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Green Startup Breaks ‘Big Six’ U.K. Oligopoly With SSE Deal

Green Utility Breaks Up U.K.’s ‘Big Six’ Oligopoly With SSE Deal

(Bloomberg) -- Ovo Energy Ltd.’s deal to buy the battered retail unit of Scottish utility SSE Plc will make it one of Britain’s largest energy suppliers, disrupting the ‘Big Six’ that have dominated the market for almost two decades.

Ovo, a 10-year-old startup that has differentiated itself by offering green power and better customer service than its peers, has about 5% market share of all electricity supplied in the U.K.. After the 500-million pound ($622 million) accord announced on Friday, it will now become the biggest provider of power in the country behind Centrica Plc.

Green Startup Breaks ‘Big Six’ U.K. Oligopoly With SSE Deal

Stephen Fitzpatrick, Ovo’s 41-year-old founder and chief executive officer, said that ever since a deal between SSE and Innogy SE-owned Npower collapsed late in 2018, SSE’s reputation for customer service and some of their technology was a good fit for Ovo. News of their discussions broke earlier in the summer.

“You can’t make much money from supplying energy unless you have economies of scale of a top three retailer,” said Elchin Mammadov, a Bloomberg Intelligence analyst in London. “The margins are small, competition is high and there is always a risk of a negative regulatory intervention.”

SSE Sells U.K. Retail Unit for 500 Million Pounds to Ovo

The deal should please the U.K. government, which has tried to boost competition for the biggest players. That’s led to a market flooded by small and medium-sized suppliers offering cheaper and more flexible tariffs for energy unencumbered by the big corporations that the biggest suppliers sit in.

According to Cornwall Insight, an industry consultant, Ovo had a 4.8% market share in the first quarter, while SSE had 10% of the nation’s dual fuel accounts.

“I don’t think scale is a good indicator of how I would define the company,” Fitzpatrick said by phone. “We started out as a customer-centric retail energy business and really nothing has changed.”

Green Startup Breaks ‘Big Six’ U.K. Oligopoly With SSE Deal

Technology and how it manages vast amounts of data has enabled Ovo to grow, including the advent of smart meters. Suppliers have gone from having one meter reading a year to one every 30 minutes, he said. The company says it was the first main supplier to not use coal or nuclear in its fuel mix. It guarantees 33% renewable energy in its standard tariff.

“Advances in technology, the falling cost of renewable energy and battery storage, the explosion of data and the urgent need to decarbonize are completely transforming the global energy system,” Fitzpatrick said.

The company says it has grown its customer base by 50% in the last 12 months, serving about 1.5 million customers before the deal.

Earlier this year, Mitsubishi Corp. invested in Ovo in exchange for a 20% stake to help it grow further. It’s expanding to France and Spain, with plans to move into the Australian and German markets after that. He declined to comment on whether he has any plans for an initial public offering.

“We are very busy on working on helping customers reach a carbon zero future and our size isn’t going to change that,” Fitzpatrick said.

The entrepreneur has also set up an electric aircraft company and heads up Kaluza, an intelligent platform used by electric vehicles and batteries to increase energy flexibility.

SSE

SSE had been trying to either sell, merge or list its embattled retail unit since the talks with Npower collapsed. As recently as May analysts had valued the unit as being close to 1 billion pounds, but headwinds from a dwindling customer base and stringent government regulations had seen its prospects dwindle.

“We have long believed that a dedicated, focused and independent retailer will ultimately best serve customers, employees and other stakeholders,” Alistair Phillips-Davies, SSE’s CEO, said in a statement.

The deal will allow the firm to focus on its strategy of investing in renewable energy and electricity networks. Shareholders will be “relieved” that the deal has been made that leaves a “cleaner group structure,” RBC Europe Ltd.’s utility analyst John Musk said in a note.

Shares in SSE rose as much as 2.2%, the biggest gain since Aug 30.

To contact the reporter on this story: Jeremy Hodges in London at jhodges17@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Lars Paulsson, Rob Verdonck

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