The big six energy suppliers are facing the loss of a quarter of their customers over the next six years, knocking £500m a year off their collective profits, City financial analysts have said.
Some large companies could be driven out of the market, the research arm of Citigroup investment bank said in a report released on Wednesday. But consumers will still suffer as the average dual-fuel bill will be at least 20% higher by 2020, the analysts predict.
The rise of small suppliers highlighted in the Citi report, UK Energy Policy – Unwinding the Big 6, will please the coalition government but the authors said Ed Miliband’s promised price freeze has played a key role too.
The report concluded: “Due to increasing competition we see the market share of the ‘Big 6’ in energy supply declining from 98% in 2013 to below 70% by 2020. When combined with declining demand and lower margins the total profit pool available to the large energy suppliers could fall [by about] 40% from [about] £1.2bn in 2013 to just £700m.”
The grim assessment of the future for the big six by Citi will worry traditional shareholders but will inspire the new breed of independent energy providers such as First Utility and Ovo that have been gaining customers by offering cheaper tariffs.
The large integrated businesses such as Centrica, SSE and E.ON have partly been the architects of their own problems, Citi said, noting that “historically customer service has not been a key focus”.
It said all the six large utilities – ScottishPower, EDF and npower are the remaining three – which are facing an investigation by the Competition and Markets Authority, will need to restructure their supply businesses and improve customer service if they are to hang on to even the predicted lower number of customers. Citi said some of the market shakeup can be attributed to politics.
“The UK energy supply market has become increasingly competitive in the last year due partly to the fallout from the Labour party’s proposed price freeze announcement late last year and increasing publicity for the industry,” said the report.
It added: “As a result, the number of customers switching suppliers increased dramatically in the fourth quarter 2013/first quarter of 2014 but the rate of switching has fallen back towards historical levels in recent months.”
Citi noted that Centrica, which provides gas and electricity under the British Gas label, reported earnings before interest and taxes of more than £600m from residential supply in 2012.
“If the supply market does develop as the current trends suggest and the available profit pool declines by circa 40% we may well see some participants simply running their supply business to maximise cashflow in the short term and exit the market at some point,” it argued.
Citi also believes the big six’s share of power generation could be driven down from 70% to less than 50% by 2020 because of a reduction in the supply business, cuts in the availability of renewable energy subsidies from the government and the closure of traditional plants.
The market share in the supply side of the big six has fallen from 98% to about 92% in the past year, partly driven by anger about last autumn’s price rises.
Figures from independent consultants Cornwall Energy indicate customers have 3.8m accounts with the smaller suppliers and 45.9m with the big six. Citi believes retail bills will rise by 20% by the end of the decade as a result of factors including inflation, increased infrastructure costs and the effect of government green policies.
In a separate development, the government is expected to reveal changes to its “contracts for difference” and “renewables obligation” subsidy schemes that the solar industry fears will damage the sector.
The Renewable Energy Association said: “With stable policy, solar is on track to be subsidy-free by the end of this decade, but pulling the rug on the industry would derail those cost reductions.”
theguardian.com
Some large companies could be driven out of the market, the research arm of Citigroup investment bank said in a report released on Wednesday. But consumers will still suffer as the average dual-fuel bill will be at least 20% higher by 2020, the analysts predict.
The rise of small suppliers highlighted in the Citi report, UK Energy Policy – Unwinding the Big 6, will please the coalition government but the authors said Ed Miliband’s promised price freeze has played a key role too.
The report concluded: “Due to increasing competition we see the market share of the ‘Big 6’ in energy supply declining from 98% in 2013 to below 70% by 2020. When combined with declining demand and lower margins the total profit pool available to the large energy suppliers could fall [by about] 40% from [about] £1.2bn in 2013 to just £700m.”
The grim assessment of the future for the big six by Citi will worry traditional shareholders but will inspire the new breed of independent energy providers such as First Utility and Ovo that have been gaining customers by offering cheaper tariffs.
The large integrated businesses such as Centrica, SSE and E.ON have partly been the architects of their own problems, Citi said, noting that “historically customer service has not been a key focus”.
It said all the six large utilities – ScottishPower, EDF and npower are the remaining three – which are facing an investigation by the Competition and Markets Authority, will need to restructure their supply businesses and improve customer service if they are to hang on to even the predicted lower number of customers. Citi said some of the market shakeup can be attributed to politics.
“The UK energy supply market has become increasingly competitive in the last year due partly to the fallout from the Labour party’s proposed price freeze announcement late last year and increasing publicity for the industry,” said the report.
It added: “As a result, the number of customers switching suppliers increased dramatically in the fourth quarter 2013/first quarter of 2014 but the rate of switching has fallen back towards historical levels in recent months.”
Citi noted that Centrica, which provides gas and electricity under the British Gas label, reported earnings before interest and taxes of more than £600m from residential supply in 2012.
“If the supply market does develop as the current trends suggest and the available profit pool declines by circa 40% we may well see some participants simply running their supply business to maximise cashflow in the short term and exit the market at some point,” it argued.
Citi also believes the big six’s share of power generation could be driven down from 70% to less than 50% by 2020 because of a reduction in the supply business, cuts in the availability of renewable energy subsidies from the government and the closure of traditional plants.
The market share in the supply side of the big six has fallen from 98% to about 92% in the past year, partly driven by anger about last autumn’s price rises.
Figures from independent consultants Cornwall Energy indicate customers have 3.8m accounts with the smaller suppliers and 45.9m with the big six. Citi believes retail bills will rise by 20% by the end of the decade as a result of factors including inflation, increased infrastructure costs and the effect of government green policies.
In a separate development, the government is expected to reveal changes to its “contracts for difference” and “renewables obligation” subsidy schemes that the solar industry fears will damage the sector.
The Renewable Energy Association said: “With stable policy, solar is on track to be subsidy-free by the end of this decade, but pulling the rug on the industry would derail those cost reductions.”
theguardian.com
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