Why SSE’s tie-up with Npower will spark competition
Ofgem recently published its annual “State of the Market” report, giving its assessment of how well the energy market is working for consumers in terms of competition, affordability, decarbonisation, and security of supply. In it, chief executive Dermot Nolan observed: “Energy markets are rapidly changing to meet our need for clean, secure and affordable energy and to accommodate a transformation in the way we consume energy. The pace and scale of changes are unlike anything we’ve ever seen in the sector.”
As someone who has worked in the energy industry for a long time, I’d agree with him. Technologies are changing, as are consumer habits. I’ve always accepted politics and regulation will play a significant part in the energy sector and there is no doubt Britain’s energy supply market has been the subject of intense scrutiny for a long time.
All of these reasons are why we have a stated commitment to embrace change in each of our businesses, adapting them to the political, economic, social and technological requirements of customers and of society as a whole. Last week we announced plans to merge SSE’s household energy and services business in Great Britain with that of Npower to create, subject to regulatory approvals, a new, independent company to be listed on the stock exchange.
Sunday’s edition of this newspaper asked whether the “lights” had “gone out on the Big Six”, suggesting that two of the largest household suppliers had effectively “thrown in the towel”. Incorrect. It’s true that the market has moved on considerably from the days of the so-called “Big Six” but this merger is about embracing change in the market, not running from it.
There are now 60, not six, suppliers in a market in which competition is stronger than ever. Over half a million customers switched supplier in September alone with new entrants growing their market share from 1pc to more like 20pc in just a few years.
So, this is not a case of six into five; it’s more like 60 into 59. And, as a result of this merger, one of those 59 will offer a completely new model that combines the resources of established players with the agility and innovation of an independent supplier.
We’ve already taken significant steps to remain competitive amid the rapid changes we’ve seen in the market. Since Ofgem began its reporting in 2009, SSE has generally had the lowest “cost to serve” of all suppliers covered, typically 10pc to 30pc below industry averages. Meeting our customers’ needs efficiently is a key reason why we’ve been able to earn a profit; we’ve taken over £225m of cost out of our business in recent years and continue to cut costs. Not every large energy supplier earns a profit every year, which illustrates just how competitive the market has become.
As well as operating efficiently, we have to earn the loyalty of our customers by providing a high-quality service. It’s a little known fact that the independent Citizens Advice energy supplier performance rankings, which are updated quarterly and evaluate the 18 largest energy suppliers on a wide range of metrics, currently show SSE to be the best performing of all 18 suppliers, big or small. But we need to do more to keep pace with the change we are seeing. In my opinion a lot more has already changed in recent years than is often recognised. But in proposing this merger we aim to take this to a new level, adapting to the pace of competitive, technological and behavioural changes that are transforming this market.
That is what this merger is all about. As Sunday’s piece put it, by establishing a combined business that is completely independent and exclusively focused on meeting the changing needs of its retail customers we will create a totally different model with the potential to shake up the market and “stand at the forefront of an industry that is on the brink of reinvention”.
SSE will remain a balanced group of related businesses, specialising in the energy, infrastructure and services needed to support the transition to a lower-carbon future, with a strong focus on assets, but continuing to serve businesses and customers in Ireland.
Meanwhile, the new, independent company will seek to combine the best of both retail businesses and be better placed to face the challenges – and pursue the opportunities – emerging in the energy retail market in Great Britain. It will be more agile, innovative and efficient with a dedicated management team and a complete focus on retail customers.
Creating a new company by combining existing businesses always brings challenges, but we have real and relevant experience of doing this and a commitment to making customers’ experience of the change as seamless as possible.
I see this as a watershed moment for Britain’s energy supply sector. We have identified an opportunity to create a new type of supplier to challenge established and newer suppliers alike. It will help drive competition and ultimately that’s good news for customers.
In doing this we will give our retail business the best possible platform for success in the long term and I hope that those calling for greater competition and change in the energy market will support this proposed merger and the benefits that it will bring customers.
‘The market has moved on from the days of the Big Six but the merger is about embracing change, not running from it’