Utility Week

14 | 17TH - 23RD NOVEMBER 2017 | UTILITY WEEK Finance & Investment T imes are tough for energy retailers in the UK. It is little surprise, there- fore, that two of the big six – SSE and Innogy – want out. But news of the merger of the two companies' retail operations, which hit the headlines last week, has neverthe- less created a stir. Is this the start of a merger spree that will condense the big six into the big three? And how will the tie-up affect the competitive dynamic of the much-maligned domestic energy market? In a move that has caught the industry off- guard, SSE and Innogy have agreed to merge Innogy's British retail business, Npower, with SSE's household energy and energy ser- vices business to form a new, separate retail energy company. The merger will effectively turn the big six into the big five, and concerned parties are urging the competition authorities to take a "critical look" at the deal. Trade union Unite's national officer for energy, Kevin Coyne, insists that if the big six become the big five, then their "stranglehold on the energy market will increase". Others are less concerned about any neg- ative impact on competition. Former Npower chief executive Paul Massara believes a sole merger of this kind will not do much harm. If more were to follow, coupling up other big six players until most of the domestic energy retail market was in the hands of three mega- suppliers, that might be a different matter. But Massara, and other commentators, con- sider such an eventuality unlikely. The company created by the Npower-SSE merger will still be smaller than British Gas – which will remain by far the UK's largest supplier to domestic households with 33 per cent of the market for gas and 22 per cent for electricity. Based on current Ofgem figures, the new entity would have a market share of around 24 per cent in the domestic electricity sector, bigger than that of British Gas. How- ever, its share of the domestic gas market would be around half that of British Gas, at 19 per cent. Coming promptly on the heels of govern- ment's publication of a dra bill to imple- ment a market-wide cap on default energy tariffs, it is hard to believe that Innogy and SSE have not been forced into bed by wor- ries about squeezed margins. Particularly so, given that SSE has the highest proportion of customers on standard variable tariffs (SVTs) out of any of the big six, and Npower has struggled with profitability aer huge cus- tomer losses in recent years. Doug Stewart, chief executive of inde- pendent supplier Green Energy, says the proposed merger is an "unintended conse- quence of government intervention". "I think it's a shot across the bows of government to be perfectly honest," he tells Utility Week. Ian Cain, former managing director of Centrica's credit energy business, agrees. He says the merger is an outcome of the way the competitive landscape is shaping up in the energy sector. Speaking to Utility Week, he said: "I see some commentators attaching significance to price caps as a driver in this scenario, though the drivers for me are much wider." For his part, Innogy chief executive Peter Terium is adamant that the merger is not a result of the price cap. At a press confer- ence following the announcement, he told journalists the timing was "irrespective of the price cap interference". Nor is it an "exit before Brexit", he said. However, neither Terium nor SSE chief executive Alistair Phillips-Davies could deny that the decision was driven by a broader cli- mate of government intervention. Terium said the "uncertain political environment" for energy retailers in the UK was the primary reason, and that the price cap news may have "pushed the deal a bit quicker". Phillips-Davies said the "scale of change" in the energy market means the deal will enable both entities to "focus more acutely on pursuing their own dedicated strategies". It certainly cannot be denied that the UK's political environment is making life dif- ficult for energy retailers. Rumblings about the potential for market exit have been build- ing since it became clear the Competition and Markets Authority's (CMA's) recommen- dations to root out market failures would be largely ignored by government in favour of more crowd-pleasing measures. Warwick Business School professor David Elmes says energy suppliers are justi- fiably fed-up. "Despite an extensive review of energy markets by the CMA, the govern- ment has chosen to go further than the CMA recommended in requiring changes to how companies supply energy," he says. "We have just had another government review aiming to 'recommend ways to keep energy prices as low as possible'." Elmes suggests there comes a point when companies which have the choice of invest- ing in the UK or elsewhere see the UK as "a tough market to compete in". He says the Innogy-SSE announcement should act as a "wake-up call". This said, it is an accepted industry truth that Npower has had a "for sale" sign hanging over it for a long time. To say the company has struggled in recent years is an understatement. It made a £100 million loss in 2015, as well as shedding more than 350,000 customers. In the same year, sig- nificant problems with a new billing system And then there were five The announcement by Innogy and SSE that they are going to merge their retail operations caught the industry off guard. So does it mark the beginning of a consolidation spree? By Lois Vallely. Analysis ELECTRICITY SUPPLY MARKET SHARES BY COMPANY, DOMESTIC (%) Source: Ofgem GAS SUPPLY MARKET SHARES BY COMPANY, DOMESTIC (%) Source: Ofgem 20 15 10 5 0 Q1 2004 Q3 2017 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0 Q1 2004 Q3 2017 Npower SSE Npower SSE

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