Energy Upstarts The Bottom Line

two years ago. Now on BBC News ` The Bottom Line

with Evan Davis. In the world up the energy Company 's popular. Certainly

not in the UK which has been conducting a fascinating experiment

in running a deregulated energy market. Today, we'll hear from small

companies, challenges, trying to take on the big companies and bid

them at their own game. We will also hear from someone who should make it

easier for challenges to challenge by helping consumers to choose their

provider. Each week, influential leaders gather in London for the BBC

radio four programme, The Bottom Line. You can see it as well as hear

it. Let us start by meeting our two

upstarts and our other guests as well. And taking a view minutes to

hear about their businesses. Dale Vince is the founder of Ecotricity.

Yours is a company that generate electricity, or in electricity as

well as retails it. Before we go into that, tell us about your life

beforehand. You had an interesting life, not necessarily the one that

would think you would be an entrepreneur. Mac I became a

traveller and spent ten years living in losses, ambulances, fire engines

and all sorts of things. I was pursuing a different way to live.

Living off the grid. I was just rejecting the nine to five and being

told what to do. What was the moment when you said, actually, I want to

go into business. I thought to myself, this was my epiphany. If I

could make a week difference in the world and bring about change. I

thought I will drop back in and build a windmill and that was my

plan. So it started with the building of the turbine? And went on

from there. Now the other businesses, we have these two bit.

We have generation, green energy regeneration and retail. In terms of

the size of the business, what is more important? They support each

other. You have got to make the stuff in order to sell the stuff. If

you look at where we are at the moment. We have a degree of price

independence. We are independent of fossil fuels. We generate our

electricity from the wind. All that to heart in the market over the last

few months about rising energy prices, people have been pointing

the finger at the wrong things. It is the rising price of fossil fuels

which nobody can do anything about. How many customers have signed up?

Sitting next to Dale Vince is the founder of Ovo Energy. You did not

drop out. You are not a traveller, you are a banker. My story is not

the same. I was working in the city. Before that, I ran my own business.

So you had no connection particularly to the energy market.

How hard was it to set up an energy company? I would not say it was easy

but it was not as difficult as a lot of people made out. Up until two

months before we signed up our first customer, I was the only employee at

Ovo Energy. Now you are just a retailer? Were you a trader in the

city? Yes. The complexity in the market is about risk management. If

you can do that well, it is possible to start up an independent industry.

How many households have you got? 170. It is not about that. We will

get into what it is all about later. That's turned to our third guest who

is not a challenger in the energy market. Ann Robinson is the Director

of consumer [email protected]. It is a price in Paris and website. I

go to your website, I put in some personal details and you tell me the

different price options. You can also ring us, we have a telephone

service. All you can send us your bill because a lot of people are not

on the Internet. The important thing for people to remember, using a

price comparison site, it needs to be accredited. You must make sure it

is credited by Ofgem. That way you will get accurate information and it

is objective and they can trust it. And you made your money... From the

switching bit of it. The big picture is over 90% of people come to our

site for information. Just to compare prices and go off and use

that information. A very small percentage actually use our website

to switch. And switching, the language of this market is changing

from one supplier to an other. Take all the hassle out of it of it. It

is another service. We have a comparison service and the switching

service. How difficult is it to set up a company?

I did it in 1995 which is a long time ago. Back then, it was very

easy. It was easier than it is today. Back then, we really just

filled in a piece of paper and faxed it to Ofgem and then we had a

licence. You need some capital? Our

first`year turnover was 13,000 pounds. The prospect of forming a

green energy company because there was none in the world. Yours is a

much more recent company. The money we needed to start the company came

from selling my house. You can do it with a man and his dog in an office

in Gloucestershire? A man, his wife and a barn. We had to cut a lot of

cost and worked very hard to launch. There is a comment I would like to

make. Some smaller companies are showing up the big companies. The

big six, they are basically generators for that. Engineering

companies, they have found it really hard to change the culture. They

have the customer service. The focus is the customer with a small

start`ups. You are partially right. They were retail companies as well.

That other company that inherited its customers never had to care

about them. I would imagine this being of securing customers is

really the big barrier to entry. The barrier has to be persuading people

to switch. How do you do that? For us, our breaking level was 3000

customers. We did not need that many customers. We reach that level in

two months. It is a big market. We have just over half a percent of the

market share and that is a quarter billion. 4000 was going to be

pushing it. We have done all right. We keep reinvesting so our breakeven

is no longer 3000 because we got more offices and more style. The

breakeven keeps going up but we are investing in growth. The numbers are

not union but it looks like 2013 could be our maiden profits. By the

end of this year, allowing for you to expand and get your, what will be

the maximum number of customers you think you could cope with by the end

of this year? That I will not save the maximum but we will have doubled

in size this year. 2 million, you would not be able to do it. There is

no physical reason why not. That your systems are designed for that

many customers? The reality is that would make us a five`year old

company with a high turnover. We would need to hire 1500 people or

thereabouts to manage. You will be the big seven, when she? I do think

customers like switching. You said a lot of people compare the prices and

then go away. You're white? They think it is not worth it. There was

ably ?50 and I do not want the hassle. I do not want to be cut off

for a day. Let me tell you why. They lack the confidence. There are still

some people who think that the gas and lectures that he gets switched

off and on again. They are worried that it is an enormous hassle. There

are... There is a big fear factor. Some people who need help most who

should be shopping around are the ones who are least likely to switch.

Better the devil I know. Everytime there is bad news about an energy

company, will say, I will stay where I am. It is a real shame. There are

still some people who are worried if they go to a small supplier, maybe

they will go bust. It is rubbish. It is unlikely. We offer a greener

outcome. It is about green electricity for us. We also push the

great customer service ethic. That is very important for us. Do you put

a phone number on the website? You actually and the phone? We do. There

is no telephone robot, is a human being. The last thing is ethical

pricing. Everybody pays the same price, it is not matter how they

paid their bills. It is really important. Whether you are a new

customer or an old one, we do not have any short`term teaser rates

that are sold below cost. We want to build a long`term relationship with

customers. We price on a sustainable basis. It is not work like that. If

you would want to be the cheapest price than go with someone else who

is willing to lose money because they think that you are going to

stay with them fulfil years and you will be profitable. That is the big

six model. Pricing in this area has been an interesting issue. They

tried and cookie. We have this market of people

switching all the time and a much larger group of people who have

never switched think the whole thing was deregulated. They are the ones

who are paying the highest price. I want to focus on the functioning of

the market. What lessons are there for challenges? I will start you off

with the reflection that the market that has perhaps been most disrupted

by challenges in the last 50 years is airlines. When we saw low`cost

airlines come in and changed the whole thing completely. And take the

marketshare from the big guys. Is that something that you could

imagine happening in the energy market? Is that a model that has

inspired you? There is no market where price is the important thing.

The shift to the cheaper airlines might say otherwise. Service matters

to people. It is not just about price. Price is always, I think, the

most important thing. When it comes to energy for most people. The

manager you pay your bill too, it is the same gas and electricity coming

through the powerline. The service does matter and in terms of the

business model you spoke of, any company that focuses on price will

be out of business. Let's talk about the way that the UK deregulated the

energy sector. There is enormous dissatisfaction with it. Is it

possible that the market works quite well? We have six big competitors, a

bunch of small competitors like yourselves, gentlemen, and we have

people who mediate, like you, and. And we have people who switch

between the suppliers and I wonder whether that is what you would call

a functioning market that is working well? It is very expensive but that

could just be that energy is very expensive. It is not obvious, isn't?

We do not have a good, functioning market. What is wrong with that? I

am not convinced that there is fair pricing. Are you suggesting that the

companies collude? I do not think that they need to. There is only six

of them with a 90% marketshare. When there is a price rise, one goes

first and then others follow. The price rises are very similar.

Everything is very similar. You do not need to collude in an oligopoly.

Prices going up at the same time can be a a very competitive market or a

very uncompetitive market. It is hard to distinguish, isn't it? I was

just on a price comparison website before the programme looking at how

much I would save if they switched to Ovo Energy. It was not

negligible. It would be about ten or 15%. Does that sound right? Yes,

that sounds about right. That is about 15%, ?180. You do not have one

of the costs but the big companies have because they have obligations

to support insulating elderly peoples homes. This year we do. Not

yet. When they get the 180 per discount by switching to you, that

is without you having to pay the obligation that the big companies

have to pay. How much of that ?180 is because they are more expensive?

It is about ?55 and this year it should be between 45 and ?50. About

a third of that is caused by an obligation. We are talking about

?120, attempts and difference in your price to those of the big six.

That is when you control for the other costs. What that suggests is,

and are not want to defend the big six, a difference between what you

would call a good value, ethical company with good customer service,

and an incumbent oligopoly rip`off merchant. That is 10%. That is not

the difference between fleecing customers and good value. That

sounds like normal variation in any market. It sounds like you could be

working for Energy UK. 10% is not a rip`off, is it? I would say that the

difference between two supermarkets within a mother and would be 10%. I

am certain that there is not enough competitive pressure. If you have

really strong competitive pressure you also get more efficiency. I am

sure that the big six could become more efficient, personally. This is

why the smaller companies have an advantage. But the advantages about

10%. That is ?100 per year. That is ?3.5 billion per year that the

country is paying to energy companies. It is not nothing, I do

not want to belittle it. For a hard`pressed family, that is a fair

bit of money. That is only on average. If you consider that some

customers are loss`making... There are some customers were unsubsidised

rates. But the profit margin on those who are not switching are much

higher. The dysfunction in the market is this weird thing that it

is possible to charge new customers less than existing customers, city

can introduce a new tariff to attract new customers and you can

fleece the existing ones who never switch. That must be a mistake? It

is often called price gouging. It is the biggest obstacle to people being

competitive because you to compete with the most competitive offer of

the big six, were as most of their customers on something much higher.

But I'm not sure that that is not coming to an end. We talked about

this, the RMR. The regulator stipulates that energy companies

could have for tariffs. I hope price cutting will go away. Then will go

away. Then there was either very cheap and very expensive products

come together and the average market price was up but the switching price

will change. People like and will end up paying quite a lot more than

people who never switch will probably pay a bit less. Yes. That

would make the market work much better because there have been too

many tariffs. There have been many tariffs. I worry that we may be

throwing out the baby with the bathwater. They have reduced so far

that it may mean that condition stops working properly in this

market. We have to wait and see. Experience of the UK, it has been an

interesting two decades in running a deregulated market, but lots of

other countries had regulated markets. However, they are

state`by`state, in the US. They have a big state supplier, as in France.

There are competitors but it is basically one in the budget others.

Would you recommend this model to the rest of the world? There are

countries looking at this market and they are pretty envious. I would.

That you have said that the consumers are being ripped off. It

is still better than it would have been without a competitive market. I

am a believer in competition and competitive markets. It has had some

advantages for us. We have ended up at the worst of both possible

worlds. We are in between a free market with loads of competition and

in a regulated market, the regulator is there to protect customers and

they dictate pricing and service levels. We are in a situation where

there is an assumption that competition is working and the

measure of competition is the number of people who switch. But our core

belief is that because some people switch, companies compete and prices

come down. That is economic theory but it is not working reality

because energy companies are able to segment their market shares and they

can say that they will have some prices were some customers and, over

here, nothing will change and, guess what? We can literally charge what

we like and nobody can prevent this from doing that. We think that most

customers will not notice. The fact that you consider that the pricey

charge for people to actually shop around for those who don't means

that you can rip off half the market. 98% of the market. And you

still point to this better be here which is said to be competition.

That is the problem, especially for energy, which is compulsory

purchase. We have got somewhere. The understanding that there are

segmented markets and that one works well and competitively because

people shop around that the other doesn't because people do not, that

is an important insight. If you are designing the market again, you

would want to think about that again. At this point, we will do in

the lights on our discussion of energy. My guests were Dale Vince,

Founder and CEO of Ecotricity, Stephen Fitzpatrick, Founder and

Managing Director of Ovo Energy, and Ann Robinson, Director of Consumer

Policy at uSwitch.com. Downloads of our show are available and the

details are on our website. We would like to get your e`mail so drop us

an e`mail. Hello. A chilly start to Saturday

morning. Through the weekend, it will be cold. We have some showers

around. Some could be wintry, especially