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How can energy retailers combat the rapidly rising risk of bad debt and collection costs? 12 OCTOBER 2020

How can energy retailers combat the rapidly rising risk of bad debt and collection costs?
5 minute read

The Profitability of energy retailers is at historically low levels and is likely to deteriorate further as a consequence of COVID-19.

In this blog, we explore the effects on the market to-date, Ofgem’s response, and how energy companies can mitigate associated risks.

Energy retailers are going out of business

In recent times, the following companies have ceased trading (with their customers being absorbed by larger retailers such ScottishPower, British Gas, Bulb, Octopus Energy and EDF Energy):

  • Toto Energy
  • Tonik Energy
  • Effortless Energy
  • Gnergy
  • Breeze Energy
  • Rutherford Energy
  • Eversmart Energy

Other energy retailers (such as Bristol Energy, Robin Hood Energy and Yorkshire Energy) have been or are involved in distressed sales, and there are likely to be more that cease trading in 2021 and beyond.

Ofgem considering additional charges to households

The increasing risk associated with bad debt has been recognised by Ofgem in considering a £21 charge per household to allow suppliers to recover the higher bad debt costs.

This additional £21 charge will be welcomed by energy retailers but it’s highly unlikely to offset the additional costs that will be borne as a result of:

  • COVID-19
  • increasing competition and switching
  • increasing volume of vacant business properties
  • evolving regulation e.g. the new Breathing Space legislation coming into force in May 2021.

There’s a tsunami of debt on the horizon and it’s moving quickly, as can be seen from the number of large retailers who have become insolvent recently. Over 200,000 retail jobs have been lost in the last 12 months. This is going to compound the deteriorating profits and expert help is needed to get the balance right in terms of fair customer outcomes and collecting what’s owed in a cost-effective way.

How can energy retailers cope with the rapidly rising risk of bad debt and collection costs?

Such costs are probably the most significant for energy retailers after wholesale energy settlement charges. Collections and recoveries activity provides a unique lens in identifying the root causes of process defects that drive up costs to serve. Potential benefits include:

  • reduced collection and bad costs through digitalisation and process redesign
  • loss mitigation
  • systems enablement to improve collections and recoveries strategies
  • accelerating and increasing cashflow
  • improved data quality through effective data strategies
  • reducing unnecessary customer contact through improved and lower cost Smart Contact strategies
  • reducing complaints
  • reducing customer churn.

How can we help?

Arum is confident that we can help you in delivering the above benefits, as well as prepare your business for the challenges that Breathing Space and other legislative and regulatory changes bring.

We can deliver value far in excess of our fees and are prepared to back this up through our 100% financially guaranteed Collections and Recoveries Programme. This programme can be tailored to address the most pressing challenges in your business. We will only charge you if we identify value that’s at least twice the value of our fees.

We focus on providing solutions through our experienced practitioners who collaborate and work closely with our client's team. Our strategy is to minimise the input required by clients and allow them to focus on business as usual activities whilst we identify and develop solutions that deliver sustainable and recurring benefits. Contact us to find out more.

Sandy Duckett
Principal Consultant

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