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TEXT 6

Big switch

Increasing competition is shaking up a moribund energy market

NOT so long ago, Britain’s “big six” energy suppliers—SSE, EDF, Npower, E.ON, Scottish Power and British Gas, now owned by Centrica—seemed to have the energy market stitched up. Now, however, all that is changing, and rapidly.

The big six—British and foreign companies (alongside the former state monopoly, British Gas) that bought up the retail energy business after liberalisation in the late 1990s—are being challenged by a wave of small, nimble and ambitious new companies. They have been eating up market share at a remarkable rate. The challengers’ share of the household market has risen from 2% in early 2012 to almost 9% now.

Just in the past year, some of the challengers have made spectacular gains. First Utility, the market leader among the new companies, has more than tripled its number of customers, to 650,000. The smallest of the big six, Scottish Power, still has over 5m customers, but if the challengers go on at this rate, the market share of the big six could have shrivelled by almost 20% within three years.

Most of the challengers’ growth is a consequence of customers switching suppliers. Switching used to be almost entirely between the big six. Now more than half of customers who switch do so from one of the big six to a smaller competitor.

It is not difficult to account for the sudden success of the new companies. They are the beneficiaries of popular anger at the incumbents, particularly over price and customer service. On price, customers saw energy prices rise gradually during the 2000s, causing little concern, but much more steeply thereafter; between 2011 and 2013 there was an increase of over 15% in average household gas and electricity spend. There is still debate as to whether these rises were justified, or whether it was blatant profiteering by the big six, but many customers drew their own conclusions. There was a stampede towards the smaller, and usually cheaper, alternatives. At this point the big six were put on the naughty step by the politicians, with Ed Miliband, in particular, promising that if the Labour Party were to win the next election his government would introduce a price freeze.

It is not all about money, however. Stephen Fitzpatrick, the head of Ovo Energy, says that his company is as much about offering good service as “fair prices.” The big six have long been castigated by consumer bodies for their dreadful customer service.

The new companies also offer the consumer more choice than before, particularly in terms of renewable energy. Good Energy, for instance, offers 100% green energy. It is consequently a bit more expensive than its peers, but is still growing. The challengers are also taking a lead in applying new technology to measuring consumption; “smart meters” allow people to reduce their bills.

All this is good news, finally, for the beleaguered consumers. They have more choice, and the lower prices that the challengers can offer have forced the big six to reply in kind. Since August they have begun to slash their one-year fixed price tariffs in order to woo customers back.

Indeed, Mr Miliband’s threat of draconian intervention already looks dated. If anything, argues Mr Reid of Lazarus Partnership, a research outfit, the Labour Party leader might have forced prices to remain higher for longer than they might otherwise have been. Companies have been reluctant to reduce prices too much, he says, for fear that they might not be able to raise them again after the election.

The Economist, November 29^th, 2014