Civic Power Supply and the Need to Avoid the Big Six Becoming the Big Twelve - Current±
11 March 2019
The news in relation to energy supply companies in the UK generally is on something of a downturn. Over the past few years, profit margins have been considerably squeezed, causing grief all around.
For the big six energy companies, who are now losing customers at an alarming rate (over past years 1.7 million people have left to move to other providers) this may not be fatal as all of them have other elements to their businesses, such as generation and distribution. Whilst concerns about profit levels, a lack of transparency and suspected collusion to keep prices high have driven trust in energy companies to an all time low – and the adverse market conditions may well be hurting them - frankly it is not going to put them out of business.
However, smaller companies are in a completely different position. Most of these only operate in the supply space and so rapidly increasing wholesale costs and the inability to buy sufficiently large tracts of power well in advance (another advantage of the big six) are proving fatal.
Up to 10 small energy suppliers have gone to the wall in the past year alone, including Economy Energy, Usio Energy, GB Energy, Future Energy and Iresa Energy. Other providers, such as Ovo and Octopus are using these failures to take over the failing companies and give a large boost to their own customer numbers. As an example, Octopus was recently handed £13m by OFGEM to take over the customers of the failed company Iresa Energy.
This is not a good position for the consumer in the UK. If we are not careful, the ‘big six’ will turn into the ‘big twelve’ with Ovo, Octopus, Ecotricity, Bulb and others simply taking a place at the top table. In tandem, more small companies will either go bust or leave the market and more still will be dissuaded from entering into it. This will not help promote better competition, a position which has slowly been emerging with the creation of new companies.
In many ways, many of the new entrants have been the authors of their own misfortune. The so called ‘tease and squeeze’ approach has visibly failed, causing many companies taking this approach to be forced to cease trading. This is where a new company deliberately advertises loss leading prices to quickly attract customers to switch, in order to try and build scale, and then simply increases its prices to more realistic levels. Such an approach is a race to the bottom and has to stop. Perhaps this year’s failures will finally help the penny drop that this approach simply does not work.
But where does all this turbulence leave the local authority energy services market? The truth is that this remains unpredictable, to say the least. There are only two fully licensed ESCOs that can sell electricity and gas to consumers in the UK, namely Robin Hood Energy in Nottingham and Bristol Energy.
Portsmouth City Council was expected to be the next entrant to this select group, but having undertaken all of the preliminary work to establish its own fully licensed company, a change in administration of the Council (from Conservative to Liberal Democrat), saw the decision reversed. As a result, the Council is currently in the process of selling Victory Energy, the separate corporate entity it established.
It has become clear that for fully licensed ESCO’s, it is not the cost of establishing the company that is the issue, so much as the costs of running the company in the early years, before such ventures make a profit. This can be a big strain on local authority revenue streams at a time when these are really tight.
Also on the civic front, it was also announced just after Christmas that Our Power was to cease trading. The Edinburgh based ethical energy firm was set up in 2016 with the backing of the Scottish Government and was owned by social housing providers, community organisations and local authorities. This was a fully licensed ESCO but was established particularly in relation to social housing. It is the first casualty from the public sector entry into this market. It had amassed 38,000 customers who will now transfer to another provider.
So all this turbulence is troubling for any local authority that wants to enter into this energy supply market. But it is absolutely essential that local authorities do continue to actively consider this option.
The civic alternative will never be the cheapest option for the consumer but offers a genuine alternative to private sector providers. Local authorities have a strong covenant with the public at a time when trust in the big six energy suppliers is at an all-time low. Civic providers will not offer loss leading prices nor chase the ‘switchers’ but will offer fair and constantly discounted prices from a respected supplier with a strong covenant and wider public and social good as a result. If that alternative disappears from the market, then it will be a loss to the public, at a time when alternative provision is so badly needed.
This is why the civic alternative must not be taken off the table, as it offers a genuine alternative to other providers. It is known that a number of authorities are still keen to go down this path and hopefully market conditions will improve to make this possible.
Stephen Cirell is an independent consultant on the green agenda specialising in local government and the public sector. He is author of Energy Services Companies, White Label Arrangements and Their Role in Local Government, published by APSE.