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UK Energy Retail: Precarious at best. Un-investible at worst.


Last week Bulb Energy published its latest financial results which were positioned as ‘another very successful year’ with 46% growth in the customer base.


This sounds great, until reading that losses for the year were £63m, significantly reduced on the prior year which were losses of £129m. Net liabilities as reported are minus £233m. This doesn’t sound so very successful for a business that has been trading for five years.

Historically, in energy retail, it was all about scale. If you could grow to 1 million+ customers, it was generally considered that you could develop a sustainable and profitable business. Bulb is already at 1.7m customers and according to OFGEM represent 5.7% market share. The trouble is, that what held true historically doesn’t anymore, as margin per customer has been almost entirely eroded.


On the face of it Bulb is a good company. It has grown successfully through quirky and price competitive sales and marketing. Customer service holds up against the competition even if it admits to some growing pains. It is underpinned by a strong technical platform and isn’t incumbered by some of the legacy issues impacting the historic ‘big 6’. So why can it not make money?


Fundamentally, the energy retail market is on its knees and needs a change in regulatory framework fast.


OFGEM’s own reporting highlights that across all the big players average margins are now in negative territory at -1.48%. Stating the obvious, negative margins do not allow for a sustainable business model, for new or established businesses. SSE’s share price bounced on its market announcement this week, no doubt helped by the fact that it is no longer weighed down by a loss making retail division, having sold it to OVO.


Greater competition was supposed to be the answer to market evolution. However, we have seen rapid shrinkage in the market as many new entrants have exited either through trade sales or failure. Two years ago there were 70 reported players in the market, as at September 2020, this number had reduced to 55- and we’ve seen further exits such as Bristol Energy, Robin Hood Energy, Green Network Energy, Nabuh Energy and Simplicity since that date. In reality, around 92% of market share is held by only 12 players, the majority with the traditional players with one or two break outs, including Bulb Energy, added to the mix. Even the most successful new entrants, such as Bulb and Octopus, are yet to make money.


After a flurry of new entrants in around 2016 and 2017, the last four quarters to September 2020, as reported by OFGEM saw only three new entrants, and nine exits. We are in a contracting market, which in itself is not a problem, except when all the remaining players are still struggling to make positive margins. It is not a function of bad business, it is a function of historic market design and over burdensome regulation.


The facts of the matter are that the risk reward dynamic associated with energy retail now sits firmly in the ‘red risk’ category. The market as designed using the ‘supplier hub’ model, puts disproportionate risks on suppliers as opposed to other market participants, and the price cap and ongoing regulatory burden associated with SMART meter roll out, and system change programmes, mean that the suppliers have little bandwidth to focus on innovation and new products. Whilst there is still investor support for some of the new suppliers (including Bulb), it is increasingly associated with a story of international expansion away from the UK. The old historic ‘big six’ are having to reinvent themselves and modernise, the new entrants are fighting for survival. All together, energy retail is a pretty sick and unattractive sector.


This is all true without taking into account the impact of COVID. Ultimately customer debt risk sits with the suppliers and there is general consensus that we haven’t yet seen the full impact of this whilst government support schemes have been in place. It is difficult to predict the full impact, but it is not going to help supplier’s balance sheets or profitability.


OFGEM have, to a degree, recognised the issue and highlight in their recently published Forward Plan the ambition to deliver an updated retail market. They have also allowed some allowance of increasing debt in the latest price cap calculations. But it is the speed of change that is key now- and history of regulatory change does not engender great hope.


The energy retail market does not lack ideas. It does not lack capability. But until the regulatory model is changed or suppliers are once again allowed to make sufficient margin to invest in innovation, it is a sector that looks in the UK, at best, precarious and at worst un-investible. Inevitably it will be consumers who suffer.