Big Six gas and electricity suppliers are losing their big grip on UK energy market

By JOSHUA WARNER

Just six energy suppliers monopolised the UK energy market after the gas and electricity networks were privatised, but over 60 smaller rivals have since emerged as effective competition.

There are multiple cogs operating together to keep the gas and electricity networks going. The UK gas network was privatised in 1986 and the electricity network followed suit soon after in 1990, allowing households to choose suppliers.

Major power plants are connected to a central transmission system that transports high-voltage electricity to smaller distribution networks, which lower the voltage and deliver the power to homes and businesses.

National Grid plays a unique role by operating this central transmission system in England and Wales, and is responsible for balancing supply and demand of electricity in the market. The transmission network over central and southern Scotland is operated by Scottish Power/ Iberdrola, with the rest of Scotland being served by SSE. 

There are eight distribution networks delivering electricity to the end user, which are ultimately owned by companies including (but not limited to) SSE, Iberdrola, PPL Corp, and Berkshire Hathaway Energy.

National Grid is also the operator of the gas transmission system that transports gas to eight regional distribution networks, one of which it also partly operates. The other distribution networks are backed by the likes of sovereign wealth funds and investment trusts. 

Who are the Big Six energy suppliers in the UK?

Big Six Parent company Glance at parent company activities
British Gas /Scottish Gas Centrica ·Supplies energy in UK, Ireland, US

·Trades and distributes energy

·Energy exploration and production

·Connected home and energy storage

SSE SSE ·Supplies energy in UK and Ireland

· Has transmission and distribution networks

· Generates energy and sells wholesale

·Energy storage, broadband, telephone

EDF Energy EDF SA(84% owned by French government) ·Generates energy, mainly nuclear

·Supplies energy in UK, France, Belgium, Italy

 

EON EON SE Generates, distributes, trades and supplies energy in numerous markets spread over the UK, France, Germany, Czech Republic, Hungary, Italy and others
npower RWE Group ·Generates and trades energy in Europe

·Supplies energy in UK, Germany, Belgium

·Netherlands, Czech Republic, Hungary, Poland and others

Scottish Power Iberdrola Supplies energy in UK and Spain·

Generates energy worldwide

Network operator in UK, Spain and US

 

Big Six energy suppliers to become the Big Five

In response to the changing environment, SSE and npower are currently merging their retail energy supply arms to create a new listed company, two-thirds of which will be owned by SSE. A name is yet to be decided.

The changing landscape of the UK energy market

The rate of change in the UK energy market has accelerated over the last couple of years and the sector has drawn criticism from both the Conservative government and the opposition Labour party, the latter of which has threatened to renationalise the industry along with other industries like water and rail.

The most significant change has been the government’s draft bill to introduce a temporary price cap on standard variable tariffs, the most popular option in the market and the option which around 60% of households find themselves on.

The tariffs have been criticised, as they often have no end date and, on average, are more expensive than shorter fixed-term tariffs.

The price cap is expected to come in before winter 2018, but the exact details are yet to be decided, leaving some major uncertainty in the market. The cap will run until 2020, when Ofgem will make recommendations as to whether a cap should continue after that.

The heavy scrutiny of standard variable tariffs has been one of the issues to plague the Big Six, while having less of an impact on smaller suppliers. This is because they hold the most amount of these tariffs on their books.

In September, a huge 71% of SSE’s domestic accounts were on standard variable tariffs, followed by British Gas at 67%, EON at 61%, EDF at 52%, npower at 48% and Scottish Power at 41%.

There are a number of other policies that Ofgem has recently introduced that impact the UK energy market, including but not limited to:

  • Proposed reducing the amount distribution network operators can pay their shareholders to 3% in 2021 from the current 5% limit, lowering the cost of equity for operators which include SSE and National Grid
  • Banning suppliers from backbilling customers for energy that was used over 12 months ago
  • Extending a safeguard tariff to millions of accounts held by vulnerable customers
  • The roll-out of smart meters to the majority of UK homes by 2020

All of these changes have culminated since Ofgem referred the UK energy market to the Competition & Markets Authority back in 2014, which was followed by the most comprehensive investigation into the market being carried out since it was privatised, introducing over 30 new measures.

The Big Six held 99% of the domestic supply market in the final quarter of 2012, but that has fallen to 80% over the last five years, as over 60 rival suppliers have emerged.

Collectively, these small suppliers have poached a large chunk of market share from their larger rivals, but only a few have managed to carve out a sizeable portion of the market for themselves.

The most intriguing rival that has emerged is First Utility, which was already leading the race among smaller suppliers, before acquiring even more firepower after Shell snapped up the company late last year, which should unnerve its larger rivals and represents another significant change in the market amid the SSE-npower deal.

Utility Warehouse, owned by Telecom Plus, has managed to carve out and keep its 2% share of the market over the last five years, while Green Star Energy is a division of Just Energy Group.

As well as providing competition in terms of pricing, smaller suppliers have been able to win over consumers by tapping in to the dissatisfaction that consumers have become accustomed to receiving from the Big Six, such as poor customer service.

 Many have created unique selling points by providing a niche service to the market, such as solely providing prepaid energy or only supplying 100% renewable energy to cater for greener consumer trends.

All of the Big Six have lost market share in the domestic supply market

Start of 2004 Start of 2018
British Gas 24% 21%
SSE 15% 14%
EON 21% 13%
EDF Energy 13% 12%
npower 15% 10%
Scottish Power 11% 10%

 

Larger suppliers are having to implement bigger changes in response to heightened competition and the rapidly-changing environment, but smaller suppliers are still highly vulnerable in ways the Big Six are not – and a lot of it is because they lack the scale or the generation capabilities of the Big Six.

Others have been dogged by poor customer service or by a lack of billing and online infrastructure.

With fixed-rate tariffs becoming increasingly popular over the heavily criticised standard variable tariffs that the majority of UK households are on, the margins that smaller suppliers can come under threat when wholesale prices rise, for example. This also impacts their ability to compete as effectively when it comes to freezing prices.

One example was demonstrated by David Bird, chief executive of Co-operative Energy, who recently that the price cap on variable tariffs could see ‘unintended consequences’, such as forcing firms to take drastic action like moving jobs abroad in order to maintain margins and cut costs.

 

Are the large energy suppliers losing share because more customers are switching accounts?

Ofgem and the government have taken steps to encourage as many UK households to switch energy accounts in order to find a better deal, including introducing measures to make it easier to move from one supplier to another – although switching is still one of the four key things customers complain about the most, in addition to customer service, billing and metering.

Collective switching has been one of the more significant developments in the market, where large groups of customer accounts are moved in one go.

There are a number of schemes that have popped up, that pool together large volumes of accounts in order to hold a better bargaining position with suppliers, to therefore achieve a better deal for households than would otherwise be possible for an individual household moving supplier.

Still, there is a misconception that more UK households have started to switch energy suppliers since the market opened up to smaller companies.

Between 2007 and 2009, when the Big Six virtually controlled the entire market, over 5 million households were switching their electricity supplier on an annual basis, with around 4 million changing gas suppliers.

Importantly, all these switches were being made from one of the dominant players to another.

Between 2010 (when competition began to heat up in the market) and 2016, switching levels of both gas and electricity have remained considerably lower than before the entrance of smaller rivals.

On average, 4.4 million households changed their electricity supplier annually over the six year period, while 3.2 million switched their gas.

The change has come in how customers are switching, with more and more leaving larger suppliers for small and mid-sized ones, with a lower proportion moving from one Big Six member to another.

However, there are concerns that those customers currently switching are savvy shoppers seeking a new deal as their contracts run out, rather than those on the most expensive deals that have the most to save by switching accounts.

A measure has been recently outlined by Ofgem to tackle the issue, and break the two-tiered system between the Big Six and smaller suppliers, which has been one of the reasons why the industry keeps finding itself under the spotlight and facing pressure from the government.

The idea is to force the Big Six to pass on details of customers that fail to switch supplier after a certain period of time, allowing rivals to approach them and make an offer to entice customers to switch, with one of the Big Six already reportedly passing on 50,000 customers who have not switched for at least three years.

Although the Big Six gain advantages from their scale and balanced portfolios, it is down to them to stem customer losses and fend off the growing threat of smaller suppliers, who are in turn having to carve out unique positions in the markets with new offerings while building businesses that can last.

The Big Six will continue to lose customers to smaller suppliers, at least in the short term, and there will be more small suppliers that will succumb to high competition in the market and continue to struggle with fluctuating wholesale prices and scaling up their companies.

JOSHUA WARNER is a utilities market analyst at IG Markets in London.

13 Mar 2018

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