Establishing a supplier that’s fit for the future

SSE recently submitted its response to the Government’s call for evidence on Professor Dieter Helm’s ‘Cost of Energy Review’. Professor Helm was tasked by Government with recommending how to keep prices as low as possible to support the UK’s ambition to have the lowest electricity prices in Europe.

The Review reflects the enormous amount of change that is underway across the sector and, in energy supply, the challenges faced by suppliers in responding to the changing dynamics of an increasingly competitive market. Three trends best characterise the high levels of competition now seen in the GB retail market.

Firstly, low barriers to entry and expansion for new-entrants mean there are now over 60 suppliers actively competing for customers. This rapid growth has been enabled through a number of regulatory measures such as the Warm Home Discount (WHD) and Energy Company Obligation (ECO) exemption, which have allowed small and medium-sized suppliers to widen their discounts and compete fiercely on price, as well as other factors such as customer service. All the evidence suggests smaller suppliers will continue to grow their market share – in October 2017, 32% of all those who switched supplier moved to a small or medium sized supplier.

Secondly, in recent months a number of experienced new-entrants from overseas markets have moved into the GB energy supply market, including the French supplier ENGIE and the Swedish supplier, Vattenfall. Separately, Shell announced it had signed an agreement to acquire the largest mid-tier supplier, First Utility. These additions to the market are likely to strengthen and diversify the tariffs and products available for customers.

Thirdly, consumer engagement in the market continues to increase as demonstrated through ongoing increases in switching rates. Last year a record 4.5 million customers took steps to save on their energy by switching electricity provider. Price comparison websites have helped make it even easier for customers to compare the price of energy and related services from a range of providers, enabling them to make informed decisions about which provider to choose in order to save money. Alongside this, voluntary initiatives such as the Energy Switch Guarantee, which SSE supports and which now extends across 90% of the market, have helped build consumer trust in the switching process by ensuring a hassle free switch in 21 days or less.

Taken together, these trends are characteristic of a market that has become increasingly competitive and which is delivering benefits to customers. Of those customers who switched in 2017, 91% said they were motivated to do so because better value tariffs were on offer. As competitive pressures in the market continue to intensify, one of the biggest longer-term challenges will be how market participants remain sufficiently agile and flexible to ensure they are focused and capable of delivering competitive and innovative offerings for customers.

The future GB energy supply market will be subject to significant technological change. Consumers will be empowered through the roll out of smart meters, which will end the need for estimated billing by providing real-time information on consumers’ energy usage.  Alongside this, connected homes, domestic household batteries and blockchain all have the potential to disrupt traditional business models in the GB energy supply market. However, this shift to a smarter energy system will require suppliers to be focused on the future, with the capital to invest in innovation to ensure they are able to respond to changing consumer demands.

It is against this backdrop that the proposed merger between SSE Retail and npower has strong strategic logic. By creating an efficient new independent retail energy supplier, the new business will be better able to respond to customer expectations on tariff innovation and technological development. As a standalone retail business, benefiting from its own dedicated board of directors and specialist management team, the proposed new supplier will be better positioned to compete against the 58 other suppliers in the market. By adapting and responding to the changing dynamics of an increasingly competitive market, the proposed new supplier will drive significant benefits for customer.

About the author

Dr Richard Westoby Director of Retail Economics

Richard Westoby was an Economic Advisor with the Department of Energy and a Senior Economist at British Gas before joining the Electricity Industry in 1989. He is currently SSE’s Director of Retail Economics where his responsibilities include pricing, forecasting, business intelligence and aspects of smart metering and fuel poverty policy.

Read more articles by Dr Richard Westoby