Centrica CEO happy to come in third
Chasing Texas brands, the UK-based company has found a comfortable niche in electricity market
The retail electricity market in Texas is undergoing consolidation as the biggest players gobble up smaller rivals. The pecking order hasn’t changed in the shuffle — Houston and New Jersey-based NRG Energy is still the biggest, selling under brand names like Reliant Energy and Green Mountain Energy, while Irving-based Vistra Energy remains No. 2 with its TXU Energy brand. British-owned Centrica, owner of Direct Energy, comes in third.
But Centrica, which supplies about 25 percent of electricity and natural gas in the United Kingdom and about 10 percent of the electricity in Texas, finds that the third place niche is a fairly comfortable place to be. It is expanding its service offerings in Texas to include home warranties and home security systems, moving more aggressively into back-up power generation and has its checkbook ready when it finds a good deal. In October, Centrica’s Direct Energy bought the retail electricity business of one of its competitors, Sugar Land-based and Australianowned Source Power & Gas, a deal which added 4,000 commercial and industrial customers in seven states, including Texas.
The company is also experimenting with new products. One incorporates a remote home monitoring function that learns behavior patterns and can alert caregivers if something is amiss if an elderly parent fails to make coffee or doesn’t turn on the television like usual. The monitoring platform is tied to the company’s remote electricity management tool and has proved to be popular with customers because it’s not intrusive yet gives the people being cared for comfort that loved ones are keeping track.
Iain Conn, group chief executive of Centrica, was in Houston recently and sat down with Texas Inc.
Q: What is the biggest challenge facing you in the electricity market?
A: The market is highly competitive and what customers want from an energy company is continuing to change. There are a proportion of customers who just want fixed price energy at the cheapest level possible and they don’t mind who they get it from. It’s actually very hard to make good margins on that basis.
There are other customer segments however that are interested in more than energy supply. They’re interested in peace of mind, of knowing that their homes are okay, that they’re able to operate their home when they’re not there through technology, and if something goes wrong, someone’s going to come and fix it. Those segments allow us to offer all of those other things as well as energy and those customers tend to be longer lived with us, and they tend to be more appreciative of what we offer them.
We are very focused on acquiring and retaining all customers of course, and one of the biggest challenges is the churn rate of about 2.5 percent a month.
Q: Are you concerned that Irvingbased Vistra is buying Crius Energy of Norwalk, Conn., in a deal that will make Vistra, the owner of TXU Energy, an even bigger competitor?
A: Look, we’re at 10 percent. We’re still a very large part of the market. Industry consolidation in itself is not necessarily a bad thing as long as it’s going to help consumers ultimately get better service or more value. We just bought an energy book here in Texas called Source. Last year we bought a business book from BP in Ohio.
Obviously, there are regulations and concerns about companies’ market shares getting too large, and in the United Kingdom we are the largest energy
supplier with about 25 percent of the market. And people are constantly competing with us to take our customers. I think that’s a really healthy thing. So, I believe very much in competition and consolidation is net, a good thing in my view, and there are safeguards for customers if anyone gets too big.
Q: Centrica is itself a product of consolidation, yes?
A: Our origins go back to the Second War of Independence in the United States in 1812. We actually started out as the Gas, Light and Coke Co. and brought the first gas lamps to London. We still light all of the old-fashioned gas lamps in London and maintain them every day. There are about a thousand of them left and we’ve been doing that since 1812.
Q: You mean just like in the new movie “Mary Poppins Returns,” when one of the characters worked as a “lerrie,” a lamp lighter who travels by bicycle and carries a ladder to light the street lamps each night?
A: Absolutely.
Q: You have branched out into home warranties, home repair and smart devices that allows your customers to remotely control their electricity. Are you making more money with those services than you make selling power plans?
A: We are in established markets for energy so we’re in the United Kingdom, Ireland, Alberta and the lower 48 in the U.S., mainly concentrated around the Northeast and in Texas. And what you’ve seen over time is that the unit margins for just selling energy have been coming down. Typically they’re 6 percent to 16 percent of gross margin but with services, it’s typically 20 percent to 40 percent. So people are willing to pay more for them because they give customers what they need and want rather than just a straight-forward commodity. We expect that business to grow.
Q: Can you talk about the trend toward distributed power where businesses and consumers produce their own back-up electricity.
A: As society has been getting more concerned about climate change, people have been pursuing more lower carbon technologies like solar energy and wind turbines. People are starting to realize they can put them on their homes, they can put them in their businesses and on top of their factory roofs. People are also using batteries to store energy.
Bigger business customers can make their energy production much more efficient if they replace an old-fashioned boiler system with a combined heat and power unit, which is one of the things we sell. Waste heat from the engine that’s generating the power is captured and used to provide heating as well as electricity generation.
The other thing customers often have is backup generation at their site, and historically that’s just been in case the grid goes down. But what customers can now do is offer up that generation, something we call demand response. One of our customers is the New York Times printing press in Queens and we can take their backup generation and offer it up if the New York City grid operators see a surge in energy demand.
Another example is H-E-B. We are installing rooftop solar for them at 50 sites which will help them use less energy. But we still are their energy supplier and because we’re providing these distributed energy services, their satisfaction with us is much higher.
That part of the business is growing rapidly with orders last year growing by 158 percent. We’re finding customers are loving it.
“Industry consolidation in itself is not necessarily a bad thing as long as it’s going to help consumers ultimately get better service or more value.”