Utility Week

UTILITY WEEK | 13TH - 19TH SEPTEMBER 2019 | 29 Customers Analysis T he UK energy retail market in 2019 is anything but predictable, with players of every size having to adapt to a rap- idly changing landscape. We have seen supplier failures at the fledgling end of the market, while the long dominant big six have struggled to maintain their place in a rapidly shi ing landscape. While these opposite ends of the market have floundered, the so-called mid-tier chal- lenger brands, especially Octopus, Bulb and Ovo, have thrived, with clear strategies and strong financial backing. But how sustainable are these so-called disruptors? Some industry experts say their business models expose them to consider- able risk from wholesale costs. One such is industry analyst Lakis Atha- nasiou of Agency Partners LLP. He says: "Smaller and medium-sized suppliers have done well this year because energy prices have collapsed. However, if we are to see a year or two of steadily rising prices, even well-backed medium-sized companies like Bulb and Octopus will struggle." Former Npower boss and now chief exec- utive of Electron Paul Massara agrees, saying smaller suppliers' lack of ability to hedge to the same degree as their big six competitors could place them in danger. Speaking to Utility Week, he says: "In the short term there are so many new entrants that are all pricing each other out with no margin. So by the time you do the set-up costs and everything else, I don't think any- one is making any money. "It's about the hedging programme and where they are. The smaller players have less credit capacity, typically, to hedge further out and therefore essentially they are more likely to be exposed to a rise in prices." Similarly, Ryan Thompson, a partner at Baringa Partners, argues that while Octopus is well backed financially, there is still a risk from unusually cold or mild winters, which can cause major upheaval to the supplier's hedging strategy. He says: "You can be perfectly hedged but you suddenly get a warm snap or a cold snap in winter months. And not necessarily just a one-off event – if you have got a generally warm winter and consumption drops by 2-3 per cent, that could sometimes be enough to make or break a year." Octopus chief executive Greg Jackson unsurprisingly takes a different view, telling Utility Week: "A lot of the assumptions made by people from traditional energy back- grounds about challengers are purely based on speculation. For example, one analyst said companies like Octopus and Bulb have only been able to grow or survive because of a fall in gas prices. "That's completely wrong. Our gas is hedged – and electricity too. Every single customer we sign up, we hedge. We hedge them for the period of the fixed product and on our variable product; we hedge them for the period of the price cap. There is no spec- ulative trading, we don't benefit from a drop in gas prices." In financial results published in Janu- ary this year, Octopus posted a £5.3 million loss in operating profit despite experiencing "rapid growth" in both customer numbers and turnover. Massara points to the fact that while com- panies like Octopus do have strong backing, there is a question of how long investors are willing to back loss-making enterprises. He says: "If you are an Octopus or an Ovo, which are well capitalised, then I think you are in a relatively strong position, but if you are a new entrant without a strong backer, how long are you willing to go through that trough of loss-making before you see profit- ability again?" Jackson responds: "Companies invest in their first few years of growth to build suc- cessful businesses. What is happening in energy is we are seeing this rapid transition from the inefficient, bloated incumbents to technology driven rivals like us." Bulb co-founder Hayden Wood also pre- sents a spirited defence of his business model, telling Utility Week: "Bulb is part of a new generation of suppliers who've built a more efficient way to provide energy." Ovo Energy declined to comment for this piece. While the future for the mid-tier challeng- ers is unclear, their impact on the market to date cannot be denied. While some are tar- geting growth, there are rumours that oth- ers are looking to capitalise on their success so far with a sale. However it pans out, the industry will watch with keen interest the next steps of what we should now perhaps call the Middle Three. The full version of this article is available to Utility Week subscribers at: https://utilityweek.net/disrupted Will the disruptors be disrupted? Much has been written about the impact of mid-tier challengers in the energy market. But how sustainable are these disruptors? Adam John reports. UTILITY WEEK CONGRESS 2019 8-9 October 2019 | Birmingham Greg Jackson will be speaking at this year's Utility Week Congress in Birmingham. For further information or to book your ticket, visit: uw-event.co.uk/congress

• Cover