Utility Week

Utility Week 13th December 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Page 27 of 33

Markets & Trading Analysis Independently minded Smartest Energy is big small player with a turnover in excess of £1bn. So what is it like competing and trading in a market dominated by six big players? Megan Darby finds out. I ndustrial and commercial customers are far closer to the wholesale market than household consumers, James Clarke, vice president trading at Smartest Energy, explains. "When we contract with them, it is all about: 'What is the market price today?' There is a level of transparency there that probably there is not in the domestic market." Smartest Energy, which has been active in I&C retail since 2008, finds that customers increasingly choose contracts that follow the wholesale price rather than long-term fixed rates. The domestic market is "quite opaque" by comparison, he says. "There is always the general perception that they [the major suppliers] all want to average in their domestic portfolios. Nobody wants to be an outlier. They all want to put their prices up together. Do they really want to trigger competitive responses from each other, or are they happier keeping their share?" Labour leader Ed Miliband propelled transparency and competition up the political agenda in September when he pledged to freeze household energy prices for 20 months if elected. That, and break up the major vertically integrated energy companies. The shock announcement was born out of a conviction, difficult to prove, that the big six are ripping people off. Yet like all the policy interventions promised or threatened by government and opposition, it ripples through the whole market. And the view from the trading screens of Smartest Energy is very different. "It is not particularly helpful if the market gets embroiled in what are essentially domestic problems," says Colin Prestwich, head of regulatory affairs at Smartest Energy. "The market we work in is very competitive." The company has fared well in that competition, nearly doubling its turnover in five years to hit £1 billion in 2012. Pre-tax profit margins have been modest but steady at 1 or 2 per cent across that period. The low profit margins in big six retail Priced out of the market? Ovo Energy has enjoyed the discomfort of the big six in trying to account for rising prices. The company tells Megan Darby that loss-leading tariffs are the problem rather than a lack of liquidity. W hen MPs grilled energy bosses on their prices and profits in October, it was Ovo Energy's chief executive, Stephen Fitzpatrick, who stole the show. While Npower's representative drew the wrong kind of attention for his flashy gold watch (Argos, not Rolex, his press office later claimed) and earnest pleas from Eon and SSE to shift levies on to taxation fell on deaf ears, Fitzpatrick relished the role of plucky outsider. As the big six sought to defend price hikes to a hostile committee, Fitzpatrick was not about to ease their discomfort. "I cannot explain any of these rises. They are not the prices we see in the liquid wholesale market," he said. "Like some of the committee members, I have been confused looking at the explanations for some of the price rises." 26 | 13th - 19th December 2013 | UTILITY WEEK His position was somewhat undermined by the fact that Ovo blamed wholesale costs when it raised prices in April, as sharp-eyed observers later pointed out. However, the press office maintained that "although there have been small fluctuations in the market", wholesale prices are "fairly similar" to two years ago and did not justify recent increases. Tom Griffin, head of trading at Ovo Energy, admits that wholesale and retail "will never exactly match up" because of different hedging strategies, but says: "We always try to make sure our prices are in line with what is on offer in the marketplace. Our prices have always reflected the change in price over time." To help convince customers, the supplier publishes wholesale price charts on its website. The blurb runs: "Energy is a complicated business. But even to us it doesn't make sense that when you hear in the news 'wholesale' prices have fallen, you don't start seeing savings on your bills." Griffin says the big six accounts are "very opaque and difficult to understand" but Ovo is not particularly concerned with splitting up their businesses. "We don't see a huge problem with the big six being vertically integrated. We buy gas and power at market price at the time. The big six buy a proportion from themselves. We don't see that as a disadvantage to us. It may even be an advantage because we are not constrained to buy from any particular power station that might not be the most efficient." The independent supplier's main bugbear is that major suppliers are able to offer

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