Residential utility retail strategies in an economic downturn

In an already tight retail margin environment, retail utilities are particularly exposed to the effects of the economic downturn. This brief explores the nature of the difficulties faced in specific EU markets and how players can seek to mitigate the effects of the downturn.

Report Highlights
The key macroeconomic indicators highlight the speed and the depth of the economic downturn with reference to demand-side impacts on consumption and the propensity for increased customer switching within the B2C market.

Branding and non-price factors will play a significant role in customer retention strategies. Utilities will also have to review internal costs and minimise the cost to serve in the most competitive markets.

Niche markets and the green agenda also have the potential to play an important role in shaping the post-downturn supply market acting as a competitive advantage.
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DATAMONITOR VIEW 1
CATALYST 1
This brief examines the impact of the economic downturn on the business to consumer market in the EU-27. 1
SUMMARY 1
Quarterly GDP data illustrate that UK productivity has fallen significantly 2
GDP has fallen sharply since 2007, with the UK formally in recession 3
Labor market contraction is another sign of economic woe 4
High prices for producers have acted as a double blow to the economy 5
The effects of high input costs have resulted in a rise in unemployment and a contraction in demand 6
Equity markets around the world reflect the crisis in investor confidence 7
Total gas consumption has been on the up for UK residents 8
Power consumption is less seasonal and flatter than gas demand 9
Household incomes have been relatively static in comparison 10
The number of fuel poor has been rising in recent years 11
Year-on-year changes in the levels of fuel poor are escalating 12
Fuel poverty has been on the agenda but faces new challenges 13
Consumer welfare will be a high priority issue 14
B2C will be driven by three key factors in the downturn 15
Regulators and suppliers will take joint social responsibility 16
Residential gas and power markets can be defined by consumption and unique demand profiles 17
The typical load profile for residential customers is not likely to alter in the absence of smart meters 18
The demand for gas shows a steep upward trend in Europe 19
EU power demand, in aggregate, has contracted since 2006 20
The economic crisis takes center stage as the EU weighs up costs 21
Reducing power supply costs will be the cornerstone of success 22
Reducing gas supply costs will be the cornerstone of success 23
The cost-to-serve metric plays an important role in maintaining competitive advantage in the UK 24
EU citizens are well aware of the budgetary situation ahead 25
The credit crunch is expected to add to company liquidations and customer default rates, heightening credit risk for energy suppliers 26
However, achieving a lower cost-to-serve is not a simple task 27
C2S are internal costs that are tangible, controllable and can ultimately be driven down 28
Customer segmentation in a competitive market offers various financial incentives 29
Economics and environmental obligations do not mix well 30
Branding in B2C utilities will shape markets in the downturn 31
Branding also plays a large part in non-price competition 32
The challenge in new customer acquisition is overcoming the inert customers in both the UK and mainland EU 33
From Kyoto to Copenhagen-will green play a positive role in the downturn? 34
Non-UK European utilities have successfully engaged with 'green' tariffs by favoring the clear-cut 100% green source variety 35
Copenhagen will set the agenda; however, compliance is the issue 36
The current trade cycle is stuck in a Keynesian bust 37
Future forecasts predict light at the end of the tunnel 38
In an already tight margin market, the downturn presents particular challenges for residential retail utilities 39
APPENDIX 40
Ask the analyst 40
Datamonitor consulting 40
Disclaimer 40
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Figure 1: Quarterly GDP data illustrate that UK productivity has fallen significantly 2
Figure 2: Labour market contraction is another sign of economic woe 4
Figure 3: High prices for producers have acted as a double blow to the economy 5
Figure 4: Equity markets around the world reflect the crisis in investor confidence 7
Figure 5: Total gas consumption has been on the up for UK residents 8
Figure 6: Power consumption is less seasonal and flatter than gas demand 9
Figure 7: Household incomes have been relatively static in comparison 10
Figure 8: The number of fuel poor has been rising in recent years 11
Figure 9: Year-on-year changes in the levels of fuel poor are escalating 12
Figure 10: The typical load profile for residential customers is not likely to alter in the absence of smart meters 18
Figure 11: The demand for gas shows a steep upward trend in Europe 19
Figure 12: EU power demand, in aggregate, has contracted since 2006 20
Figure 13: Reducing power supply costs will be the cornerstone of success 22
Figure 14: Reducing gas supply costs will be the cornerstone of success 23
Figure 15: QUESTION: Given the recent economic downturn, to what extent do you agree with the following statements? I haven't seen or felt any difference - my lifestyle won't change. 25
Figure 16: However, achieving a lower cost-to-serve is not a simple task 27
Figure 17: C2S are internal costs that are tangible, controllable and can ultimately be driven down 28
Figure 18: Customer segmentation in a competitive market offers various financial incentives 29
Figure 19: Economics and environmental obligations do not mix well 30
Figure 20: A sample of current German, French and Spanish residential 'green' offerings shows that some of the largest European suppliers have opted for the 'greenest' green tariffs. 35
Figure 21: The current trade cycle is stuck in a Keynesian bust 37
Figure 22: Future forecasts predict light at the end of the tunnel 38
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