40GW+ Network charging review Supplier hub changes mooted Connected home enters the mainstream Brexit Household battery storage Subsidy free wind and solar Retail price caps EVs and smart charging ‘Prosumer’ and service

• ffering?

Brexit

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• Choices made at market entry set the path
• Most value has been realised by suppliers from niche markets
• Trade off between speed and cost of acquisition with depth of

customer relationship

• Creating a brand is a first step to building customer loyalty
• Is the retail model as we know on its last legs as bundled service
• ffers emerge in the next decade?

Key takeaways

44

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Sli.do Do you think consumers consider brand when choosing an energy supplier?

45

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Outsourcing in a competitive market

Ben Hall Head of new business

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Supplier responsibilities

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White label White label plus Licence Lite Fully licensed ‘Thin’ Fully licensed ‘Off the shelf’ Fully licensed ‘Own systems’ Fully licensed ‘Integrated supplier’ Sales Customer Service Pricing Settlements Trading Metering

Opening choices

48

Maximum

• ut-sourced

Fully in- house Thin Thick

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Rapidly developing markets

Meter Operator Provider (MOP) Registration and meters reads Trading and forecasting Data collection and registration Billing systems

Representative options for outsourcing

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The parameters of choice

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Cost Internal control

Significant value – USP Possible value – mass market Potential value – responsive to market opportunities Off the shelf supplier – strategy to be set

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• Key funding considerations
• Seasonality of revenues and costs

– Gas usage heavily weighted to winter – Significant one off costs e.g. the Renewable Obligation

• Timing of customer payments

– DD, prepayment, pay-as-you- go

• Can additional capital be raised if

required? – E.g. additional loans or line of credit with a bank

Cashflow is key

Managing cashflow

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Supplier Outsourcing Uber-isation of supply? Dilution of supplier hub? Lowered barriers to entry Improved customer

• utcomes?

Creation of new

• pportunities

Homogenised new entry?

Key takeaways

52

• The growth in supplier
• utsourcing opportunities and

up-take over recent years has had significant impacts on the retail market

• Led to the retail market we

have today

• Increasingly impacting on policy

and regulatory discussions

• Supplier hub review
• Supplier ‘stress tests’
• Secure and Promote

pause

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Sli.do Does having proprietary systems increase the value in an energy supplier?

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Externalities: policy costs and price caps

Charlotte Farmer

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Benign wholesale prices are no more

Relative power price stability

Source: Cornwall Insight weekly energy market bulletin

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• The policy umbrella covers both simple cost pass-through schemes as well

wider structural interventions

External influences extend beyond wholesale prices …

56

Monthly Quarterly Annually

ECO

~£2.5/MWh

CCL

~£5.5/MWh

CM

~£3/MWh

WHD

~£2/MWh

CfD

~£5/MWh

FiT

~£6/MWh

Renewables Obligation

~£22/MWh

Policy scheme costs passed through to consumer bills Wider government policy programmes

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2 4 6 8 10 12 2018-19 2019-20 2020-21 2021-22 2022-23 2018-19 2019-20 2020-21 2021-22 2022-23 Electricity Gas

p/kWh

Networks Renewables and capacity Energy efficiency Smart June 2018 total

• Policy costs rising
• Can affect all three aspects of the

energy trilemma

• Suppliers have least direct control
• Need expertise

… and need managing too

57

Third party charges forecasts (domestic user, real prices)

Source: Cornwall Insight third party charges report, September 2018

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• 6% of all domestic

customers are with suppliers below 250k domestic energy accounts

• Exempt from ECO and

WHD for now

• Thresholds to reduce to

150k by 2020-21

• Price cap assumes full

liability for policy costs

Policy thresholds and headroom

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2,000 4,000 6,000 8,000 10,000 12,000 14,000 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218

Accounts (k)

SaMS accounts outside ECO SaMS accounts with ECO

Energy accounts served by SaMS 2012-2017

Source: Cornwall Insight domestic energy market share survey Q417

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Managing the safeguard tariff

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900 950 1000 1050 1100 1150 1200 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Average annual cost, Ofgem Medium TDCVs (£/year) PPM large supplier PPM medium supplier PPM small supplier Variable Large Variable medium Variable small

Tariff costs and Ofgem’s safeguard tariff

Source: Cornwall Insight domestic energy tariff reports

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• Market/published values used for:
• Wholesale costs
• Network costs
• Policy costs

– Incl. smart meter roll-out

• Benchmark values used for:
• Operating costs
• Payment method uplifts
• Standardised values used for profit,

headroom and tax

Default cap construction

60

• The default tariff cap is made up of several components

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• Suppliers face difficult choices:
• Increase prices on

discounted non-default products

• Re-align hedging strategies

to cap formula

• Increase efficiency
• Stay underneath thresholds

for ECO and WHD

• Take costs out of policy

schemes, especially RO and ECO

Key takeaways

61

Source: Cornwall Insight tariff cap predictor

Safeguard tariff 2018-19 (£/year)

£0 £100 £200 £300 £400 £500 £600 £700 £800 £900 £1,000 £1,100 £1,200

Summer 2018-19 actual Winter 2018-19 actual Dual fuel bill (£/year)*

VAT Headroom PPM uplift Indirect costs Policy costs Network costs Wholesale costs *Based off

3,100kWh/year electricity and 12,000kWh/year gas

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An investor perspective

Peter Atherton, Associate Cornwall Insight

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Winners and losers what have we learned so far?

Robert Buckley, head of retail

63

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Type of company Energy incumbents Consumer-centric entrants Lifestyle services Competence

• Scale
• Efficiency
• Expertise
• Rule capture
• Brand
• Trust
• Data
• Systems
• In home technology

integration

• Energy as just one

service Regulatory facilitators

• Supplier hub
• Regulatory risk
• Policy
• bligations
• Smart meters
• Half hourly settlement
• Effective data

regulation (open data)

• Reduced complexity
• Unbundled functions

Where is value moving to?

64

Today 2-5 years 10 years

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Tech stock value

Connected homes Battery storage and small scale renewables Demand side response Bespoke tariffs Accurate billing Strong brand EVs

Winning the race?

• Flotation at tech valuation
• Multiples of achieved value

to date

• Driven by demand (of

investors) or supply (of companies)?

• How many?
• The regulation/policy variable
• Does “fairness” limit value

arising from specific propositions

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• Investors slow to recognise the energy-as-

tech company vision

• Growth achieved by many, profits elusive in

mass domestic market:

• Business markets different
• Service providers can help delivery but

differentiation is strategy and is management’s responsibility

• Value so far is in niche markets, good

internal process and customer trust

Key takeaways

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Today’s Cornwall Insight presenters

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Who Role Contact Gareth Miller Chief executive 01603 542101 Anna Moss Retail team lead 01603 542134 Tom Goswell Senior analyst 01603 542135 Jacob Briggs Analyst 01603 542139 Ed Reed Head of research 01603 542129 Ben Hall Head of new business 01603 542102 Charlotte Farmer Domestic and SME markets 01603 542131 Robert Buckley Head of retail 01603 542133

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