Iain Conn: We have to change the nature of our relationship with the customer

It has been anything but plain sailing, but Iain Conn is content that the super tanker that is Centrica is now well and truly turning around.

After three years at the helm of Centrica, Chief Executive Iain Conn admits – in an interview published in the Financial Times – that it has been a “challenging” time for the company, but says he is confident of the course being plotted. The strategy, he believes, “is right for us”.

Since he took over in 2015, the slump in oil price has impacted the global energy market, the company has launched an efficiency programme to save £1.25 billion a year, and the UK government has proposed a cap on household energy bills.

It has been anything but plain sailing, but Iain Conn is content that the super tanker that is Centrica is now well and truly turning around.

Clarity of purpose

When Mr Conn arrived from BP, with the crude oil price collapsing, he moved to stem the losses by cutting the dividend and reducing Centrica’s exposure. “With hindsight, I think we over exposed ourselves to exploration and production - and I think we were starting to confuse our shareholders about what we were all about,” he told the Financial Times.

His subsequent review involved a “fundamental analysis” of what was going on in the energy sector. Mr Conn characterises the collapse in commodity prices, heightened competition and political involvement in the market as meaning the company had been “running up a down escalator” for the past few years.

“In response, what we’ve had to do is drive efficiency and capital discipline as hard as we can, while also creating the ability to grow gross margins,” Mr Conn added.

A new model for growth

Centrica is now in much better financial shape. It has paid off half its net debt, delivered three years early on a promise to cut costs by £750m a year and avoided further reduction in the dividend. “I believe we have got to first base,” said Mr Conn, but admitted that “what we haven’t yet done is demonstrated that we can grow”.

The chief executive believes that growth will come from adding new services on top of energy supply. Energy companies, he said, have to change “the nature of the relationship with the customer”.

The traditional centralised model of energy supply is rapidly becoming outdated. The future is about low carbon sources of generation, increasing digitisation and decentralisation.

Mr Conn has invested heavily in new businesses, notably Centrica’s Connected Home business and the Distributed Energy & Power unit. The divisions each have a target of delivering £1bn in revenues by 2022.  There is, said Mr Conn, “quite a long way to go,” but pointed out that growth rates have been high.

Investors shouldn’t focus just on these two businesses as the company’s entire future, said Mr Conn, “Don’t think of these as being the lifeboats for Centrica on their own”. Instead, he said the growth will come from a wider front, as the energy market is reshaped.

Green shoots

Centrica wants to reward loyal customers who want additional information from Centrica about their energy usage. Businesses in particular will value hard facts about the efficiency of the equipment they use to power their operations.

The company also sees a lucrative market in providing distributed energy, which bypasses the central transmission grid and is seen as a big growth area as renewable energy becomes more prevalent. Centrica’s recent contract with St George’s Hospital, for example, included the installation of two combined heat and power units that will save the hospital £1m a year in energy costs.

Centrica has also announced the sale of its 20% stake in eight existing nuclear power stations that it co-owns with France’s EDF. A potential buyer is seen as China General Nuclear which is already a partner with EDF in the Hinkley Point C new nuclear station under construction in Somerset.

When it comes to the challenge of the looming price cap, Mr Conn believes Centrica will be able to maintain its profitability. “We are much more competitive than we were,” he said.

And that’s a message he wants people to hear after a challenging period for the company. “I am not going to sugar-coat the fact that people have not felt great about all the change and all the challenges,” he said. “But there are green shoots beginning to appear.”


Read more in The Financial Times article “Conn hopes pain will lead to gain for Centrica”, available to subscribers.