Utility Week

16 | 8TH - 14TH MARCH 2019 | UTILITY WEEK Policy & Regulation Analysis the retailers in a riskier situation than they should be." Small supplier struggles As the price cap begins to bite, it's not just the big six being affected by political and market strain. At the other end of the scale, small suppliers are also suffering. Fieen suppliers have gone out of business over the past few years – with the highest concentra- tion in 2018. These have been both large and small. Electraphase, which went out of business in August last year, had fewer than 100 custom- ers, while Spark Energy (bought by Ovo in November last year) had 290,000 customers. More suppliers are expected to follow as they are hit with wholesale price rises and burdened with renewable subsidies and taxes. Hawkins predicts that as consolida- tion happens over the next few years, the market will end up with a relatively small number of well-financed companies which have scalability and are better-able to deal with the risks they're faced with – such as fluctuations in prices and demand. On 22 February, Ofgem announced that it had banned Solarplicity from taking on new customers. This is not necessarily an indi- cation that the supplier will go out of busi- ness. However, it should be pointed out that Ofgem banned Economy Energy from taking on new customers due to poor customer ser- vice just before it ceased trading. And Iresa suffered the same fate last year. The unprecedented collapse of smaller suppliers has led to calls for Ofgem to do more to vet prospective entrants to the market. When a supplier goes out of business, and a trade sale is not feasible, Ofgem may need to appoint a "supplier of last resort". This was originally brought in as a last resort mechanism, but has recently become com- monplace, as the rate of suppliers going out of business has increased. At Utility Week's Energy Customer Conference in Birmingham in mid-January, Ofgem's director of conduct and enforcement, Anthony Pygram warned that the supplier of last resort mechanism is there to protect consumers, and not as an "insurance policy for dodgy business models". The regulator is currently in the process of reviewing its existing arrangements for supply market entry, exit and monitoring. Although several new suppliers that entered the market over the last five years have managed to expand significantly – for instance Utilita, Ovo Energy and Bulb Energy – there are no suppliers, besides the big six, that have yet reached an individual 5 per cent market share. One side effect of some smaller suppli- ers going out of business is that, through the supplier of last resort process, mid-tier sup- pliers have grown rapidly in size by taking on their customers, and so are inching ever closer to that 5 per cent mark. As of June 2018, seven suppliers had a market share between 1 per cent and 5 per cent and 60 suppliers had market shares Smart meters Smart meters will have a positive effect on the market in the long run, according to PA Consulting's Peter Siggins. "An increasing customer interest in not only energy consump- tion but where we're buying it from, will mean we continue to see a positive transformation in the market," he says. The government-led initiative aims to deploy 50 million smart gas and electricity meters to every UK domestic property, and smart or advanced meters to smaller non- domestic premises. This rollout is being led by energy sup- pliers, who are required to take what Ofgem refers to as "all reasonable steps" to roll out smart meters to all their customers by 2020. Although it is widely agreed that smart meters will benefit consumers in the long run, the rollout has been plagued with major delays and setbacks. Latest figures show that almost 12.8 million smart meters are currently in operation. How- ever, most of these are first-generation SMETS1 meters, not all of which will be interoperable and could go dumb if the customer switches to another supplier. It is predicted that more than seven million more SMETS1 meters have been installed than were originally planned. Why the price cap? The CMA investigation into the market found that 70 per cent of big six domestic custom- ers were still on expensive default standard variable tariffs, despite the proportion falling in recent years. In its State of the Market report, Ofgem said around 54 per cent of customers had been on a default tariff for more than three years. The difference between the average SVT price of the six large suppliers and the cheapest market tariff was on average £320 between June 2017 and June 2018. In July 2018, parliament mandated Ofgem to introduce a temporary price cap on all SVTs. The cap came into force at the beginning of the year and was set at £1,137. On 7 February, Ofgem announced the cap would rise by £117 to £1,254 a year from April onwards. However, some analysts have predicted it will come back down again in October. Energy market investigation Back in 2014, despite some new entrants, the big six had 95 per cent of the market and there were concerns about a lack of competition and barriers preventing new suppliers from enter- ing the energy market. This led to Ofgem referring the entire energy sector to the Competition and Markets Authority (CMA) aœer an initial investigation found competition was not as healthy as it should be – particularly between the big six. The CMA investigation lasted two years and was by the far the biggest of its kind since energy privatisation in the 1990s. In July 2015 the CMA published its initial findings, which put forward around 20 pro- posed reforms aimed at boosting competition within the retail energy market and removing barriers to engagement for customers. In June 2016 it published its final market reforms. These included 30 measures it hoped would drive down costs by increasing competi- tion and helping more customers switch to better deals, while protecting vulnerable customers. Since then, Ofgem has been implementing these remedies, and competition in the market has increased to the point where many of the more than 70 suppliers in the market are strug- gling to make money. Some are even being forced out of business. continued from previous page below 1 per cent. Ofgem says it still sees some barriers to expansion for medium and small suppliers. For example, there is cur- rently a 250,000 customer account threshold – above this threshold suppliers must bear the costs of contributing to schemes such as the Energy Company Obligation and the Warm Home Discount. However, these constraints have so far not prevented the continued erosion of the six largest suppliers' market share.

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