Utility Week

UTILITY WEEK | 23RD - 29TH MARCH 2018 | 7 Interview S mall suppliers have had a tough time of it lately and, despite its experience in the market, Flow Energy is no exception. At a time when even the big six are feeling the pressure to merge, increasing competition in the energy market and the burden of gov- ernment costs are creating a difficult environment for a small energy supplier to grow. Flow Group was originally founded as an engineering company in 2013, and now has three strands – home ser- vices, domestic energy retail, and research and develop- ment. The group announced in February last year that it would sell off its domestic retail business Flow Energy – which reported a turnover of £98.4 million but made an overall loss of nearly £9.2 million for 2016 – due to pressure on margins and a desire to pursue growth in its smart boiler business. However, it halted the sale aer a US investment firm offered to provide funding to help turn the business into a "viable challenger" to the major retailers, and decided, instead, to step back from its boiler business. Flow Energy managing director Andrew Beasley meets Utility Week in London to talk through some of the reasons behind the company's recent decisions, the issues facing smaller suppliers, and where he sees the energy market heading. Many small suppliers have struggled over the past few years because they have not been able to afford to hedge against wholesale prices, which have risen sharply and have offered loss-leading tariffs. A case in point was GB Energy Supply, which ceased trading in November 2016 as rising wholesale prices made its busi- ness "untenable". Brighter World Energy then closed at the end of 2017, saying its business model was unsus- tainable because of market conditions. More recently, Future Energy shut up shop saying the marketplace is "difficult for challenger energy suppliers, which lack the financial advantages of larger, national energy firms". Even the big six are feeling the squeeze: SSE and Npower announced the merger of their retail businesses to create the second-largest supplier in the market and, last week, RWE and Eon announced a deal in which Eon would take on Innogy's retail business. Beasley warns that the market could suffer: "We could see a consolidating giant market at one end and an increasingly straggling market at the other and a challenging position for those in the middle." Flow, unlike many small suppliers, hedges against wholesale prices – as it is required to as part of its deal with Shell – which supplies the company gas and elec- tricity at wholesale rates. "We're possibly quite unu- sual," he says. Hedging can oen reduce your margin, and it does in Flow's case. "I speak to my shareholders and the rest of the board, they say: why is it that some small suppli- ers came out of last year with a higher gross profit? "The answer is if you buy month-ahead or week-ahead on a falling market, you generally do better than if you hedge two years out like we do. The kicker comes when it goes the other way, and that was the GB Energy scenario." When the US investment was first announced, the idea was that the group would raise up to £29 million through loans and share sales to allow it to quadruple the number of gas and electricity customers it supplies to more than one million. However, the company struggled to get past the 250,000-customer barrier – the point at which payments into government social schemes such as the Warm Home Discount (WHD) and Energy Company Obligation (Eco) kick in. In a trading update at the end of last year, Flow made a strategic decision to drop back below the 250,000-cus- tomer level. "We actually churned a lot of customers last year. We brought in a lot of higher value customers through a variety of different channels and we dropped some of the more acquisitive customers who, when they were faced with the price rises we were putting through, were going out and finding that there were significant savings to be made, including from a number of products put out by the big six." In August last year, Flow put its prices up by an average of 10 per cent. Competition in the energy market has risen at an unprecedented rate over the past few years. More than 660,000 customers switched supplier in February, which Energy UK claims is the "highest number ever recorded", meaning the energy market has "never been so competi- tive". While this is good for customers, Beasley warns that many smaller suppliers will "rush up to the 250,000-cus- tomer-barrier and will be unable to move sustainably past it" because of the huge costs they are hit with.

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