The Big Six Could See Bigger Rivalries After U.K. Energy Price Cap
(Bloomberg) -- The energy price cap announced by Britain’s regulator Ofgem may help smaller suppliers grab customers from the biggest six utilities.
That’s the conclusion of some analysts and energy suppliers following the announcement Thursday of how much companies can charge households on so-called standard variable tariffs. The limit was set at 1,136 pounds ($1,465) a year for a typical duel-fuel customer, or about 7 percent below the average SVT price. How effective the cap will be divides opinion.
Here are some views from across the industry:
The U.K.’s largest utilities have the most to lose and unsurprisingly have opposed the cap from the beginning. It means lower profits and the potential loss of their most lucrative customers. Suppliers from SSE Plc to EON SE argue that a ceiling will reduce competition, because prices will bunch around the cap. Centrica Plc, the biggest supplier to U.K. homes, describes setting a fair price cap as an “impossible task.” EON blamed 500 U.K. job cuts on cost-cutting measures needed before the tariff squeeze.
Medium-sized utilities Ovo Energy Ltd. and Octopus Energy Ltd. are in favor. They stand to win customers that are shifted off SVTs and onto other contracts. The “shakeup will turbocharge competition for everyone’s benefit” and drive down prices, according to Greg Jackson, chief executive officer of Octopus.
“The cap is a godsend for small suppliers,” said Lakis Athanasiou, an analyst at Agency Partners LLP. They can’t compete against the deep discounts offered by some of the Big Six as the small companies “do not have the ‘sticky’ customer base to offset loss making discounts with high standard tariffs,” he said.
2. Consumer Groups
Consumer groups support the principal of a price cap. Most users in Britain don’t think much about their energy supply and more than half of households have never switched provider or have only changed company once. Price plans typically last one year before customers are put on a more-expensive SVT, reinforcing perceptions that utilities are taking advantage.
While the best deals on the market won’t be the capped default tariffs, the majority of customers should now be protected, according to the Citizen’s Advice information service. Martin Lewis, founder of MoneySavingExpert, warned that a reduction in the differential between tariffs could discourage switching.
3. Industry Groups
Government ministers couldn’t be too heavy-handed bearing in mind the need to draw 100 billion pounds in investment over the next decade to keep the nation’s electricity system up to date.
“It’s crucial that the cap ensures we have an investible energy sector where efficient and financially robust companies can trade, and innovation and engagement can continue to flourish and deliver benefits for consumers,” said Lawrence Slade, CEO of industry lobby group Energy U.K.
The energy price cap plan, mooted by former opposition party leader Ed Miliband in 2013, was then taken up by Prime Minister Theresa May last year. Both sides of the house united to see its speedy progression through parliament before this summer. Labour has still been critical, saying that the government took far too long to introduce the policy.
The Business, Energy and Industrial Strategy Committee, headed by Labour’s Rachel Reeves, found in its pre-legislative scrutiny of the bill that the Big Six brought the introduction of a price cap upon themselves by raising prices and failing to help customers on SVTs.
The aim of the cap is to reduce the amount that customers overpay on their bills, which was measured at 1.4 billion pounds by the antitrust watchdog in 2016. Ofgem estimated that the cap would save consumers 1 billion pounds.
5. Industry Analysts
Since May’s announcement in 2017, the threat of the price cap has been hanging over utility stocks, damaging investor confidence in the sector. Now that the level is known it should “remove a key area of uncertainty,” according to John Musk, a utilities analyst at RBC Europe Ltd. Although the limit will provide a quantifiable level of “regulated earnings,” 2019 still looks “challenging” for Centrica in particular, according to a report by Verity Mitchell, an analyst at HSBC Holdings Plc.
Centrica rose to the highest for more than six months on Thursday while SSE gained the most since June.
The crude measure of an absolute price cap could have been avoided if Ofgem had tackled the practice of offsetting loss-making tariffs offered to new customers with high standard tariffs, according to Athanasiou at Agency Partners. This behavior turned the political spotlight on the sector, he said.
Ofgem aims to have the cap in place by the end of the year. The level will be updated every six months until 2020 with the option to extend it to 2023 if needed.
©2018 Bloomberg L.P.