Ovo: the new player in the power game

An energy provider which has just cut its prices? That must be Ovo, founded two years ago by an ex banker. It may have only 50,000 customers, but if I were EDF or E.On, I'd be worried, says Andrew Saunders.

by Andrew Saunders
Last Updated: 09 Oct 2013

With the unmistakable whiff of the MoD common to ex-military locations, a slightly shabby looking office block on an airbase-turned-trading estate in rural Gloucestershire makes a fitting home to one of Austerity Britain's most successful start-ups. Ovo Energy's HQ may not be the last word in glamour, but the firm's commercial performance has been pretty stellar nonetheless. Since entering the domestic energy market in September 2009, this upstart rival to the monolithic big six energy providers has barely had time to draw breath. Founded by 34-year-old former banker Stephen Fitzpatrick, Ovo has signed up over 50,000 customers from a standing start and should be profitable by the end of this financial year. Turnover is an eye-popping £60m, a figure for which most two-year-old start-ups would sell their grandmothers. And it has managed all this in the teeth of the worst recession for decades, which despite being officially at an end still won't go away.

Over the summer, a period in which hardly a week went by without news of price rises from one or other of its heavyweight rivals (the big six have now raised prices rise by around 14.5% across the board), Ovo has even managed to announce a modest cut in the price of gas for its customers. How?

'It all comes down to my belief that the big six aren't as efficient as they should be. Their prices are inflated by inefficiency,' says Fitzpatrick. 'There isn't enough competition in this industry - 13 years ago, you couldn't choose your energy supplier. If there was more competition, then firms which were pricing incorrectly would lose out. That's what supposed to happen.'

For all its impressive growth rate, Ovo remains a tick on the back of the energy elephants - but if Fitzpatrick has anything to do with it, British Gas, EDF, E.On, npower, Scottish and Southern Energy and Scottish Power are soon going to be noticing its bite. Ovo's offering, he says, is based on three key principles: keen pricing, market-leading customer service and a commitment to bring renewable energy to a wider audience. Fitzpatrick, whose only prior experience of the utility business was as a disgruntled consumer, is particularly sold on the potential for improving customer service. 'We make every decision based on the idea there is a customer in the room, listening to us. If we can't explain things in a way which a customer would understand and not think we were trying to rip him off, we don't do it,' he says.

Take, for example, Ovo's novel approach to the thorny issue of outstanding balances. In recent years, customers have become resigned to the need to pay by fixed monthly direct debit to secure the best energy deals. This leads to the running up of substantial positive balances - aka overpayments - during the warmer months, which are then run down when the nation's thermostats are raised over the winter. Added together, those balances make a handy little nest-egg for the provider, which can pocket the return on all that cash held on deposit. Despite this obvious iniquity, Ovo is the only firm in the market that pays interest at 3% on outstanding balances.

In further contrast to its giant competitors, whose marketing is dominated by dozens of tariffs, seemingly designed to bamboozle customers into staying put, Ovo offers only two, dual-fuel, options: standard (which includes 15% of renewable energy, twice the average figure); and a 100% renewable one. This no-nonsense approach got the firm voted number one energy provider in a Which? magazine members' poll recently.

But if the customer is important, so is the bottom line.

Fitzpatrick is an entrepreneur after all and admits energy is a pretty good thing to be in commercially - especially in austerity Britain - because it is not a discretionary purchase. 'People tend to pay their gas and electricity bills if they possibly can,' he says. 'I have always been interested in businesses which are not influenced so much by the economic cycle, where you're not exposed to everybody else's problems. Energy is a huge market, there are 26.5 million customers in the UK, it's stable and you're competing with British Gas and Scottish Power, which nobody likes.' Do it right, he says, and the world's your oyster.

Like those businesses in our feature on 'failing well' (p36), Ovo was born out of an earlier, less well-thought-out venture. 'At university (he studied business at Edinburgh), I ran a student accommodation rental business,' he says. 'It was reasonably successful, but it was never going to be big enough, the market was too small. I could have done it for years and been no better off. So I closed the doors and went to get a job.'

That was in finance, as a trader for JP Morgan, but he was already planning his next step, he says. 'I wanted to do the job for five years to prove I could commit to something. I also knew strong personal finances were key - I remember being in the position first time around where I couldn't commit to the business enough because I had to keep earning a living.'

Although he admits he didn't enjoy banking as much as he thought he would, he stuck to it, leaving after 'five years and a week'. Lean, and dressed down in shirtsleeves and jeans, Irish-born Fitzpatrick looks relaxed and has a twinkly smile, but there's a restless intensity about him that is anything but laid back. He gives the impression that once he has locked his sights on target, nothing and no one is going to distract him from the pursuit.

Why energy? It's hardly noted as a hotbed of entrepreneurial activity, after all. If a contestant were to pitch a utility start-up on Dragons' Den, chances are that Duncan Bannatyne wouldn't be the only to say 'Ah'm oot'.

But that's precisely the point, says Fitzpatrick. 'I was looking for a market which had pretty high barriers to entry, enough to deter lots of small competitors, but low enough that I might just be able to find a way through. Markets which don't have barriers, like small retail and recruitment, are very competitive and attract low valuations as a result.'

You can't fault his bank-bred logic, but can a tiddler with 50,000 customers really compete with the big six and their tens of millions of punters? Aren't its real rivals to be found among the handful of other small providers, like Ecotricity, Ebico and Utility Warehouse, chasing a relatively tiny pool of active (often green) consumers? Fitzpatrick bridles at the suggestion. 'We're not on the same scale as the big six, but we do compete with them. We're signing up between 1,500 and 2,000 customers a week,' he says. Based on Ofgem estimates that 80,000 people switch energy provider every week, that's 2.5% of the market. 'Our customers are not niche buyers.'

His approach is resolutely mainstream, even when it comes to renewable energy - something that has traditionally only been of interest to that aforementioned small band of committed eco-consumers. 'Mainstream green is what we want to be. I'm an absolute believer in the switchover to renewable energy, but it won't happen overnight and you have to take people with you. Singing to the choir won't do it.'

What about the controversial subject of the 'energy mix'? Is wind power really the answer? 'Wind is what we have at the minute,' he says. 'But I'd rather see people using 10% less energy and the country building 10% less capacity as a result.'

Despite the apparent evidence to the contrary, Fitzpatrick reckons small is beautiful, even in this monolithic marketplace. 'This is a systems business; there is no advantage to being big. There ought to be economies of scale, but size brings complexity, which adds cost.' And the big boys are at further disadvantage in comparison to Ovo's state-of-the-art (and very expensive) IT, he adds. 'There is a huge legacy of old systems that aren't customer-centric. The cost of overhauling that legacy would be huge, with no guarantee of success.'

Fitzpatrick is definitely of the 'look before you leap' school of entrepreneurship, and so thoroughly has he thought through the angles he can make it sound a bit too easy, almost preordained. But then come the glimpses of white-knuckle moments, which help to explain why there aren't more eager new rivals in this apparently dead-cert business.

'Getting regulatory approval was really the bet-the-farm moment,' he says. 'The documents you have to fill in run to hundreds of pages, it's not dissimilar to the process you have to go through to start a bank. It cost hundreds of thousands of pounds, almost all the money we had, and took six months.' Six months when they couldn't sell anything and were spending hand over fist. 'The biggest risk was cost overruns - running out of money before we had even started.'

Thanks to the depths of the financial crisis, there was no bank loan or external investor safety net either. 'January 2009 was a black time. Without a background in the energy market no one was going to back us. I was spending my own money.'

Didn't that make him think twice? 'No, because I knew the demand was there. If I'd been opening a coffee shop selling four quid muffins, then I'd have been worried.'

What doesn't kill you only makes you stronger: he reckons that the strict disciplines required from the start bred a lean and efficient foundation. 'We had to be very creative in the way we structured our costs. We moved as much as possible to a variable cost base, and tied down a lot of our suppliers to a cost per customer.' The harsh climate even helped in some ways. 'We did a few deals and hired a few people, that we probably wouldn't be able to now.'

As consumers, we're all familiar with the front-end aspects of the utility business - customer acquisition and service, billing and so forth. The back-end trading side gets less attention, but is at least as make-or-break commercially. 'Demand forecasting, knowing how much energy you are going to need, is key,' he says. And that relies on sophisticated and expensive customer profiling and demand-forecasting IT systems - another major start-up cost. 'We use algorithms which predict, very accurately, that, given x customers, the demand for gas will be y, when the temperature is z,' he says.

Ovo employs two traders - whose desks are immediately outside Fitzpatrick's office, where he can keep a close eye on their screens - to buy gas and electricity on the wholesale market a year ahead, matching purchases month by month to projected customer needs. It then modulates requirements, selling excess or buying top-ups a week ahead of time, matching demand with supply round the clock in 30-minute segments. 'These are big calculations - 50,000 customers, 48 half-hour periods daily for each of them, and there are around 1,000 different types of meter each customer might have.'

One way or another, they seem to be making a reasonable fist of it. 'We are currently 14 months ahead of plan,' he says. 'We were expecting to have 20,000 customers after two years.' Oh yes, true to form, he still has a plan - a 10-year one this time. 'I am a big believer that you can't achieve goals if you don't have them. Our 2020 vision is to have a million customers, be a top 10 employer and have the lowest rate of customer turnover in the industry.'

He also says he wants people to have fun while they are doing it. That's not a word much associated with the kind of call centre work which accounts for a lot of the jobs in the utility sector, but the 100-odd staff at Ovo do seem to be having a good time. Moving to the customer service floor to have his photo taken, it's clear that this moment in the limelight is going to cost Fitzpatrick dear in leg-pulling after we've left. But he grins and takes it on the chin - you can go too far with this austerity thing, after all.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today