Britain’s Retail Energy Segment in Trouble?

An interesting article in Forbes draws attention to the British retail energy segment and the collapse of a 10th independent retailer (Our Power) within a 12-month period. The article by Guarav Sharma draws attention to the plight of independent retailers and their customers in the UK.

“A mere five years ago rising numbers of U.K. independent energy suppliers were hailed as upstarts bringing much needed competition to the British energy supply market. Unlike the so-called British ‘Big Six’ – i.e. British Gas (owned by FTSE 100 company Centrica), EDF Energy, E.ON, Npower, ScottishPower and SSE – these independents do not generate electricity, instead purchase it from wholesale markets selling it on to end-consumers.

However, if events of the last 12 months are anything to go by, the business model has spectacularly unraveled. On Saturday (January 26), Edinburgh-based independent Our Power, went out of business making it the tenth U.K. supplier to go under.

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It joined the ranks of Economy Energy, Spark Energy, Extra Energy, Future Energy, National Gas and Power, Iresa Energy, Gen4U, One Select and Usio Energy; all of which have collapsed in the past year.”

He points to a mixture of challenges including managing wholesale market volatility, tougher regulations, and Government interference via price caps designed to help keep the ‘Big Six’ in check. Poor customer service has also been an issue with issues around refunds, invoicing and switching being reported to OFGEM, the regulator, regarding a host of these small independents. In a BBC article, one now-defunct supplier – Economy Energy – had action taken against it with the Energy Ombudsman cited as saying,

In November alone we opened investigations into 399 complaints about the company, compared to just 112 last January. Common issues include disputed account balances, failure to issue refunds and concerns over billing delays.

A recent FT article also looked into the issue.

Over the past few years, there has been a rush of new entrants as companies have sought to break the dominance of the “big six” suppliers such as British Gas and Npower. Competition has worked; the incumbents’ market share has dropped to 80 per cent, and there are now about 60 independent suppliers compared with 11 a decade ago. Yet while larger “challenger” companies such as First Utility and Co-op Energy have built sustainable market shares of more than 1 per cent, the recent failures have raised questions about the smaller suppliers that control about 8 per cent of the domestic energy market. Is the regulatory environment right and is the market ripe for a shake-out? Are consumers getting a fair deal? “The marketplace is difficult for challenger energy suppliers, which lack the financial advantages of larger, national energy firms,” said David Stroud, chief executive of Future Energy, last month. “We have been unable to convert sufficient customers to enable us to forward purchase energy at the most competitive rates.”

The same article actually pointed to the availability of cheap software solutions as a part of the problem!

One of the problems, say analysts, is that it has become too easy to set up as an independent supplier. Rapid changes in technology have lowered the barriers to entry and some consultancies now offer off-the-shelf billing and customer relationship management systems. It is also relatively easy to win new customers simply by offering a low tariff.

Another review pointed to problems with Government interference as the new price cap mechanism comes into force, stating

Britain’s energy market already is the most competitive in Europe, with a choice of dozens of new suppliers, easy transfer mechanisms and comparison websites.

Indeed, one of the ironies is that at a time when switching is taking off – British Gas owner Centrica lost 340,000 customers in the first half of 2018 – the cap is weakening the economics of the challengers.

It is no accident that Spark Energy, with 290,000 customers, went bust in November, the seventh challenger supplier to call it a day. The price cap means consumers will be more reluctant to switch, making it harder for independents to win customers.

The cap was also among the factors which led UK energy giant SSE to call off its proposed retail merger with German rival Innogy because of the altered economics.

The proper answer for a market not changing fast enough was for the regulator Ofgem to have come down hard on companies sticking with default tariffs by punishing them with heavy fines on their turnover.

OFGEM is now proposing (a bit late perhaps?) rules requiring providers to show they had financial resilience and ability to serve customers. Meanwhile, Bloomberg reported on the EU decision removing an EU state aid approval for a mechanism that pays generators for keeping their power plants available.

The 1 billion-pound ($1.3 billion) a year capacity market is at a standstill while an investigation is carried out with payments suspended and uncertainty about when they will be reinstated. The probe may take 12 to 18 months. 

“It was a big shock,” said Phil Hewitt, director at Enappsys, a U.K.-based energy trading consultant. It now looks like there’s “a massive red light over the industry saying it’s not safe to invest in.”

The ruling adds to the darkening outlook for British utilities, including the government’s cap on energy bills and stiffer competition that’s draining customers from the Big Six suppliers. The collapse of a merger involving the U.K. retail units of SSE Plc and Innogy SE’s Npower earlier this week underscored the difficulty of doing business in the U.K. energy industry.

The article states that even after BREXIT, “the government has signaled its intention to use the Competition and Markets Authority to rule on the fairness of state aid in the way that officials in Brussels do now. So it’s likely that Britain would still have to uphold the EU Court ruling on the capacity market and continue the EC’s investigation.

The UK retail market doesn’t seem like a great place to be right now as a combination of factors makes it increasingly difficult to operate. When combined with poor customer service and an inability to manage wholesale exposures properly, it’s difficult to see much changing in the medium-term. Perhaps, however, there is a silver lining for ETRM vendors as these independent retailers plainly do need better solutions for managing their wholesale activity and risks……

 

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