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The birth of Powershop

It’s a decade since Kiwis could pick their power provider—and yet reading your power bill is an exercise in frustration. What if you could buy your power from anybody—the cheapest, the greenest, or the most socially involved—and never receive a ‘bill shock’ again? That’s the promise of a new Kiwi startup—and it will even let you launch your own power company. meets the bright sparks behind Powershop

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Simon Coley & Ari Sargent Photographed by Mike Heydon

It’s a decade since Kiwis could pick their power provider—and yet reading your power bill is an exercise in frustration. What if you could buy your power from anybody—the cheapest, the greenest, or the most socially involved—and never receive a ‘bill shock’ again? That’s the promise of a new Kiwi startup—and it will even let you launch your own power company. meets the bright sparks behind Powershop

On a sunny day in mid-January, Idealog once again finds itself in the offices of a Silicon Welly startup with aspirations well beyond its size.

Only today there is sobering news on the wires. Ferrit, the online retailer that was the big e-commerce hope of owner Telecom, has shut its doors with the loss of 37 jobs and an estimated $40 million in investment.

Many will just be glad to see the torturous Ferrit ads off our screens, but for Ari Sargent and Simon Coley, the founders of online electricity marketplace Powershop, it’s a grim reminder of the way the majority of commercial dot-coms end up.

Che Guevara scowls down from a Powershop poster on the wall of the company’s open-plan office. Its slogan, ‘Power to the People’, is equally revolutionary—not something you’d normally associate with the electricity industry.

Despite 20 years of liberalisation, the creation of a wholesale market for electricity that effectively means anyone can sell it, there hasn’t been too much to get excited about for those of us flicking the switch. “The electricity market is saturated with bland offerings,” says Sargent, an electrical engineer who has spent a career visiting places like Meremere, Huntly, Waitaki and Manapouri—the places our power comes from. “People struggle to make meaningful comparisons.”

The result is information asymmetry—where most consumers don’t have the information they need to make an effective choice. In New Zealand, some power retailers don’t even have their prices listed on their websites.

Powershop, a spin-off startup from state-owned power generator Meridian Energy, hopes to change that with the help of some clever web technology. The promise is not just cheaper power, but the ability to change electricity provider at the drop of a hat and to more closely monitor your power usage so you can cut down on your power consumption.

The electricity market is saturated with bland offerings. People struggle to make meaningful comparisons … suppliers assume they have a customer for between five and seven years. If you change that, you really open the game up

“The balance of power is shifting,” says Sargent, who witnessed first-hand the break-up of the Government’s Electricity Corporation and the reforms that moulded the current shape of the electricity industry. “Electricity providers kind of assume they have a customer for between five and seven years. If you change that, you really open the game up.”

Powershop emerged as the result of a black room project to secure Meridian’s future in the retail electricity market. Although it’s the biggest generator of electricity in the country, Meridian is a relatively small player in retailing electricity to businesses and consumers.

“At that level, it’s harder to get the economies of scale that the big players have,” says Sargent. “It was obvious that if Meridian was going to stay in retail and do so profitably, it needed to find a smarter way to do it.”

Three top-secret ideas were put on the table in 2006. The first was simply to make the existing business better—cut costs and yet make it more profitable. Meridian turned a full year profit of $129 million last year, but that was down from $241 million in 2007. A bad winter like last year’s, where drought drained reserve capacity in the dams Meridian relies on, can devastate the company’s bottom line. The retail electricity market also operates on tight margins. Cost-cutting is the only way to lessen the impact.

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Another idea was to prepare the way in New Zealand for the introduction of electric cars, creating a grid allowing motorists to plug into charging stations while they’re parked. “But that’s a very early play,” says Sargent. “The fruits of that would be a number of years away.”

The third idea was to turn electricity into a fast-moving consumer item—literally putting it on supermarket shelves. It would involve shoppers buying electricity tokens or top-up cards in supermarkets, a concept that has taken off overseas, but Sargent says “cost and logistics” forced them away from that model towards the Internet. And so, Meridian flicked the switch on the Powershop project.

Sargent quit his job as head of strategy to head up Powershop in late 2006. Coley arrived later—“a fortunate accident”, says Sargent. Coley was working on another Meridian project but a shortage of desk space left him squeezed in with the Powershop team, and he quickly decided Powershop was the more interesting endeavour.

An advertising and design guy from way back, Coley was behind New Zealand Trade & Enterprise’s Better By Design brand and had a hand in the successful marketing campaigns that helped lift vodka maker 42 Below to international prominence.

The two set about building an online marketplace for electricity that would make buying power more akin to buying, say, groceries. You could chop and change supplier as often as you liked based on the deals on offer, without the traditional hassles associated with switching electricity provider.

But the idea goes further than that. A series of fancy forecasting tools and power usage graphs allow users to easily gain a clear picture of their power usage and how it’s changing over time. “The average person struggles to understand their bill,” Coley says. “Consumers find it hard to make meaningful comparisons between companies and tariffs. And they’re frequently surprised at what they pay, particularly in winter.”

That ‘bill shock’ evaporates online because Powershop users effectively prepay for electricity, choosing a power plan to cover their forecast usage. In a bid to simplify electricity pricing, Powershop’s plans feature a per unit charge only—typically between 18 and 22 cents.

“Powershop will forecast how much you use per day. You buy enough to cover your usage,” says Sargent, who has been trialling a group of users on Powershop for months. “People on the pilot prior to joining had no idea about the level of their consumption. They’re now actively looking at their daily average in units.”

Eventually power companies will use smart meters to take readings remotely, removing the need for monthly visits by meter readers. Genesis Energy, Meridian and Mercury all plan to install wireless meter readers for many of their customers. For Powershop, the move will also mean more accurate readings though Sargent expects it to take up to five years for smart meter use to be widespread.

There are other forces working in their favour, says Coley. Combine the threat of climate change with the pain of the economic downturn and you have a lot of people keen to keep closer tabs on their power usage. Meridian plans on offer from Powershop include a carbon-free energy plan and another where two cents from each unit purchased goes to help plant Pohutakawa trees. But although the site will launch only with Meridian offers, Powershop will welcome any retailer. In fact, they’ll set up anyone as a retailer—even you.

Building Powershop has involved creating a virtual electricity retailer—a ‘white label’ electricity business. If you bring your brand, Powershop will provide the infrastructure to sell power. This should appeal to retailers who operate loyalty schemes—say, Foodtown or Farmers—community groups, schools or anyone who wants to tip a margin into their coffers. Perhaps next year you’ll be buying power from Idealog. Or perhaps we’ll be buying it from you.

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Powershop’s founders admit the eco-friendly power option is still a niche market.

“If climate change hasn’t changed people’s behaviour, it’s made them more concerned. I don’t know if there are a lot of things an average consumer can do, aside from not buying a big car or not travel,” says Coley. “We won’t do carbon calculations for Powershop users, but they’ll see how much they can save.”

Will Powershop be cheaper for customers switching over? “Most typical customers will save money,” says Coley.

While open to all players, Powershop will launch with plans only from owner Meridian and it receives no preferential rates. Doesn’t that defeat the purpose of a marketplace? “It’s a chicken-and-egg thing,” says Sargent. “We have to exist before other suppliers will come onboard.”

Electricity retailing is an industry dominated by crusty utilities operating at glacial pace with a fetish for complexity and industry jargon

Powershop is in discussions with other electricity providers and big retail brands that may want to buy electricity on the wholesale market and sell their own packages through Powershop. Its big coming-out to the industry will be at an electricity talkfest in Auckland later this month, which will be attended by all Meridian’s competitors—who are Powershop’s potential partners. “I don’t think we need all of them,” says Sargent. “We want to be able to offer as much choice as is meaningful. But if you get four companies offering the same thing, you may as well just get one.”

Powershop will remain 100 percent owned by Meridian for the foreseeable future. Sargent and Coley are planning on signing up 40,000 to 50,000 customers in their first year of business. The start-up has ten staff working out of the Wellington office, with a further 12 employees based at the Powershop call centre in Masterton.

If the pair is nervous about launching an Internet startup in the midst of a recession, they’re not showing it. “Of course the Ferrit closure raises some concerns for us,” says Sargent. “But we’ve already taken on board many of the learnings from Ferrit's early mistakes. We’re confident that Powershop is underpinned by a relevant and valuable proposition for customers, particularly in the current economic climate.”

He says Powershop represents the “unfinished business” of two decades of electricity reform with an opportunity to finally deliver a different experience to power users. “Our view is that electricity retailing is an industry dominated by crusty utilities operating at glacial pace with a fetish for complexity and industry jargon—anything but helpful to consumers in choosing a supplier or managing their consumption and energy costs.

“We’re confident we have designed a service that keeps people well informed and therefore engaged more frequently than the traditional experience. Enough to better understand how much energy they’re using, how much it’s costing and to be able choose how and when they pay for it on their own terms—truly, power to the people.”