The UK utilities sector is in tumult. The difficulties are diverse – from the unpredictability of climate change and environmental issues to the challenges stemming from regulatory mandates and cyber threats. After reeling from the aftermath of COVID-19, the energy market was further stressed by the Ukraine-Russia conflict, leading to supply disruptions and an uptick in sourcing costs. Now, with recessionary undertones and inflationary pressures, utility service providers face the spectre of escalating consumer bad debt.
The declining number of utilities – a stark decrease from 70 in 2018 to under 30 as of recent counts by Reuters – illustrates the gravity of the situation.1 80 percent of energy companies fear that the international competition for investments could jeopardise their operations.2 Meanwhile, governmental caps on energy prices not only erode the bottom lines but also deter potential investors.
The current climate significantly influences both utility providers and their consumers. As the cost of living continues to climb, households are feeling the pinch. The Office for Budget Responsibility's prediction of a 4.3 percent dip in real post-tax household income for 2022-23 further darkens the horizon, marking the steepest decline since records began in 1956.
The consequence? Growing numbers of consumers cannot afford their energy bills. As Debt Justice's analysis reveals, the collective energy debt burdening UK households reached a new peak, with debt owed for over three months surging from GBP 1.086 Billion in Q1 2018 to GBP 2.25 Billion in Q1 2023.3 This grim reality forces many households, particularly those with young children, to make the heart-wrenching choice between sustenance and warmth.
Complicating matters, the accelerated smart meter installations have introduced additional challenges, such as faulty meters, incorrect billing and other related issues. These, in turn, deepen consumer mistrust towards utility providers.
So, how can utilities restore trust, enhance their collection strategies and reduce debts in this turbulent landscape?
The answer lies in harnessing data for a deeper understanding and crafting a nuanced, empathetic approach to debt collection.
Through rigorous analysis of existing data, enriched with supplementary sources and processed via advanced algorithms, utilities can devise solid strategies. This data-driven approach can foster:
1. Empathetic Engagement and Proactive Debt Prevention:
Leveraging data insights allows utilities to maintain consistent and empathetic customer engagement. This proactive approach helps monitor customer behaviour and prevent them from falling into debt. For instance, by embracing flexible payment solutions through open banking tools, operational costs can be significantly reduced. Moreover, the invaluable consumption data from smart meters equips consumers to pay based on actual usage, thus steering clear of the pitfalls associated with fixed payments and recurrent direct debit reassessments.
Notably, in the UK, 57 percent of electricity and gas meters are smart4, offering detailed insights into individual consumption patterns, right down to the duration and type of appliance used (subject to permissions and specific apps). When this granular data is combined with other datasets, such as demographics and neighbourhood characteristics, it offers profound insights into population behaviours, facilitating a better understanding of needs and consumption demands.
For example, households with young children, infants or elderly residents should be promptly identified and added to the Priority Services Register. This ensures that their specific needs are prioritised during energy disruptions. Such comprehensive data offers a golden opportunity for utilities to collaboratively work with households, helping them efficiently plan and manage their energy budgets.
2. Optimised Utility Data Management:
An effective debt management strategy hinges on the foundation of dependable data. It's not uncommon for data to be riddled with inaccuracies or be incomplete due to human errors. However, these issues can be mitigated with a systematic approach that incorporates automated validation.
During the first quarter of 2023, a notable shift occurred: only 571,000 customers opted to switch their energy suppliers.5 This represents a significant 75 percent decrease compared to the pre-COVID era and the period before energy price caps were introduced. Such a drastic decline in customer transitions has presented companies with a golden opportunity to delve deeper into understanding their customer base. It's imperative now, more than ever, to ensure that data is not only owned but also diligently managed and maintained, especially in anticipation of any potential resurgence in switching trends.
Data from specialised external entities and third-party sources can significantly bolster the integrity of a company's dataset. It aids in verifying addresses and ensures sustained data precision. By meticulously cleansing and enriching this data, companies can craft detailed customer personas, pinpoint vulnerable segments and proactively offer services like heat and energy-saving audits. Such a data-driven approach paves the way for a more resonant and empathetic engagement strategy.
3. Customer Segmentation for Improved Recovery:
Harnessing advanced analytics and sophisticated modelling techniques, utilities can profoundly segment their customer base. By integrating existing customer data with various socio-economic indicators – including government initiatives, credit bureaus and other publicly accessible data sources – a richer, more insightful perspective is formed. From this vantage point, utility companies can craft tailored engagement strategies that resonate more effectively with different customer groups. Interestingly, much of this essential data – from payment histories to customer care interactions and feedback – already resides within the utility provider's databases. Such information, when supplemented with external data, becomes even more potent.
Consider this: If a household in default is a recipient of benefits, it's a clear sign of financial vulnerability. Recognising this, utility providers can offer assistance, such as instituting a temporary payment freeze, suggesting instalment-based bill payments or guiding customers to supportive government initiatives. For instance, organisations like the British Gas Trust work extensively with individuals grappling with financial challenges and energy debts. Conversely, by assimilating external data regarding creditworthiness, utility providers can discern between those genuinely struggling and customers who possess the means but choose not to pay.
4. Personalised Communication:
After successfully segmenting customers, the next pivotal step is to engage them through their preferred communication channels. For utilities to optimise these channels, it's imperative to discern the preferences, effectiveness and associated operational metrics – like time, effort and cost-to-serve – of each customer segment. Delving into historical customer contact data and conducting comprehensive call analysis can help ascertain volume per channel, instances of transfers, deflections and reasons for contact. Such analysis facilitates the creation of a 'transition matrix', providing a lucid view of customer movement between communication avenues.
Consider the tech-savvy demographic: They might find phone calls disruptive, leaning towards more discreet notifications like e-mails or text messages. Similarly, the tone and content of messages should be calibrated based on the customer's profile and payment behaviour. For instance, a courteous reminder suffices for a consistently punctual payer. Conversely, a more assertive tone might be necessitated for someone with a pattern of defaulting.
For utility companies, proficient debt collection isn't just essential for survival – it's a delicate art. A well-designed data-centric approach to collections can both amplify delinquency management and foster stronger, more empathetic customer relationships.
Building on a robust data foundation helps identify vulnerabilities, understand individual capacities to pay and set repayment terms accordingly. The result? Enhanced customer satisfaction, improved resilience and greater profitability.
In an era where energy access is often viewed as a fundamental right, utility providers must walk a fine line. Bolstered by data insights and a people-first approach, they can craft a flexible, effective collections strategy that serves both the bottom line and the public good.
Ready to transform your utility company’s approach to debt management with data-driven insights? Talk to our experts.
National Audit Office
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05 February 2022
24 January 2022