Paul Massara, RWE npower

8 April 2013

RWE npower’s new CEO, Paul Massara, tells Peter Curtis how he plans to improve the company’s reputation – and why it’s time for an “honest conversation” about the effect of government policy on our utility bills.

RWE npower’s new CEO, Paul Massara, tells Peter Curtis how he plans to improve the company’s reputation – and why it’s time for an “honest conversation” about the effect of government policy on our utility bills.

He’s been in the job for only three months, but Paul Massara, chief executive of energy firm RWE npower, has already set himself a tough challenge: to give its customers the best experience in the industry by 2015.

Given that npower ranks last of the UK’s big six energy suppliers in Which? magazine’s customer satisfaction survey, and received the second-highest number of complaints (4,001 per 100,000 customers) in Q4 2012, this is nothing if not ambitious. 

“We recognise that there’s a huge amount that we need to change,” he says. “I don’t want to be number six for customer experience when I wake up in the morning.”

In part this reflects a structural reorganisation at the firm’s German parent company, RWE. In January it consolidated its traditional generation activities in the UK, Germany, Belgium and the Netherlands into one pan-European organisation, turning npower into a standalone retail business

But it’s also a response to what Massara admits is “a fundamental breakdown of trust” in big businesses such as energy suppliers, supermarkets and banks.

He argues that a once-paternalistic relationship, in which corporations told consumers they could be trusted to look after them, has broken down as people enjoy greater access to information thanks to the internet and freedom-of-information laws.

“Consumers have said to companies: ‘Actually, you know what? You weren’t looking after me or putting me first; you were doing what was right for you.’”

This problem cannot be solved simply “by telling somebody to trust you. You need to have the intent to say you’re going to get it right. Then you deliver on your promises to customers every day.” 

For that reason, npower decided to make a public commitment, which also demonstrated to its employees that it was serious, according to Massara. 

The company has sought feedback from both consumers and staff, identifying 360 things that it could do better for customers. “It’s not a one-off change; it’s a continuous improvement process,” he says. “It all starts with that cultural belief that the customer has to be at the heart of your business.”

That means breaking down organisational silos and taking greater account of consumers’ changing expectations. “For instance, ten years ago you’d have gone to the airport to check in and pick up your ticket. 

Five years ago you’d have printed it at home. Today you want it on your mobile phone. Consumers’ tastes change – and by listening to them we can change around them, not for us.”

But restoring trust will be tough for an energy firm – five of the big six, including npower, have been the subject of a mis-selling probe by regulator Ofgem. And the political climate is rife with accusations that the utilities are profiteering, as energy prices rise far above the rate of inflation. 

In November npower announced an average 8.9 per cent increase in its bills. Massara says he “completely understands” consumers’ concerns. “If you take average earnings to be £26,000 and the average bill to be £1,300, that’s a huge percentage. 

Fuel poverty isn’t going away. If anything, it’s getting worse. We do an awful lot to help people in need – I regularly listen to their calls. We as an industry and government need to work together on this problem.”

He welcomes Ofgem’s recent proposals to simplify tariffs. “This is a helpful move. I don’t think the energy industry has been as transparent as it could have been,” Massara says. 

But he’s less sure about some of the details, particularly the proposed cap of four core tariffs. “There’s a trade-off: if you over-simplify, do you get the competition, choice and innovation that you require? We’re also moving into a smart world with more data. We’ll probably need more tariffs for time-of-use meters that can really reflect a consumer’s needs.”

Massara believes that energy companies should follow the example of petrol retailers by explaining how energy bills are composed and the reasons for any increase

“It’s about giving people the options – telling them how they can save energy and manage their bills, and what the right tariffs are for them.” 

But he accuses the government of playing “cheap politics by trying to bash the energy companies”, pointing out that no more than half of a typical bill is under the provider’s control. 

“It’s time for an honest conversation with consumers to say: ‘Actually, your bill is made up like this and government policy will effectively have costs.’ The government has chosen – for good reasons – to aim for a low-carbon economy. 

But we know that onshore wind has been more expensive. The honest conversation is for government to admit that its policies are adding to consumers’ bills. Unfortunately, politicians find it easier to make headlines about our profits.”

RWE npower announced a 24.6 per cent increase in operating profits to £390m across its retail and generation activities in 2012 (revenues rose 14.7 per cent to £7.7bn). 

“We’ve invested over £5bn in the UK in the past six years, so it’s not really surprising that our profits should be going up – we should be getting some return on that capital,” Massara says. “The reality is that in 2009, 2010 and 2011 we lost money in the domestic retail business. 

And in 2012 we made a small profit. People talk about the industry’s average margins being about five per cent. We’re talking five pence in the pound for all that employment, capital and regulatory risk. It’s not a big return for the risk we take.”

As Business Voice went to press, npower was facing criticism for paying low levels of corporation tax in 2009-11. In a statement, the company said that this was because of the losses in its retail business and a large increase in tax relief owing to its investment of “hundreds of millions to keep the UK’s lights on”. 

Policy priorities

The UK is at a critical juncture with regard to energy policy. Massara argues that a fair return, coupled with policy certainty, will be necessary to attract the pension funds and other long-term investors needed to provide the required £110bn capital injection in Britain’s energy infrastructure.

The energy bill, published in November, is the government’s attempt to attract that £110bn and safeguard access to secure and affordable supplies while meeting its carbon-reduction targets. 

About one-fifth of the UK’s current power-generating capacity is due to close over the next decade as ageing coal-fired power stations (including npower’s Didcot A in Oxfordshire) are shut in order to comply with EU environmental laws. 

And there have been significant delays in bringing in new nuclear plants and offshore wind to fill the gap. 

Although EDF Energy recently received planning consent to build two new nuclear reactors at Hinkley Point in Somerset, negotiations are still in progress on the “strike price” – the amount the government will guarantee for electricity generated at the plants under “contracts for difference” (CfDs).

There have been some fairly alarming warnings from senior industry figures in the past couple of months. Alistair Buchanan, chief executive of Ofgem, said that Britain faced a “horrendous” gas supply crunch that would lead to higher energy bills, as the nation’s reliance on imported gas increased and the global market tightened.

And Sam Laidlaw, chief executive of British Gas’s owner, Centrica, warned the Financial Times of the risk of rolling power cuts by 2017-18 if the “reserve margin” – the surplus generation capacity compared with actual electricity demand – falls as expected. 

So does Massara think that the nation will keep the lights on over the next decade? “Yes, I’m confident we can. I just think we need clarity and a long-term plan that everybody can get behind,” he says, although he acknowledges that the margin looks tight. “In effect, we have to manage a transition from this position where many of the country’s coal plants are being phased out to a new generation mix: is it coal, is it gas, is it nuclear? 

People are making decisions on a long-term basis, investing in a plant that can take three or maybe eight years to build and then running it for ten or 20 years. You need stability in decision-making and clarity – and previous governments haven’t always given us that.”

The energy bill is a “good and helpful” development and it needs to be pushed through, Massara says, but he adds that the House of Lords needs to take a close look at the powers the legislation would grant the secretary of state for energy and climate change to “make arbitrary decisions without judicial review”. 

And he warns that there’s a lot more detail to be worked out before the necessary certainty is achieved with regard both to CfDs, which are intended to stimulate investment in low-carbon technologies such as renewables and nuclear, and to the capacity mechanism, which is designed to encourage generators to invest in power stations (particularly gas-fired) that will act as a back-up when extra supplies are needed to match peaks in demand. 

Electric dreams

Massara believes that the capacity mechanism will be beneficial in aiding the transition to new forms of supply, but argues that it should be broad-based, with all forms of generation allowed to take part in the auction of capacity, in order to keep prices down. 

And, while he thinks that CfDs will, despite some problems with the transition from the current renewables obligation, ultimately help to bring clarity and create a better environment for renewables, he stresses that they need to be set at the correct level.

So what is the appropriate energy mix for the UK? Massara says that a key priority is to achieve security of supply. Then it comes back to the trade-off between cost and cutting carbon dioxide emissions – and the need for transparency about that. 

“The imperative at this stage is to meet the country’s energy requirements at the cheapest possible price. We don’t want to get into a situation where industry can’t be competitive because its energy costs are too great. We know that we want to move to a smarter, greener economy and, as we do that, we believe we can create the jobs that this country desperately needs.”

Policy should not be “about picking winners”, he adds. “We need a framework that allows the market to decide on the right product and when to invest.” 

In particular, he questions the affordability of the drive to develop a new generation of nuclear reactors. “I don’t have a problem with nuclear. The issue is its relative cost,” Massara says. “Is signing up to a 35-year deal with a strike price going to be the right deal for consumers when I can build gas power stations in three years and I know how efficient they will be?” 

It’s an unsurprising argument, seeing that npower withdrew from Britain’s nuclear new-build programme last year when it sold Horizon, its nuclear joint venture with E.ON, because of economic uncertainty and the impact of Germany’s decision to stop using atomic power. 

Given that 95 per cent of the electricity produced by the RWE group in Britain last year came from fossil fuels, and that it has opened two gas-fired power stations in the past three years, this seems suspiciously like special pleading. 

But Massara insists that he’s questioning the affordability of nuclear on behalf of consumers. “Their bills are going up because of all these different policies.” 

The investment case

So what does all this mean for RWE’s plans for its British operations? “We’ve been a significant investor in the UK and are the largest investor in renewables,” says Massara, who as well as being npower’s CEO is RWE’s national representative in Britain.

“But the economy has changed and the environment for power generation has worsened. The capital programmes we’ve had in the past cannot continue, so we’re having to scale back and be much more selective with our investments.”

Sixty per cent of RWE’s UK investment since 2006 has been in renewables. The group has a number of wind projects that it will continue developing through the RWE Innogy subsidiary, including a 60 per cent share in the €2bn Gwynt y Môr 570MW offshore wind farm in Liverpool Bay.

It has also converted its Tilbury B power station in Essex to run on biomass, using sustainably sourced wood pellets.

“We will continue to invest in renewables but we won’t be growing them at the same rate,” Massara says. “I think many of the utilities will be scaling back until we see the returns that make it sensible for us to reinvest. We need to have clarity from the energy bill.”

The company has also invested in two new gas-fired power stations – at Pembroke in Wales and Staythorpe in Nottinghamshire – both of which use the latest technology to emit far less carbon dioxide than equivalent coal-fired stations would. But these have been running below capacity.

This is because European suppliers are taking advantage of the fall in coal prices that has resulted from the increased availability of even cheaper shale gas in the US. “Our gas plants aren’t making the returns we expected and they’re barely covering their cash costs,” Massara says.

It’s the increasingly international nature of energy that’s behind RWE’s decision to consolidate its traditional generation activities into one pan-European business. 

“There are big impacts happening across Europe. We’re in a global market for energy – and capital can go to any market where it needs to be. 

So we have to ensure that on a European basis we run our fleet as efficiently as possible. Putting the generation businesses together allows us to look at savings and efficiencies that we couldn’t achieve country by country.” 

Capital is mobile in a global energy market – something for our politicians to ponder as they seek that £110bn investment.

A partnership model to save energy costs »

It probably won’t come as a shock to anyone to learn that businesses can expect to see their energy bills continue rising over the next few years.

“I think there is upward pressure on prices – forget about the commodity side; just purely in the other areas, such as network charges and some of the other charges coming in through government,” says Paul Massara. 

But he adds that the relationship between businesses and their energy providers is changing to more of a partnership rather than “negotiating the next 10p or 20p discount per megawatt. 

We have big clients coming to us saying: ‘I want to sign a ten-year deal with you. We’ll set it at market price, but I want to work with you to save ten per cent of my energy costs over that period.’”

One example is npower’s work to help McDonald’s become more energy efficient. It provides metering, measurement and monitoring across the restaurant chain’s outlets, enabling it to identify whether one franchise is using energy far more efficiently than another and suggest potential changes in, say, the refrigeration process.

The company has also worked with part of Sainsbury’s supply chain for dairy products to ensure that the energy input to milk production is cost-effective. 

“That’s a saving that works all the way up,” Massara says. “It’s about being much more creative, it’s about partnerships, it’s about helping customers to manage their energy bills. We foresee much more of that going on in future.” 

He adds that npower is already recognised for its expertise in the commercial market, picking up the prize for best risk management product and service at the Energy Awards in 2011 and 2012. 

But he would have liked the coalition’s energy bill to have been more imaginative on demand-side management and encouraging industry to cut its power consumption. 

“If you can reduce demand, it’s cheaper than having to build a power station,” he says. “Having spent time in Canada, I can tell you that we’re behind the curve on energy efficiency in the UK.”  

A European conundrum »

David Cameron’s promise of an in-out referendum on Britain’s EU membership if the Tories win the next election has caused concerns that foreign direct investment in the UK could be undermined. 

What would a referendum mean for npower’s parent company, RWE – a big German investor in Britain?

Paul Massara believes that the prime minister has got his facts right about the challenges in Europe, but “the concern we have about the way the referendum has been laid out is that it’s a bit like saying: ‘I want to be part of the club, but it has got to change its rules for me because actually it isn’t that great.’

“The trouble is that the club has got a bigger set of problems called the euro. My concern is that, by the time you have the referendum, [the other eurozone members] will have had to become more closely integrated to solve their bigger problem, which means that we’ll have a starker choice between a more joined-up Europe or not. That creates some uncertainty,” he says.

Would it stop RWE’s investment in Britain? “No, we’ve invested a lot here.” (The UK represented almost a fifth of total group revenues last year.) “We know this market and it’s a great market. We enjoy it.