Smartest Energy tells Janet Wood why it is happy to launch its new retail business in the teeth of a recession.

Smartest Energy's retail arm went live on 16 September and soon afterwards the company celebrated taking on Barnardo's as its first customer. Since then, however, switching has been slow, which is hardly surprising given that the new entrant was hit first by the credit crunch and then by the news that two other independents, BizzEnergy and E4B, had collapsed.

"It's fair to say we are behind schedule," says vice president, commercial, Steve Armitage. But Smartest Energy is keen to get the word out that its business model is very different to those high-profile failures. In fact, Smartest would argue that it is not a new entrant at all, it is a company that has had a generation business for a long time, and now it is simply joining the Big Six in adding supply to its portfolio. Armitage says it has long been accepted that UK companies need to balance out market cycles by having both generation and supply businesses.

"For us it was the natural next step," he says "We began talking about it last year and we got the go-ahead from our shareholder Marubeni Corporation last December."
The centre of the company's existing business is in central London, from where it manages about 1.2GW of power from an array of small generators. However the company found a pool of skilled staff in Ipswich, where Eon recently closed an office.

One of those was Jo Butlin, who has now become vice president of the new retail business. She says the Big Six "are trying to do the right thing on customer service, but they have a lot of legacy issues resulting from bringing together systems, and the consequent data quality is poor".

Green credentials

She thinks key account managers and named customer service advisers will help Smartest win new customers, initially in the half-hourly and eventually in the non-half-hourly market. The company's ability to tightly track the green credentials of the power it sells will also appeal greatly to some.

E4B and BizzEnergy ultimately failed because of a lack of cashflow, Armitage says. He explains: "The market's volatility has made it difficult if you are owned by an investment found or a hedge fund and you can't top up your collateral. The great fear is if you can't hedge long-term contracts and manage the shape in the short term, it means a distressed short position. But Marubeni has invested to provide comfort and make sure we can meet any collateral calls."

Other companies may have been caught out by the market, but Armitage insists the past few years, during which Smartest has been consolidating and trading power from a raft of small, mainly renewable, generators have laid solid foundations.

"The way the market trades does not suit small deals, so it may not match the profile that a smaller company needs," he says. "But we have seven years' of experience in those types of trades on the generation side. We have developed relationships in the market, so we can put out non-standard contracts." Armitage says those relationships - and the deep pockets of shareholder Marubeni - mean Smartest can ride out current market volatility.

Confidence

In the current market, building confidence in the company is vital. But the new retail business also needs to be confident of its customer base. Jo Butlin concedes that the credit crunch is hitting here as well.

"When we started up in September, credit insurers were unable to provide cover for 19 per cent of our potential customers. Now that is 40 per cent, and I can't see it getting any better in the near future," says Butlin.

Without that insurance, energy companies like Smartest are unable to offer a contract and Butlin says it is paralysing parts of the market, making it impossible to offer contracts not just to large energy users, but also to companies of any size whose revenues are being hit by the crunch. This is a real concern for existing suppliers, if they are carrying customers who are no longer creditworthy.

Butlin says the customers also suffer. If they cannot switch supplier, she says, "the incumbent has an opportunity to apply penal rates or increase their margin".
For Butlin, as a new supplier, it cuts both ways. She is not carrying any bad debtors, and although her pool of potential customers has fallen by 40 per cent, the remaining 60 per cent will be "very good quality customers".

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