Utility Week

12 | 19TH - 25TH OCTOBER 2018 | UTILITY WEEK Policy & Regulation Analysis 8 Nov 2017: SSE and Innogy proposse the merger of their retail businesses 17 Nov 2017: GMB calls for the merger to be blocked 31 Jan 2018: SSE begins talks with CMA on merger 28 Feb 2018: CMA opens investigation 6 Apr 2018: Katie Bickerstaffe named CEO 26 Apr 2018: CMA says it will launch a full investigation 30 May 2018: CMA publishes detail on phase 2 of its probe 11 Jun 2018: Gordon Boyd named CFO of merged company 19 Jul 2018: SSE shareholders back retail merger with Npower Timeline of the merger so far November December January February March April May June July I n an era when the energy market is becoming increasingly competitive, and the largest six energy suppliers are rapidly losing their stranglehold on a retail sector they have dominated for so long, two of the biggest players have teamed up to create an even bigger player. So, how will this affect competition in the market? Well, the Competition and Markets Authority (CMA) doesn't have a problem with it. It has given the £3 billion merger the green light aer a "thorough" review found it wouldn't make much of a difference whether there were six big companies or five. The "big six" are fast losing market share anyway, as was spotlighted by Ofgem in its latest State of the Energy Market report. The regulator revealed the cohort – which together held 99 per cent of the gas and electricity markets until around 2012 – now holds just 75 per cent, its lowest ever. The creation of the "big five" doesn't mean a shrinking energy market or less choice for consumers, claims Stephen Murray of price comparison website MoneySuperMarket. Some argue that, amid calls for re- nationalisation from the likes of Labour leader Jeremy Corbyn and at a time when the very legitimacy of the sector hangs in the balance, now may not be the best time for two of the most dominant companies to forge a union. Others say it won't make a difference to And then there were five With the CMA giving the green light for the merger between Npower and SSE Energy Services to go ahead, Lois Vallely explains what and who it will involve. competition, what with the government's recent decision to impose a price cap. Utili- ties analyst Nigel Hawkins tells Utility Week the CMA's ruling is "no real surprise" since the pivotal standard variable tariff is protected both by the price cap and by emerging compe- tition; hence, the CMA's "hands-off stance". PA Consulting energy expert Ted Hopcro suggests it is feasible that the "big five" could become the "big four", referring to a planned asset swap between Innogy's parent com- pany RWE and rival company Eon. However, he says, more likely the move could "accel- erate the evolution of retail energy suppliers into businesses that are delivering a broader range of services, with higher value and greater customer focus". The news has brought some complaints from smaller suppliers. Igloo Energy, for example, says it is "surprised" the merger has been given clearance, given that both providers have "notoriously given custom- ers a lacklustre service alongside some of the highest tariffs". Chief executive Matt Clemow sent around a statement following the news of the clearance urging billpayers to "vote with their feet" and "put an end to the big five ruling the roost". For most of the indus- try, though, the news didn't come as much of a surprise. The CMA had already provision- ally cleared the merger at the end of August. What is it? The merger will be between Npower – Inno- gy's UK retail company – and SSE's house- hold energy and energy services business, forming a "major, independent British retail energy company". The new company will have a premium listing on the London Stock Exchange. Innogy will hold a minority stake of 34.4 per cent, with SSE's shareholders (not SSE itself) holding the remaining 65.6 per cent stake. Based on the most recent Ofgem figures, the merger will create the UK's largest electricity supplier and the second-largest gas supplier behind British Gas, with market shares of 24 and 19 per cent respectively. Why now? In short, economies of scale. SSE and Npower say the main reason for the merger is that the energy retail market in Great Britain is becom- ing "increasingly competitive and changing rapidly", and more needs to be done to lower costs, further improve customer service and engage with those that are vulnerable. They say combining the two firms will create a new British energy company, which can "better face the challenges – and deliver on the opportunities – of the British energy market". One market analyst told Utility Week any benefits of the merger are unlikely to be seen for a while. "[It] will likely create increased challenges in the short term, as the integra- tion and customer migration will be complex and take a number of years. It's probable that this will have an impact on service, which will likely cause a number of customers to exit." They also suggest the merger will not nec- essarily stave off the threat of losing market share to smaller rivals. "Retention will only happen by offering customers a great service at a price that doesn't make them want to shop around." If Innogy and SSE can make the merger a success, the results are likely to be seen in the longer term, creating a "sustain- able supply business with the ability to invest in new products and services and supporting the employment of thousands of people". continued overleaf

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