September 2017

1. September 2017 THE UK ENERGY MARKET SECTOR REVIEW

2. Trends noted in Autumn 2016 market review continue to play out: • Changes in regulations have made markets more transparent and facilitated switching • New competitors with perceived fairer tariffs, combined with increasing use of PCWs, are keeping household bills down • Growing penetration of smart devices in homes, cars etc. are helping to make consumers better informed over energy usage and potential savings • Experts predict 17% sales growth in 2017 (US in-home smart device penetration is c. 10%, Uktbc) • Consumer trust in energy suppliers slowly improving Forthcoming regulation and the `drive to renewable energy sources will disrupt market further: • Experts predict energy brands’ propositions will change from supply to service management, with individual household usage/cost overseen by supplier • Clear implication for brands to position themselves around a service positioning • Understanding customer usage/behaviour patterns and targeting relevant and potentially complex messages is key first step ENERGY MARKET IS EVOLVING … … SLOWLY Sources: McKinsey ‘Connected Home’ 2016

3. THE ENERGY MARKET ‘TRI-LEMMA’ Long-term challenges facing the UK’s domestic energy have been dubbed a ‘Tri-lemma’: • De-carbonisation: drive to renewable energy • Affordability: focus on smarter usage and lower costs • Security of supply: by 2020 60% of the UK gas supply is set to be imported, rising to 90% in 2035 Key trends putting the squeeze on energy since 2000: • 12% rise in household numbers • 10% population growth • Huge growth in number of products consuming energy • Brexit effect on economy and confidence In contrast: • Recent, dramatic decline in consumer confidence and greater focus on household costs intensified with Brexit vote • Drop in domestic energy consumption of 19% since 2000 • Average 20% increase in energy costs since 2010 • British Gas are latest to announce 12.5% rise in electricity, 7.3% in Dual Fuel, following other suppliers incl. SSE, Npower, E.On • Cheapest fixed rate has risen by 12% to £833 pa since April Despite smarter, reduced consumption and move to alternative energy, 2020 targets for reduced greenhouse gas emissions unlikely to be met, putting pressure on regulators and suppliers to do more. Mooted changes to tax laws include proposal to price carbon according to supply and demand. CPI for gas & electricity British Gas raises electricity price by 12.5% Emily Gosden, Energy Editor August 1 2017, 9:00am, The Times Sources: ONS; PwC Energy market report; Dept of Business, Energy & Industrial Strategy 2016 CBI: Climate Change, everyone’s business 2016 ; Times 01.08.17; Telegraph 01.08.17

4. GOVERNMENT COMMITTED TO CHANGE 2013 Ofgem Retail Market Review has led to reduced number of tariffs, improved information, enforceable standards, with aim of installing 53m smart meters in 30m homes by 2020 July 2017 Ofgem announced tougher price control policy taking effect from 2021 2016 average annual household energy bill of £1066: -20% vs 2015 Government programmes continue to drive reduced domestic usage: • >60% houses now have insulation • Average savings of £66pa in smart households • Subsidies offered for renewable energy Ofgem will pilot a database with details of customers on an expensive default tariff for three years, to allow rival suppliers to offer better value deals and encourage switching Western Power Distribution trial obtained better results from households with automated devices controlling energy usage than households without: suggests future positioning as service brand managing energy supply, rather than as energy supplier “Smart meters will act as the gateway to enable other household appliances and services to change how and when people use and sell power. Time of use tariffs, smart appliances and battery storage should allow consumers to manage their demand more flexibly. Homes with solar panels on the roof, storage batteries in the garage and electric cars in the drive will be able to sell surplus back to the grid when it is needed.” Dermot Nolan, Ofgem June 2017 Sources: OFGEM; Energy Live News, Energy UK July 2016; Energy UK Dec 2016

5. TRIALLING LOYALTY: LATEST MOVES Continuing government-led push to trial and/or expand loyalty programmes: • ‘Sticky customers’, who have not switched from standard variable contract for 3+ years, a key target • Research suggests customers happy with brand/supplier and deal, but would like to be rewarded for loyalty Examples of current offers from major suppliers: • British Gas investing claimed £100m in loyalty scheme, offering long-term customers better tariffs, deals on smart home devices, home insurance and subscriptions with partners including Sky • Launch of EDF ‘Cherries’: “a range of exciting offers and deals from EDF Energy and other brands”, in addition to ongoing offers on boiler check/service, home insurance protection products and energy saving suggestions • Npower offers include discounts on NOW TV subscriptions, smart home devices, home insulation and boiler service/replacement SUGGEST THE INDUSTRY IS LISTENING Sources: Daily Telegraph, Jan 17; energy brand websites

6. CONSUMER TRUST IN ENERGY SUPPLIERS Latest survey data suggests improving reputation: • 65% (+10% vs 2015) trust in suppliers, stable vs previous year • 80% (+6%) agree easy to switch • 68% (+9%) agree easy to deal with supplier • 71% (+6%) find clear information on my account New entrants using market dissatisfaction to challenge Big 6: • Independent providers have grown share from 9% to 13.4% (2011 to 2016) • 82% claim to trust small suppliers vs 63% large • Ovo and First Utility top most trusted brand table • E.On top of Big 6 suppliers (79%), Npower bottom (67%) June 2016 switching reached new high: • 360,000 customers switched suppliers, + 58% vs June 2014 • Of these 33% switched to small/mid tier suppliers • 51% switchers used a price comparison website vs 40% in 2014 IMPROVING SLOWLY • “The big 6 have repeatedly failed to deliver a decent standard of service, so it’s no wonder customers are leaving them in droves. .. We now need radical change to boost competition and introduce fairer prices.” • Richard Lloyd, Director, Which? Sources: Competition and Markets Authority report, Consumer Association Ipsos MORI : Consumer experience of energy market 2016

7. CONSUMER ENGAGEMENT STILL A Energy market described as a ‘confusopoly’: • 86% need energy company that puts consumers first • 62% believe my supplier benefits at my expense • 58% say energy companies are all the same • 72% never switched tariff with existing supplier, did not know it was possible or did not know if they had done so Ofgem‘Future Insights’ report: two-thirds householders are disengaged, paying more for energy than customers who have switched suppliers: • 21% energy users labelled ‘Unplugged’ or least engaged • ‘Unplugged’ households most likely older, on lower incomes, in rented accommodation, with fewer qualifications and less tech-savvy To date, households had little incentive to engage positively: • No quality differentiation: product is invisible until something goes wrong • Price the most important characteristic when choosing supplier and/or tariff Trials suggest behaviour change alone is unlikely to shift consumer demand patterns as much as automated responses from smart devices: • Opportunity for energy suppliers to incentivise take-up of in-home smart devices, in order to capture/analyse data and offer real-world advice on energy usage Recent moves by some suppliers (EDF and E.ON ‘free boiler cover’) suggest new focus on improving consumer engagement/loyalty. But enduring engagement/loyalty is only likely to be gained if suppliers can: • improve transparency, particularly over costs • reassure that personal data will be held securely CHALLENGE These audiences don’t intend to change energy suppliers in the next year: DE social class (73%) Rural Dwellers (73%) Disabled (74%) 65+ (78%) Sources: Ofgem Retail Market Review , Ipsos MORI: Consumers’ experience of the Energy market

8. GDPR MAY IMPACT SIGNIFICANTLY General Data Protection Regulation (GDPR) laws to be enforced from May 2018 • Wide-ranging security, protection and privacy laws aim to give consumers greater control of personal data • Onus on businesses to record exactly how data is collected and processed, what permissions or consents exist Rules around First vs Third Party data clarified: • First-party marketing to existing customers/warm leads requires opt out message • Third-party marketing to cold prospects requires them to have previously opted in, meaning data sourcing with correct proof of consent much harder New laws will affect energy suppliers/brokers, particularly where service extends to smarter energy use rather than simply supply SIX STEPS PREPARING FOR GDPR Map data flows Set up project team Check data consents Best Practice data capture & consent “Robust data handling procedures and cyber security will be important to ensuring consumers are confident in allowing firms to use their personal data. Some demand-side response activities may enable third parties to control appliances remotely. Secure systems will be needed to mitigate harm to individual consumers and potential adverse impacts on the wider energy system.” Ofgem Future Insights 2017 Test retention/acquisition with Mail and Door Drop Evaluate, iterate

9. PLATFORMS FOR ENGAGEMENT: SPREAD Multiple opportunities to stimulate dialogue positively, rebuild tarnished reputations: • 66% adults interested in fridge technology that runs automatically when energy is cheaper • Green home technologies e.g. affordable homes constructed from sustainable wood or high-insulation hemp and lime • More efficient white goods conserve water and electricity usage • Smart-meters show energy costs/savings • Ways consumers can generate their own energy • Programmes to test/implement measures providing additional or alternative information on energy value/usage • Review/change information provided on domestic bill Prize for successful energy brand is to reposition as service provider: • Facilitate take-up of smart devices to give ongoing read on consumption • Automated data collection becomes basis for smarter usage patterns • Energy provider takes over challenge of supplying power in most cost-effective way from householder • Build on current promotional strategies, especially with provision of multiple services incl. broadband, mobile • Consider reward strategies as competitors start to trial loyalty programmes Unique challenges facing energy suppliers’ messaging – engaging customers in inherently uninteresting market and explaining complexities of ‘smarter’ usage – can be solved by mail/door-drops: • Analysis of individual household energy usage/behaviours the pre-cursor to relevant, targeted messages • Print medium allows clear explanation of complex technology and/or supply management GOOD NEWS ON ENERGY Sources: OFGEM; Energy Live News, Energy UK July 2016 ; ‘Lean & Green’ Mintel