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UK utilities face shake-up as customers turn to local suppliers
October 26, 2015 / 1:06 PM / 2 years ago

UK utilities face shake-up as customers turn to local suppliers

LONDON (Reuters) - A fast-growing group of small energy suppliers is eating away at the market share of the big six firms that dominate the business in Britain as customers, disheartened by poor service and soaring bills, seek cheaper, local supplies.

Elise Thomas, who lives in Southend-on-Sea in eastern England, recently switched energy provider for the first time in over 20 years, saving more than 400 pounds a year by buying her electricity and gas from Southend Energy, a new supplier set up by her local authority.

“I think it’s very entrepreneurial of the council to do something like this,” the 86-year-old said. “I would like to have my house painted so the amount I’ve saved will be a big help towards the upkeep of my house.”

Findings that customers were overcharged by up to 1.2 billion pounds a year, hefty bonuses paid to energy company bosses and fines on suppliers for breaching customer service rules have eroded the public’s trust in big energy suppliers.

The bad publicity is driving disillusioned consumers to demand a return to basics with locally-sourced, cheaper energy.

The country’s largest six suppliers, who have dominated the market for decades, have banked on steady retail income to underpin their shareholder payouts. Their small competitors don’t face that dividend pressure.

Over their last financial year, Britain’s two London-listed energy suppliers, Centrica’s (CNA.L) British Gas and SSE (SSE.L), jointly lost over 800,000 customer accounts, hitting energy supply revenue.

“The whole community and localism agenda is going to have huge bearing on the energy market and is going to bring a new challenge to larger suppliers,” said Robert Buckley, director at advisory firm Cornwall Energy.

In Nottingham, the local authority last month set up Robin Hood Energy, a new electricity and gas supplier named after a local medieval hero who took from the rich and gave to the poor. The new supplier has already poached thousands of customers eager to take energy from a local brand.

Independent suppliers like Robin Hood Energy are a real threat to the ‘Big Six’ suppliers which have already ceded 13.4 percent of the household energy market to smaller rivals, compared with 2.6 percent just two years ago.

“Companies with non-traditional business models have the potential to transform the energy system,” energy regulator Ofgem said recently.

The Big Six energy suppliers -- EDF Energy (EDF.PA), RWE npower (RWEG.DE), E.ON (EONGn.DE), Centrica’s British Gas, Scottish Power (IBE.MC) and SSE -- face a huge shake-up unless they adapt to the changes quickly.

Citi analysts last year forecast the Big Six’s market share would fall to below 70 percent by 2020 and that if the trend continues and profit margins are squeezed, some could decide to quit the market.

BROKEN TRUST

Most of the large suppliers are involved in some form of ‘community’-labelled initiative, ranging from district heating systems to projects helping households in poorer areas that have problems paying their energy bills.

But none goes to the heart of the issue that consumers are seeking energy provided locally by trusted brands, wishing to re-engage after alienating experiences with large, faceless suppliers.

Councillor Alan Clark, a Labour politician who spearheaded Nottingham Council’s initiative to set up Robin Hood Energy, said people trust the authority to do the right thing.

“We don’t pay our directors, they’re all councillors and they do it for the public good, and we don’t pay bonuses. That rips out quite a lot of costs and makes us cheaper,” he said.

An energy supplier’s pure profit, or pre-tax margins, on an average bill comes to around 9 percent of the overall charge, according to Ofgem.

Operating costs, including marketing and billing, make up around 14 percent and environmental and social obligations, which are higher for large suppliers, another 7 percent.

This means smaller and more nimble companies can better control around 30 percent of their average bills, giving more room for lower prices.

Some of the new suppliers buy energy on the general market, but others, like Ecotricity or Good Energy (GOODG.L), generate and market their own energy.

Independent supplier Ovo Energy launched a programme last year which helps communities to establish themselves as local energy suppliers, such as Southend Energy.

Britain’s large suppliers, who still control more than 85 percent of the market, will have to take community energy needs much more seriously to avoid missing an important trend, analysts say, and the firms insist it is a growing market.

“We are very interested in the community energy area,” said a spokesman for RWE npower.

Centrica has come closest to kickstarting change as its new chief executive in the summer announced the launch of a 700 million pound distributed energy business to combine onsite power generation, such as solar panels, and energy efficiency measures.

However, for now this is only aimed at business-to-business customers.

At the extreme end of the spectrum, the trend could mean Britain is heading for a decentralised energy market similar to Germany’s ‘Stadtwerke’ model where local authorities generate and supply electricity and gas to towns and villages.

Britain’s opposition Labour Party said community-based energy companies and cooperatives could become a new powerhouse.

“There should be nothing to stop every community in this country owning its own clean energy power station,” Labour’s energy spokeswoman Lisa Nandy said in a recent speech.

Additional reporting by Susanna Twidale; editing by Adrian Croft

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