NEWS

Two recent deals in the UK energy sector have the potential to shake the industry to its foundations. Is it right for the consumer?

The UK power industry is changing shape. It’s all down to two deals happening right now.

• E.on is buying npower and merging the two businesses
• OVO Energy is buying SSE’s home energy business in a deal worth around £500 million

Will this have an impact on the industry? What will it mean for consumers? Will this be a boost for the average energy user, or is too much power consolidated in too few hands? 

 

The news

The traditional Big Six in the UK energy industry is becoming the Big Five. That is because npower is being absorbed by E.on. Both of these companies are members of the Big Six, so one place has to go!

Many thought this slimming down of the industry giants was going to happen in 2018, when npower and SSE proposed a merger. However, it fell through, with SSE citing that the new national tariff price cap would make conditions unfavourable for them.

Now, npower is moving to E.on. This is happening because E.on are buying Innogy, npower’s parent company, formerly a part of RWE. This deal is part of a complex asset swap between RWE and E.on, two giant German multinationals.

The other deal is OVO Energy buying SSE in a deal worth in the region of £500 million. Since its founding in 2009, OVO has grown into a challenger to the Big Six, currently supplying 1.5 million customers. Now it is ready to join the top table. OVO’s USP is green energy, which has become a hot topic in recent years. It had already taken on new customers from Economy Energy and Spark when these companies ceased trading.

When this deal goes through, OVO will take on 3.5 million more customers, making it the second-largest supplier in the industry, behind British Gas and their 12 million customers.

 

Why are these deals happening?

These are challenging times in the UK energy industry. It’s no surprise that companies are seeing consolidation as a solution. 

More consumers than ever are switching their energy suppliers. In the process, they are ditching the traditional Big Six. OFGEM figures from 2018 showed that 25% of consumers now get their energy from providers outside the Big Six. 19% of consumers switched suppliers between June 2017 and July 2018, an increase of two percentage points from the previous year. There is more competition than ever in the sector, especially from smaller, more specialist companies who can promote greener credentials.

Another problem for suppliers is that in June of 2019, the UK Government’s energy price cap came into force. This law caps how much energy suppliers can charge their customers if they are on default tariffs. While this is good news for the consumer, it eats into the suppliers’ profitability.

There are also a lot of synergies in the UK energy industry which makes it ripe for consolidation, as long as the regulators allow it. After all, npower and E.on essentially do the same thing. Merging the two companies shouldn’t be too hard.

All these factors have led to the consolidation we see now.

 

How is consolidation impacting the industry?

On an individual level, things are still to be decided. The purchasing companies have not said what they will do with their new brands yet. At the moment, npower customers still receive their bills from npower. However, you would presume that E.on will phase out the npower brand in due course.

Part of the downside of the E.on and npower merger is job losses as the two companies consolidate. In February 2019, npower announced 900 job losses, reducing its employee numbers by 14%. Unfortunately, that will probably not be the last job losses we hear about, as more synergies are found.

On a macro, industry level, there is a reduction in competition. That much is clear. The Big Five will have more customers than the Big Six did (with OVO’s original customers becoming part of it), with fewer players.

However, this may not make much difference to the new Big Five. There has been a lot of pressure on them to change the way they operate from before these deals came about. The Big Six have been losing customers to smaller, independent suppliers, not to each other. For that reason, it’s unlikely the new Big Five will be raising prices to take advantage of a lack of competition. There is no incentive for them to do it.

For customers, again, there will be no real change. However, consumers may see this consolidation as a reason for them to shop around when it’s time to renew their energy contracts. When npower customers find themselves receiving bills from E.on, they might think it’s time to get online and look elsewhere for something totally new.

 

What do we think?

At Meter Corp, we like to keep a close eye on developments in the UK energy industry. We’re never shy of saying something is a bad idea, if it is. 

On this, we have to sit on the fence a little and see how it plays out. Wait and see.

There could be issues that arise from this consolidation.

• More smaller suppliers could go out of business, or get gobbled up by larger challengers or even the Big Five
• Further Big Five tie-ups could happen, causing a more significant drop in consumer choice

On the other hand, customers could see better service and lower prices from the Big Five, as they try to stave off competition from smaller, challenger brands. We’ll see.

We’ll be sure to keep you up-to-date with developments as they happen, so make sure you stay in touch with Meter Corp.