Discover how a Profitability and Cost Analysis is critical to stay on top of the energy retail market changes.
Controlling the gross margin and profitability is critical for any organisation. For an energy retailer, the challenge lies with any negative variance in revenue or commodities, network, policies or operating costs compared to its budgetary assumptions as it translates into potential losses.
The "heat was turned up" for energy retailers when the wholesale energy and network costs increased in 2018. OFGEM new domestic price cap to be implemented in January 2019 simply added to the financial complexity: a £1,138 for a dual-fuel annual bill value for a typical household with medium energy usage (1) leaves the retailer with just £20 (1.76%) of earnings before interest and taxes.
Mid 2018, an energy retailer requested solid profitability and cost analysis to support their strategic business decisions particularly regarding tariffs.
Under my supervision as Finance director, the Controlling and Pricing team designed and developed a financial model providing a complete analysis of consumption, tariff and revenue for each customers' segment and cohort.
We used several dimensions to improve the insights, for instance:
- For domestic customers: distribution network area and type and duration of their contract.
- For SMEs: industry and acquisition channel.
The corresponding wholesale energy, network, policy and operating costs were added to the model in order to calculate a profitability per group of customers.
A tariff increase was implemented as a short-term answer to the business profitability issue. The analysis provided Senior Management with insights into the true value drivers of the business and with the right financial information to make business-critical decisions.
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(1) Default tariff price cap for a dual-fuel, direct debit domestic customer with typical consumption of 12,000kWh/year for gas and 3,100kWh/year for electricity.