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Sturgeon runs big risk with energy pledge

Terry smiling headThey may control something we all need, but running an energy company doesn’t win many friends these days.

The so-called ‘big six’ – British Gas, EDF, E.On, Npower, SSE and ScottishPower – are suffering a customer revolt. They are the new banks, the corporate monoliths the public loves to hate.

A record monthly exodus in September of 163,000 customers to smaller rivals coincided with the latest hike in electricity prices by British Gas, trading in Scotland as Scottish Gas.

Taken together, the six companies control 80% of the market, but their grip is clearly weakening. Small competitors such as Ovo and Our Energy may have a tiny fraction of the market, but the latest data suggests they are beginning to make their presence felt.

They have been assisted by pressure over pricing from customer lobby groups and regulators, The electricity and gas bills of one million more households will be capped this winter after the energy regulator, Ofgem, extended a price cap for vulnerable customers.

Gillian Guy, chief executive of Citizens Advice, said the move was a warning to energy firms that they can “no longer get away with ripping off their poorest customers”.

This is now turning into government action, north and south of the border.

Prime Minister Theresa May has published draft legislation to cap bills for five years while Scotland’s First Minister Nicola Sturgeon last week unveiled her government’s plan for a publicly-owned not-for-profit energy company and pledged to deliver the lowest prices.

Customers are already encouraged to switch to find the best deal, but many who move to another of the Big Six simply find themselves locked into new, equally unattractive deals. The small companies not only offer competitive pricing but are also viewed as more nimble and closer to the consumer.

Jefferies investment bank said 1.1 million customers had already switched this year from the Big Six to smaller competitors, 18% up on the same period last year. SSE lost nearly 250,000 between March and June, and Scottish Power was down by 100,000 in the first half.

Scottish Gas
Electricity prices rising

Trade body Energy UK says the switching figures prove the competitive system is working. Ovo has been taking about one percentage point of market share every quarter for the last four years.

With this combination of a diminishing customer base and a price cap the big six are likely to see their finances squeezed further.

Even so, there are dangers in allowing politicians and consumer groups to be too focused on driving down prices. Some companies are so keen to sign up customers that their rates don’t make them any money.

Energy companies have long argued that they need to raise prices to cope with fluctuating wholesale prices and to invest in their networks. A programme of constant price cutting therefore starves them of this resource. They also point out that far from ripping off consumers, margins are already tight.

The backlash is now beginning, led not surprisingly by the Big Six firms whose shares have taken a battering on the prospect of lower earnings.

E.On argues that the price cap would actually hit competition rather than encourage it. Michael Lewis, the firm’s UK chief executive, argued in an interview that “the market is working quite well”. There are 60 competing firms and a high level of switching, he says. With margins cut there would less of an incentive for new entrants.

SSE and EDF expressed concern that the Scottish government’s plans risked deterring investment in the industry.

Given the scope of Ms Sturgeon’s ambitions she has perhaps the most to prove, not least that a state-run energy company can achieve what two commercial operators apparently cannot. It may not have to service shareholders but shareholders also provide capital.

Ms Sturgeon has yet to reveal full details about how she would finance this new enterprise, unveiled to an adoring conference but appearing to outsiders as an attempt to divert attention from failures in education and health.

A simpler solution to lowering prices would be to cut VAT on energy bills, an issue rising up the Brexit agenda.

The debate is likely to heat up – so to speak – this week when Iain Conn, managing director of Centrica’s domestic retail business and a vocal critic of a price cap will be questioned by MPs. Also giving evidence will be the chief executive of Ovo and the head of the energy regulator, Ofgem.


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