Consumer debt in energy Utility Week Consumer Debt Conference - PowerPoint PPT Presentation

Consumer debt in energy Utility Week Consumer Debt Conference Birmingham – February 2019 Chris Harris Head of Regulation npower

Why are we looking at credit and debt ? Changes in the consumer Changes in the energy and supplier credit-debt product landscape landscape Effects on energy affordability

What is the problem to solve • Debt is inefficient (collection costs, cost of working capital and risk capital etc.) and thereby a deadweight cost to society and less to spend on welfare • Bad debt costs are unfair as “good payers” cross subsidise “bad payers” • The psychological consequences of being in a situation of unaffordable debt repayment are devastating • “ The Poor Pay More ” – Once in a debt situation, everything becomes more expensive (interest on debt, reduced access to products, etc.) and the situation can spiral • Supplier debts to customers have been defaulted on, with the forced insurance causing unfair costs to other consumers, and the threat of instability of the political-regulatory model of gas and power

The effect of credit and debt on affordability Increased arrears Relatively easy Unaffordability Debt access to credit Limited access to products The poor pay more

The system can function with no debt Paytype Mechanism to avoid debt Action Prepayment Pay As You Go Maintain account Receipt of Bill Up front deposit balance or switch paytype Direct Direct Debit Maintain account credit withdrawal from customer bank

So why do we allow debt • Evening out payment over the year without requiring a positive account balance/deposit in summer • Accommodating of higher heating costs during unseasonably cold spells • Having some flex to accommodate unexpected non energy customer expenditure, for example replacement of broken washing machine • Using energy bills as a day to day buffer for variations on normal life expenditure (e.g. delay energy bill payment to accommodate the cash flow need for a holiday or sofa) • Having some flex to accommodate variable income , for example arising from temporary unemployment, illness, or the gig economy • Temporary vulnerability , with or without financial vulnerability, such as lesser focus on bills following bereavement

Using energy payment variation to balance energy cost variations - constant income £ Account debit Energy payments Account Energy costs credit Time (months)

Return of direct debit account credit increases average and maximum debt Increase in account debit £ Payment rate shock Payment rates Account credit Energy costs returned Time (months)

Using energy payment variation to balance energy cost and non energy cost/payment variations -- constant income Accruing energy Falling into credit energy debt Income Non energy costs £ Energy costs Time (months) Energy payment = residual income excluding energy, i.e. income minus non energy

Using energy payment variation to balance energy cost, non energy cost variations and variable income Income £ Energy plus non energy cost No income Energy cost Time (months)

Information to the supplier • Energy consumption patterns based on meter reads • Weather • Payments by customer to supplier, and account balance • Personal information voluntarily provided by customers including relating to Vulnerability Indicators, including financial condition and thermal need • (Sometimes) personal information relating to eligibility for welfare benefits not currently received • (For some customers in debt) an Income and Expenditure Statement • Credit Reference Agency information • Sometimes – information on dwelling place, occupancy, thermal characteristics and thermal improvement potential (e.g. insulation) • Location, demographics

The supplier debt spiral Default Mutualise

With inadequate regulatory oversight, risk-seeking can be the dominant option for companies Profitable Profit 50% likely Dividends and bonuses £0 Loss Loss making Default costs 50% likely passed on

The supplier obligation spiral Obligation Obligation exemptions cost rises Switch from obligated to exempt Obligations base falls

The connection of the spirals Reduced Increase in obligation base Standard so higher Variable Tariff obligations Cap Switching to costs exempt or Reduction in unsustainable Default Fixed Term suppliers mutualisation Contract prices Increased value More default of exemptions Fixed Risk seeking costs not Default covered mutualisation Default

Conclusions – the issues • In large part due to fairly relaxed credit control in the UK, average unsecured indebtedness is increasing and the associated high interest payments for many people is a hit to income that compromises spend on essentials such as energy • Consumers with challenging finances, especially those in debt, can be avoided by suppliers offering the cheapest products, and hence these customers get left behind • The general unfairness in debt is particularly bad in 2019 , with socialised bad debt costs from suppliers and consumers going to the least advantaged

Conclusions – thoughts on solutions • Avoiding energy debt by early diagnosis and proactive use of prepayment, and level and adequate direct debit payments • Use of Credit Reference Agency information to deter taking on unaffordable debt and enabling access of good payers to supplier products and services • Multi-agency and individualised approach to the salience of addressing debt • Continue to work towards resolution of the tensions in the debate between data/privacy and consumer protection in an essential service • Reducing supplier defaults by more active scrutiny and enforcement

Conclusion The solutions to consumer credit and debt are not easy, as the debates between greater freedoms and greater protections, and between privacy and intrusion, are finely balanced. As a society we have decisions to make and the utilities are wrapped up in this debate, especially as the energy sector enters its greatest ever transformation. On the energy supplier side, there is similarly a debate, also finely balanced, on how much customer money to hold for the purpose of enabling energy payments phased with income. Addressing the risk of default on money-on-account is a more urgent issue.

Thanks Chris.Harris@npower.com