Big Six Energy Suppliers To Lose More Market Share Due To Price Cap

LONDON (Alliance News) - The UK's Big Six energy suppliers are likely to continue losing market ...

Alliance News 20 March, 2017 | 5:43PM
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LONDON (Alliance News) - The UK's Big Six energy suppliers are likely to continue losing market share to small and medium sized competitors as the cost of meeting government policies looks set to continue rising, while Parliament debated introducing a "relative price cap" on the largest suppliers.

The Big Six - Centrica PLC's British Gas, SSE PLC, E.ON, EDF Energy, ScottishPower and nPower - have been under increasing pressure over the past few years from the swathe of new suppliers that have emerged, spurred on and encouraged by the government and regulators that are seeking to improve competitiveness in the market in the hope of benefiting consumers.

On Thursday, MPs debated and approved a motion on energy prices in the House of Commons. The motion was put forward by MPs John Penrose, Caroline Flint and Patricia Gibson to the Backbench Business Committee that considers requests for debates from any backbench MPs.

The motion put forward and subsequently approved was that the House of Commons "deplores the big six energy firms' treatment of out-of-contract energy customers on default tariffs" and that "immediate action is needed" to protect those consumers. The motion also claims that efforts by the government and regulator to push customers to switch energy suppliers "will not fix the problem sufficiently enough or completely on its own".

Over the course of 2013 to 2016, the big six suppliers have lost an average of 3.4% of their total customer base each year, which Barclays estimates equates to losing 4.2% of market share each year, partially offset by growth in the amount of total customers in the market.

There are now around 48 active suppliers in the UK market, 40 of which provide both electricity and gas. Regulator Ofgem claims larger suppliers held around 84% of the gas market and 84.8% of the electricity market, with small and medium suppliers holding the balance.

In 2016, 3.3 million customers switched gas accounts while 4.4 million switched electricity suppliers. Of all the switches across both fuels in the year, 47% moved to small and medium sized suppliers.

The price cap looks at setting a maximum mark-up between a large supplier's lowest tariff and their standard variable tariff, aimed at making sure consumers are not impacted if they fail to switch when their existing deal ends. The temporary measure would be in place until such time as switching to a lower cost energy supplier is far simpler and quicker.

Barclays said any price cap is "unlikely to reduce the Big Six standard variable tariffs", and would actually have the unintended consequence of driving up the cost of the Big Six's lowest priced tariffs so that they fall within the mooted 6% maximum cost limit from lowest to highest cost tariffs.

"Such a regulation would therefore likely benefit relatively few consumers, though likely would be supported by many lower cost small suppliers whom we'd expect would subsequently face a reduction in competition from the Big Six at the lowest cost fixed-term end of the market," said Barclays.

"Government policy means criticism of Big Six tariffs – and thus regulatory risk – will be ongoing," Barclays added. "We see little if any chance that the media, political and regulatory scrutiny/criticism of the Big Six is likely to materially diminish any time in the foreseeable future".

Larger suppliers have been under increasing pressure to lower energy bills for customers, but five of the six have recently announced imminent price rises with some already coming into effect. Centrica's British Gas was the only supplier not to raise standard variable tariff prices, freezing them until later this year.

Larger suppliers have been criticised for not reducing consumer prices when wholesale energy prices fall, but raise bills when they go up. Suppliers, in turn, argue that wholesale energy costs represent only a portion of customers' bills, with large proportions comprised of other elements - including the cost of government policies.

Environmental and social policy costs introduced by the government only apply to larger suppliers and are not borne by smaller ones, meaning the largest have a structurally higher cost base than most smaller competitors at no fault of their own.

"In effect, the playing field is deliberately tipped against larger suppliers; outweighing any scale advantage in our view," said Barclays.

Ofgem claims that a typical dual fuel energy bill is comprised of 43% wholesale costs, 24% network costs, 16% operating costs, 4.76% VAT, and other direct costs of 0.6%. Environmental and social obligation costs make up 7.4% - with the average pretax margin for suppliers standing at 4.04%.

Notably, for a gas bill the environmental and social policy costs make up only 2.10% of an average bill while representing 13% of electricity bills. Suppliers' margins on gas bills are 6.93% while the profit margin on electricity bills is just 0.94%.

Barclays said it believes these policy costs will "continue to increase materially". The bank said suppliers pay much more in policy costs each year than they generate in earnings.

"Combined with many smaller suppliers often pricing their tariffs unsustainably low as they seek to gain market share, we expect this ongoing pricing differential to continue to attract criticism. In turn, this sustained criticism likely leads to ongoing risk of populist political driven negative regulatory intervention, even if such criticism and intervention is unjustified," said Barclays.

However, Barclays believes that the Big Six will protect margins rather than aggressively defending their market share.

"This ongoing regulatory uncertainty provides a perverse incentive for large suppliers to maximise near-term profitability – even at the risk of ongoing market share losses – as medium to long-term margins are highly uncertain," said Barclays.

To justify a 0.4% cut to tariffs or a 10% cut to margins by the Big Six, annual customer losses would need to be around 1.5 times higher than at present to over 5.1%, Barclays states. For a 1.0% tariff cut or a 25% margin reduction, the Big Six would need to lose 8.2% of customers each year, 2.5 times the current rate, and a 2.1% tariff cut or 50% margin reduction would need annual customer losses to be over 5.0 times higher than present at 17% per year.

Barclays believes SSE and Centrica would see "no current impact" from a price cap.

"Indeed for SSE and Centrica – based on current London prices for an average consumption household – there would be absolutely no impact at all under a 6% relative price cap, as their highest priced tariffs are only 3.3% and 4.7% respectively above their lowest tariffs," said Barclays.

Centrica shares closed down 0.6% on Monday at 215.25 pence per share while SSE closed down 0.1% at 1,502.15 pence.

By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance

Copyright 2017 Alliance News Limited. All Rights Reserved.

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Securities Mentioned in Article
Security Name Price Change (%) Morningstar Rating
SSE PLC 1,386.00 GBX -0.43
Centrica PLC 173.10 GBX 0.64
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