Yesterday came the symbolic moment that many in the smaller supplier market had been waiting for. The erosion of dominance by the biggest of the UK’s energy companies culminated in the announcement that SSE (number two of six in market share) and RWE npower (six of six) would combine their household energy and services businesses to create a new, independent energy supplier.
The news that these two would blink first following years of customer losses and fines from Ofgem for various issues is not a surprise. npower has lost millions in recent years after failing to really kick off in the UK, while SSE’s results released yesterday showed the company saw its operating profit fall by a whopping 30.9% in the six months to 30 September.
Combined with the now confirmed energy price cap to be introduced by this most interventionist of Conservative governments, it’s no great shock that npower owner innogy’s chief executive Peter Terium stated the company’s intention to reassess its presence in the UK energy market.
“When we look at the competitive landscape and the uncertain political environment for energy retailers in Great Britain, it is clear that npower would be better placed to offer value to our customers and our shareholders as part of a new company with the ability to succeed in the face of the challenges that lie ahead,” he said yesterday.
SSE was just as realistic when it came to its announcement, suggesting the company was not up to the challenge posed by the break-neck speed of change in the UK energy space.
Echoing words made recently by Ofgem’s Dermot Nolan, chief executive Alistair Phillips-Davies said: “Change is becoming one of the only constants in our sector.
“We are very proud of what we’ve delivered as a group over many years; but the scale of change in the energy market means we believe a full separation of our household energy and services business in Great Britain and the proposed merger with npower’s household and business energy supply and services business in Great Britain, will enable both the new retail business and the remaining SSE to focus more acutely on pursuing their own dedicated strategies, and will ultimately better serve customers, employees and shareholders.”
For innogy, the decision to move away from the UK energy retail sector was a simple one; it didn’t make money. In September the company revealed a new cutthroat attitude to business ventures, stating that should a business unit not lead in terms of market position or profitability, it will get the chop.
Terium clearly had this in mind when he said: “This is a logical step in our 4P strategy to review our market engagements if we aren’t able to reach a leading position in them.”
A new independent addition to the UK energy sector
If successful, the new entity will form a standalone retail business incorporating the household energy supply and services business SSE Retail, and npower household and business energy supply and services business.
SSE will hold on to 65.6% of the business while Innogy is set to pick up a minority share of 34.4%. A note sent out yesterday said innogy plans to retain this share for a period of “at least” six months from admission (not a huge sign of confidence) while it could be in for a £60 million windfall if SSE’s shareholders fail to provide their approval by 31 July 2018.
The resulting firm would offer a new independent addition to the UK energy sector, with both companies presenting this as set apart from the traditional utility incumbents - “a new market model combining the resources and experience of two established players with the focus and agility of an independent supplier,” as SSE sees it.
It will have its own dedicated board of directors, management team, staff and capital, while SSE will focus on its other money-spinning areas of the business: energy generation, infrastructure assets and services, as well as its business customers and households in Ireland.
What are the hurdles?
However, all this is dependent on the deal getting approval not just from shareholders but from the UK itself. Competition rules being what they are, the new supplier could face a series of challenges from the Competition and Markets Authority (CMA), or could peak the interest of the European Commission which also has jurisdiction over certain merger deals.
The CMA has a number of criteria for which the deal will have to meet before it gets involved, beginning with if two or more enterprises cease to be distinct, as will be the case with the SSE and npower businesses.
Secondly, and where this could become an issue, is if these enterprises after the merger, together “supply or acquire at least 25% of all those particular goods or services of that kind supplied in the UK or in a substantial part of it.”
According to Ofgem’s most recent figures for Q2 2017, SSE currently enjoy 14% of the electricity market share, with RWE npower sitting on 10%. Combined at 11.5 million customers, this puts them right up against the threshold of the CMA’s interest and could be too close for comfort.
There are also a number of customer protection implications of the merger which will need to be addressed. Historically, both companies have faced an avalanche of customer complaints regarding their service, particularly npower which was fined £26 million by Ofgem in 2015 over billing issues which affected half a million of its customers.
Similarly, SSE was fined £10.5 million for mis-selling gas and electricity in 2013, when Ofgem said the supplier had failed “at every stage of the sales process.”
Both companies have improved their performance and brought down their complaints numbers in previous years to below the majority of other Big Six suppliers, and they will have to convince the CMA that this trend will continue if it is to be believed that customers will benefit from the deal, rather than just SSE’s shareholders.
However, consumer group Which? has already expressed its concerns over the plans, as managing director of home products and services Alex Neil explained: “Mergers of such big players in essential markets, such as energy, are rarely a good thing for consumers, especially given the low levels of competition.
“As both businesses struggle on customer service, coming in the bottom half of our satisfaction survey, the competition authorities must take a hard look before allowing any venture to go ahead.”
However, SSE has already got started on its charm offensive by announcing a voluntary contribution of £65.1 million to consumers following a review by its networks business' performance under Ofgem’s RIIO-T1 (electricity transmission) price control and discussions with Ofgem.
All of this will have to resolved before the successful completion of the demerger, combination and listing together of the businesses, which SSE has slated for the last quarter of 2018 or the first quarter of 2019.