Mark Hodges speaking at the Utility Week Congress:
Thank you for having me at this Utility Week Congress – it’s an important and valuable opportunity to consider the changes that are rapidly transforming the markets in which we operate.
I’m going to talk about the future – and what a post-CMA world may hold for customers. My focus today will primarily be on residential customers.
Whilst regulators, governments – and even the occasional newspaper article – can drive change, the greatest force for change today is customers themselves… aided and magnified by advances in technology.
As well as focusing on customers, I’ll mention my views on the regulatory environment which, as you heard from Rachel earlier this morning, is going to be characterised less by prescriptive rules, and more by principles... a very welcome change, in my view.
Like many other sectors going through change, our success is going to depend on innovation, leadership, courage, and – above all – keeping the customer at the core of everything we do.
I should first introduce myself.
I’m a member of the Centrica Board, and Chief Executive of UK and Ireland Energy Supply and Services, British Gas in the UK, and Bord Gáis in Ireland. I also lead our global and growing Connected Home business, famous for the Hive smart thermostat, among other things.
Before this job, my background was in financial services, where I spent 25 years – more than 20 of them at Norwich Union and Aviva, where I was UK Chief Executive... big, customer-facing businesses.
I’ve been in this job for 18 months now, and it’s a privilege to lead the fantastic British Gas brand, with its proud heritage spanning more than two centuries.
As a snapshot for you: we’ve got more than 21 million customer accounts, and we employ 29,000 people. And -- this is important -- we’re not just an energy supplier... we’re the nation’s leading energy services business. Each year our engineers drive 130 million miles, and conduct more than 11 million visits to homes and businesses. This gives us a unique insight into the lives of customers and what they feel about energy.
I recognize that what we do really matters to people. Turning on the heating and lighting in your home is a basic need. It’s fundamental to our business that we never forget there is a customer at the start, middle and end of everything we do.
I’m hugely excited that I have entered the energy industry at a time of radical transformation and disruption. That was the attraction for me in the first place – and I have not been disappointed.
Let me start with a quick view on the regulatory context. Following the conclusion of the exhaustive and challenging Competition and Markets Authority investigation, we are facing a significantly changed landscape.
Whilst I do not agree with all of their conclusions, the package of 36 different remedies touches all aspects of the energy market. For the retail market, the range of remedies is extensive.
Perhaps the three most significant were:
- Removing many of the prescriptive rules restricting the design of customer offers.
- Proposing a database for the least engaged customers.
- And the prepayment meter price cap.
These are, individually and collectively, significant changes.
As a business, we welcome the certainty that the end of the CMA investigation brings. If the measures and remedies proposed are given time to bed in, we believe they will drive more customer engagement, more customer choice, more competition, better customer service, and prices that customers want to pay.
One of the key developments that’s followed the conclusion of the CMA is Ofgem’s commitment to principles-based regulation – which puts the emphasis on delivering a better outcome for customers. I’m really positive about this development.
In my experience, principles-based regulation includes two elements that should benefit customers: it brings room to innovate and take risks; and it must be owned by senior leaders.
Businesses and the regulator will need to be brave. We both need to accept that we won’t get everything perfect first time. If we fail, we need to fail fast, and learn quickly, ensuring we keep the customer at the heart of our decision-making.
Let’s be clear, though – the accountability for customer outcomes must rest with the business, and its leaders.
One other insight I can offer on principles-based regulation is that it does not mean “less” regulation. A P.B.R. regime is no less onerous than one with detailed rules. I believe it is potentially more demanding, because of the premium this framework places on making the right kind of judgements. Getting those judgements right is a key enabler of success.
So, we agree with the thrust of what the CMA and Ofgem have been saying about the market. And I believe we need to give the new framework time to settle.
If I step back to consider the changes in our sector, the sheer number of developments is remarkable. They will bring considerable disruption over the next three to five years. It’s also clear to me that on the whole, these developments present an opportunity.
A quick checklist of these forces at the industry level would include:
- Regulatory changes – I’ve already mentioned the CMA remedies and principles-based regulation
- The nationwide roll-out of smart meters
- The goal of 24-hour switching
- The increasing number of competitors (and types of competitors)
- The advance of new technology like smart thermostats
- Moves toward distributed energy
- And the bundling of energy supply with other services
I’d like to touch on each of these in turn and offer a view.
A significant enabler for the future world of energy is the smart meter. We strongly support the roll-out of smart meters, because they will bring the double benefit of improving service and customer engagement.
For customers, it means accurate, near real-time data on what they’re consuming and how much it’s costing. This addresses one of the strongest points of feedback customers give us: they don’t like estimated bills, and they want to make informed decisions about their energy use. They want to engage.
Data from smart meters will allow providers to offer customers more tailored products. We’ve already seen an example of this with the launch this summer of the FreeTime tariff… giving smart meter customers free electricity on a Saturday or Sunday. It’s proving very popular. But it's only a start. I expect to see a lot more innovation. Maybe even the word "tariff" will disappear!
Smart meters also underpin the industry’s move towards faster switching. To build confidence, it’s important for customers that they can choose and move supplier, and that these transitions are smooth. We’re already seeing higher levels of switching – Ofgem figures show that almost 4 million customers had switched by the middle of this year. Whilst the current goal is 24-hour switching, for the sake of our customers we just need to make sure that the cost of delivering that capability doesn’t outweigh the benefit.
We operate in a competitive market. Customers can now choose from as many as 52 suppliers – that’s to be welcomed. It drives change and innovation. Many have entered the market during a once-in-a-generation fall in commodity prices. However, these conditions may not last for ever, and as an industry we need to make sure that competition is sustainable should market conditions change.
The provision of energy and services are becoming less distinct activities, and this blurring is being accelerated by advances in technology.
Customers can now choose products and services which aren’t just about energy supply – but are broadly about what you could call “managing your home” in the widest sense. This is what people are interested in.
We and others in the sector are responding to an exciting new market with products and services that harness smart technology – like the Hive thermostat. The “Internet of Things” is here, and it will change the way consumers use and think about managing their lives and energy.
In North America, where Centrica also has a business, this market is growing rapidly. 9 million American homes already have some form of connected device. Globally, consumer devices connected to the web are predicted to more than quadruple in the next 3 years: there are 3 billion of them today; by 2020 there will be more than 13 billion.
The UK is slightly behind the pace set across the Atlantic, but it’s catching up. And Centrica is Britain’s leading smart home provider. By midway through this year, we had 360,000 Connected Home customers. They’re really engaged with their energy use – the majority of them use their Hive thermostat at least twice every day during the winter months. They are not just engaged, but satisfied customers: more than 90% recommend Hive to others. So there can be a big uplift in engagement and satisfaction through technology.
It’s clear the concept of “managing your home” is a lasting trend that will continue to evolve, and continue to disrupt and stimulate the market.
The services side of our business is also part of this change. One thing we know is that customers crave choice and convenience.
Here in Birmingham, we have just launched a new online service called Local Heroes: it’s a network of local tradespeople whose work is guaranteed by British Gas. Local Heroes will swiftly connect a customer with an accredited person to get a job done, to a high standard -- more flexibility and choice for customers. This is a technology disruption -- technology putting customers and tradespeople together. In that sense, we're becoming a network provider.
Whilst we are busy thinking about disruption and exciting technology, it’s important to remind ourselves that customers tell us every day they expect us to get the basics right. There is no point looking to a "bright future" if service is poor: customers will not accept this.
We’re working hard to make it easy for customers to deal with us, give them a smooth digital journey, bill them accurately, communicate well with them, and help them control their consumption and their spend.
A strong theme in customer feedback is that they want their energy bill to be easy to understand. British Gas is currently trialling a new-look simpler bill for tens of thousands of customers. Our goal is that during 2017 all of our customers will get a simpler bill.
That imperative, to communicate well and engage more actively with all our customers, is what the Prime Minister herself also recently reinforced to the energy industry.
And we are. We take that very seriously.
Price is also an area which customers tell us is critical. Although we can’t control all of the elements that make up their bill, there’s an onus on us to do everything we can to reduce the costs that we do control.
At Centrica, we’re just over a year into a programme to cut our costs and become more efficient. This will enable us to keep prices competitive.
It’s been challenging, but we’re making good progress.
Achieving better service for customers and doing it at lower cost are not mutually exclusive. In the new world, they are an imperative. As we become more efficient for customers, complaints are falling: they fell by around 40% to June 2016.
These are basics… and we must get them right.
There have been improvements, as I’ve indicated, and these have contributed to stronger levels of trust in our business. Consumer trust in energy companies is rising, according to Government figures. In a survey this summer, 63% said they trusted their supplier to give them a fair deal, up 9% on the previous quarter.
But there’s much more to do. It's a low start point.
So the future we’re moving into – the future we’re being led into by our customers, and by the advance of technology – is exciting. It's dynamic and fast.
Our customer’s home five years from now is one that’s increasingly automated… with smart technology and appliances, easily activated and managed, which “learn” about how they want to live, and help them to run their home.
Our competitors in this new connected world aren’t just the household energy names… …They’re Google, Amazon, Samsung, Apple and O2! These are the companies I worry about.
Meanwhile, energy companies aren’t just selling energy: some offer their customers broadband; some will offer you insurance-based services products... our Connected Home business is diversifying fast – one of the new capabilities Hive will offer next year, for instance, is leak detection in the home. These examples show that not only are we being disrupted in this sector – there are also opportunities for us to disrupt other markets.
So we all need to re-frame, and re-think our labels. I believe the term “the Big Six” is becoming meaningless and obsolete. I do not see us as a "utility" -- that's a description I want to leave behind.
Some of the brands I just listed are involved in a really intense “battle for the consumer’s home”. Its winners and losers will be decided in a few years, not decades.
If you doubt me, cast your mind back just a short while and remember how quickly one-time market-leaders like MySpace, Nokia, Napster and Friends Reunited suffered in the teeth of new, radical competitors, their business models disappearing. The stakes are high.
I actually believe that the more radical we are as a company, and the more we act as a disruptor ourselves, the more secure our future will be. I’ve set out some of the key trends, most of them customer-led, that are changing our world… and how we’re responding to them… and the sort of regulation we’ll need -- allowing risk, innovation and learning.
In these ways we all can improve customer service, engagement and choice.
In the end though, it doesn’t matter what I say. The arbiter of our success will be the customer. We must respond and evolve. Ultimately, the destiny of every business is decided by its customers. That's the challenge facing our company, and this market.
Mark Hodges, Group Executive Director and Chief Executive, Energy Supply & Services, UK & Ireland was talking at the Utility Week Congress 20 October 2016.