[NGW Magazine] Digital Trade and Wholesale Markets
Several new digital trading platforms are being tested and introduced in the UK’s gas and power market, which could revolutionise the way business is done. Their focus is on cutting costs while expanding choice.
Despite UK National Balancing Point wholesale gas prices being used as a benchmark around the world, UK consumers have long accused the domestic gas and power market of suffering from complexity, inefficiency and a lack of transparency.
The inefficiency stems from a lack of technical innovation, with manual processes and spreadsheets dominating right from the generation plant to the meter – it was one of the last industries to stop using faxes.
Embedded terminology, complex legislation, taxes and exposure to wholesale prices make it hard for buyers to understand why a price is what it is. The resulting lack of transparency is made worse by limited regulation and helps disguise retailer margins.
Business consumers tend to rely on brokers to get the best deals, while residential customers are encouraged to shop around and switch suppliers, but often end up being lured by cheap deals to find that prices are quickly jacked up. Some of the new trading platforms could change all this by dramatically improving visibility and choice, linking customers directly with gas and power producers, and creating an alternative option to buying through brokers or utilities.
Most gas is bought from the UK wholesale or international markets from suppliers who are also producers such as Norway's Statoil, UK BP or Anglo-Dutch Shell, by retailers (the ‘big six’ utilities still dominate the sector) – and then sold on to consumers at a mark-up.
The new platforms vary in their target client base, objectives and ambition, ranging from British Gas Lite, which simply offers its small and medium business customers an online platform for Centrica’s electricity sales; to independent sites like Open Energy Markets (OEM). Its founder, Chris Maclean, describes it as a “hybrid of a price comparison site and Ebay” for businesses involved in energy buying. Other examples include Pure Planet, which is 23.7% owned by BP, and is aimed at selling green energy to all consumers at lower prices than the big utilities.
Maclean said his platform addressed the problems with the UK market by “delivering clear, concise and relevant information. Ensuring the buyer can get what they want, when they want it.” The platform buys for business customers from a number of live supplier offers: “For the first time a buyer can see the process end-to-end and it's important to back that up with the correct education. On the flip side, we are using our technology to help some of the supplier processes. By doing this we can start to drive market change with the suppliers.”
Cheap and green
Pure Planet, on the other hand, offers an exclusively green product, which it purchases through BP. It was set up by an experienced team from the telecoms sector, which has already experienced a similar technical and business model change to the one now reaching the energy market. “The combination of price and carbon reduction is very important for us. We quote a carbon saving as part of our app,” said co-founder, Steven Day.
The site plans to undercut mainstream tariffs by providing renewable gas – covered by carbon offsets – and electricity to consumers at cost, meaning no mark-up. “Companies were unnecessarily building profits into the unitary cost of the energy they supplied. Pure Planet customers pay no more than the firm pays for wholesale energy. A nominal monthly membership fee of £10/fuel, which includes the standing charge, covers the company’s margin… We think the energy market will move more toward the mobile banking model, where transaction and interaction in terms of consumption and usage is all there in your device, all of the time.”
When asked about the strengths of British Gas Lite, compared to other digital systems, Rob Kerr, director at British Gas Lite, said: “Customers can now manage their account with online webchat rather than traditional call centres and our lower operating costs are passed on to customers through lower prices, all via a simple platform. British Gas Lite increases the efficiencies of service, and the fact that 40% of our fuel mix is from renewable sources is a great benefit for customers.”
Centrica launched the platform in partnership with cloud-based technology software company, Ensek, whose CEO, Jon Slade, said: “The energy sector is facing a period of unprecedented change, driven largely by the number of smaller suppliers entering the market. We want to build on our work of providing market-leading software services to energy suppliers.” Smart meters mean customers will only pay for what they use each month, and the system is designed to be able to improve its product and processes based on feedback from customers and brokers.
Take your pick
Unlike British Gas Lite, OEM offers gas and power from all suppliers, with the customer – or OEM traders on their behalf – being able to compare and pick the best prices. It is also – like Pure Planet – adopting novel payment methods, including taking a cut of savings below the average market price for larger customers – so it only gets paid when it is saving its customers money.
“[We take] between 25% and 50% depending on the complexity of the customer and how much (if any) they want to pay as a fixed fee up front… We're always trying to innovate the products we're bringing to market and they come with a range of fee mechanisms dependent on the service, from monthly 'software as a service' licences through to one-off transactional commission for the very small customers.”
He said there was little problem attracting all the main suppliers to the site, even if they had their own platforms: “It's a very profitable route to market for [suppliers]. They may need only one or two resources internally and will obtain access to hundreds of commercial opportunities to win multi-million-pound procurement deals. Their digital platforms tend to have a different focus from ours and be more aligned with the billing process and not generating price competition.”
“So long as buyers require independent market appraisals and price competition, there will be a need for our platform and suppliers recognise this… Suppliers also benefit from instant pricing feedback, so they can always monitor their competitive position in the market,” said Maclean.
When asked what the implications of new platforms were for brokers and the market more widely, Kerr said: “Through our cloud-based, 'application programming interface' enabled service we work closely with our partners to ensure we offer them market leading ease of use. We’re always assessing and looking at integration with the systems our sales partners use to continue to improve the process.” Maclean was more forthright: “Brokers will have to adapt to compete. Although we do offer partnerships to brokers so that they can utilise our technology to deliver to their customers.”
Other new technology could further disrupt the way the wholesale markets work. This includes smart metering ideas that Pure Planet wants to adopt from New Zealand and Australia, where consumers are incentivised to monitor their energy use and opt for cleaner, and increasingly cheaper, alternatives. “We believe embracing digital technology – that includes AI and bots that learn – will result in a more efficient, automated service,” said Day.
There are also blockchain trading applications, with Germany’s E.on and Italy’s Enel both having already carried out trials in a marketplace called Enerchain. OEM said it had been looking at blockchain applications as well: “We have a number of very significant developments in the near pipeline and blockchains is certainly under consideration, so watch this space,” said Maclean.
OEM is also looking at water and energy markets outside the UK: “On a simplistic level, our platform brings suppliers and customers together in a competitive environment. It doesn't have to be energy that is purchased, we have already received requests for silicon, fuel cards, vegetable oils and other agricultural products. The US opportunity is driven by the relative immaturity of their energy procurement processes and the industry in comparison to the UK. We believe we can add significant value as we have already experienced the market evolution here in the UK that they are going through now,” said Maclean.