The last month has seen announcements relating to the UK’s retail energy market which have potentially seismic implications.
Consolidation & exit: With OVO’s proposed acquisition of SSE’s customer base and the path cleared for E.ON/Npower integration, the traditional ‘big 6’ view of the market will be a thing of the past. The fact that SSE have decided to exit the market, and the same option is one of several being tabled for Npower’s beleaguered customer base highlights how tough it really is to make money in the current climate. This massive structural change however creates challenge and opportunity for the whole market. Also announced is Octopus and Coop’s planned partnership demonstrating the value placed on scale in being able to deliver low cost to serve operations. We’re seeing the emergence of a new set of ‘major players’ with all the benefits and challenges that scale entails.
Naughty step: OFGEM unceremoniously put four suppliers on the naughty step this week, for failing to pay their renewable obligations (RO) on time. Inevitably the focus has been on Robin Hood Energy, who owes the lion’s share of the £14.1m outstanding with media interest focusing on the fact that failure to pay the RO has historically been an early warning indicator of supplier failure. Whatever, the outcome for Robin Hood, the public statements made by Nottingham’s auditor highlights how tough it is for all concerned after an investment made to date of around £40m. The overlay here is that Robin Hood’s fate is heavily linked to the majority of the existing white label suppliers favoured by local authorities. Robin Hood has been highly successful in leveraging the white label model- which could again have the potential for major shifts in market dynamics if it unwinds.
Continued exits and few new entrants Eversmart and Solarplicity join the twelve other small suppliers that have exited the market, and the flow of new entrants has almost stopped. The optimism of a few years ago appears to have evaporated after the slew of failures and media coverage in the last year.
In this context, it would be easy to run for the hills rather than look at investing in energy retail.
However, from adversity comes opportunity, and there is an argument to say there has never been a better time to enter the market.
1) The new model: There is now a clamour in the market to reinvent the customer proposition. Only today we’ve seen announcements surrounding link ups between Bulb Energy with Samsung and Chameleon and Shell Energy with PassivSystems. There is a drive to transform supply businesses into energy service providers as quickly as possible. Why? The margin from supply only is not sufficient to sustain businesses and more importantly the drive to reduce carbon supported by smart technologies is quickly turning into a pull from consumers. Large scale and established business models by nature do not have the agility to transform overnight- but a new entrant starting with a very different and targeted proposition has potential to grow fast.
2) Smart metering: The Smart meter programme has been a catalogue of disasters, and whilst roll out is way behind where it should be, the technical, supply chain and financing elements are now in place to enable a new entrant to enter the market with a ‘smart only’ offer, without having to manage all the legacy issues associated with an established dumb/SMETs1 portfolio. Until SMETs2 meters were genuinely mainstream this year, this has not been an option.
3) Supply chain support: Part of the challenge of entering the market is that it is complex and expensive. With very tight margins, many suppliers go bust before they tip into profit or at best do not have the capital reserves to deliver the innovation that they know they want to. The ‘supplier in a box’ model has been hugely successful in bringing many new suppliers to market and there are several excellent companies in the market, who support new entrants in working through the complexity- But they are not cheap. With the change in market dynamics, a prospective new entrant may be able to have very different commercial conversations around cost, structure and risk than have prevailed through the period of ‘boom’ in new entrants.
4) Learning from others’ mistakes: Harsh though it may sound, there is a lot to be learned from the demise of those who have gone before- Chasing prices to the bottom via price comparison websites, is not a smart route to market. Likewise failing to manage wholesale market risk and buying on a ‘sunny side up’ basis inevitably goes sour when the market reverses (as it reliably does). Failure to manage cash effectively (eg spending rather accruing cash for the Renewables Obligation) also has an inevitable outcome. Risk management has to be central to any retail business operations.
Entering the energy retail market is complex and not without risk. However, the ability to lead the way in helping consumers drive towards a low carbon future is a compelling business proposition. It is the ability to effectively develop a sustainable market strategy and understand and manage the inherent risks that will separate those who win and those who lose. It could be a great time to join the party!
EnergyBridge helps businesses, investors and local authorities navigate the complexity of the UK market with a combination of market and operational expertise and experience. www.energybridge.co.uk