As the Big Six be­come five, the ‘di­nosaurs’ must do

SSE and Npower prom­ise a ‘new and dif­fer­ent model’ in sup­ply-arm merger to take on up­start in­no­va­tors , re­ports Jil­lian Am­brose

The Sunday Telegraph - Money & Business - - Business - The Sun­day Tele­graph.

The de­ci­sive blow was de­liv­ered months ago. But it was only last week that the en­ergy in­dus­try re­alised two of its largest house­hold sup­pli­ers had thrown in the towel.

The shock de­ci­sion by Theresa May, the Prime Min­is­ter, to leg­is­late a cap on stan­dard en­ergy prices has spurred the big­gest up­set in the en­ergy in­dus­try since pri­vati­sa­tion.

Bri­tain’s sec­ond largest en­ergy sup­plier SSE and Npower par­ent com­pany Innogy will both cut their losses by spin­ning off their UK sup­ply busi­nesses to cre­ate a new ven­ture they be­lieve will be tough enough to com­pete in an in­dus­try far more po­lit­i­cally hos­tile than the one the six largest sup­pli­ers first en­tered more than 10 years ago.

The merger ush­ers in the de­con­struc­tion of the Big Six in the big­gest shake-up of the in­dus­try in over a decade. From this al­liance will emerge Bri­tain’s largest elec­tric­ity sup­plier, and a house­hold gas sup­plier sec­ond only in size to Bri­tish Gas.

SSE prom­ises a “new and dif­fer­ent model” to the en­ergy sup­pli­ers that have come be­fore, in a pledge that ac­knowl­edges the sorely needed change called for by reg­u­la­tors and con­sumers for years.

A vic­tory would cre­ate a com­pany with the vi­sion and heft to stand at the fore­front of an in­dus­try that is on the brink of rein­ven­tion. A fail­ure would been in­structed to freeze the ac­counts of many of those al­ready be­ing held. Pri­vate jet flights out of Riyadh have been grounded and palace com­pounds across the desert king­dom raided in a shock­ing sting op­er­a­tion. Oil – the best barometer for sta­bil­ity in the world’s largest ex­porter of crude – jumped $2 fol­low­ing news of the ar­rests, to a new two-year high close to $65 per bar­rel as traders di­gested the un­fold­ing events.

Some an­a­lysts have ar­gued that the crack­down is part of Crown Prince Mohammed bin Sal­man’s plan to con­sol­i­date power be­fore he suc­ceeds his 81-year-old fa­ther who is ex­pected to ab­di­cate im­mi­nently. The vig­or­ous 32-year-old prince – who is known by his ini­tials as sim­ply MBS – ousted his el­der cousin Mohammed bin Nayef to be­come first in line to the Saudi throne in June. He has now seized con­trol of al­most all el­e­ments of gov­ern­ment from de­fence to oil pro­duc­tion pol­icy and the Mutawa re­li­gious po­lice. But of the 11 high-rank­ing princes ar­rested only Mitab bin Ab­dul­lah – who was si­mul­ta­ne­ously re­moved as head of the Na­tional Guard – posed a se­ri­ous po­lit­i­cal threat to the cur­rent line of suc­ces­sion. How­ever, their sud­den in­car­cer­a­tion has ef­fec­tively ended any re­al­is­tic as­pi­ra­tions any may have had to chal­lenge the new regime.

“This is about con­sol­i­dat­ing power un­der Mohammed bin Sal­man,” said Ni­cholas Kroh­ley, founder of Front­line Ad­vi­sory, an emerg­ing mar­ket con­sul­tancy that spe­cialises in the Saudi mar­ket.

The sud­den na­ture of the ar­rests may cause con­cerns, along with Saudi Ara­bia’s poor record on hu­man rights, leave an un­holy en­ergy “Franken­firm” as a grim relic of the in­dus­try’s years of strug­gle against pub­lic mis­trust and ac­cu­sa­tions of prof­i­teer­ing.

It’s a gam­ble that Peter Terium, the boss of Innogy, says was “in­evitable” against the ris­ing com­pe­ti­tion in a mar­ket once ruled over by the six in­cum­bents.

The Big Six grip on the en­ergy mar­ket has fallen from nearly 100pc 13 years ago to 82pc in the mid­dle of this year as a new breed of en­ergy sup­plier gains ground with build­ing mo­men­tum.

As late as 2012 these nim­ble new ri­vals held just 2pc of the mar­ket. The hard-fought 18pc share they now hold is di­vided be­tween an army of 55 en­ergy min­nows of var­i­ous sizes.

In a mar­ket where each per cent rep­re­sents hun­dreds of thou­sands of house­hold ac­counts the losses have forced up the mar­ginal cost of sup­ply and dragged down earn­ings.

The rise and rise of new sup­pli­ers is both the prod­uct and the driver of new tech­nolo­gies into the mar­ket, which threaten the es­tab­lished models of gen­er­at­ing en­ergy and sell­ing it on.

To­day’s en­ergy in­no­va­tors of­ten don’t bother dirty­ing their hands with en­ergy pro­duc­tion. In­stead, they are build­ing on­line plat­forms and al­go­rithms to mas­ter the dig­i­tal home be­fore the likes of Ama­zon and Google wrest con­trol of this grow­ing mar­ket.

Terium says the merger will help the new ven­ture to com­pete in the en­ergy mar­ket of the fu­ture where sup­pli­ers will re­quire a very dif­fer­ent set of skills.

“This mar­ket is trans­form­ing,” he tells This is a game less about gas and power than dig­i­tal tools and data. Terium says the smart meter revo­lu­tion will bring a wave of con­nected ser­vices into peo­ple’s homes, fun­da­men­tally chang­ing the way cus­tomers see an en­ergy sup­plier. “De­vel­op­ing a dig­i­tally based prod­uct re­quires two Saudi Crown Prince Mohammed bin Sal­man at­tends a cer­e­mony held in his hon­our, right, as King Sal­man bin Ab­du­laziz placed him as the first in line to the throne; the Ritz Carl­ton ho­tel in Riyadh where the ac­cused are be­ing held, above but a sus­tained top-down cam­paign to tackle sys­temic cor­rup­tion in the king­dom is prob­a­bly long over­due.

Scru­ti­n­is­ing the fi­nances of the army of Al-saud princes and hang­ers on could also help boost the pub­lic purse, which is still strug­gling to come to terms with lower oil prices. Fund­ing of the royal fam­ily through a loosely ac­counted sys­tem of royal al­lo­ca­tions and monthly stipends has be­come un­sus­tain­able in a coun­try that is be­ing forced to im­pose aus­ter­ity mea­sures. A re­search paper pub­lished by the Lon­don School of Eco­nom­ics (LSE) Mid­dle East Cen­tre in Septem­ber, which cited US Em­bassy re­ports from the Wik­ileaks dis­clo­sures, claims that in the Nineties al­lowances doled out to Saudi roy­als con­sumed $40bn an­nu­ally.

The scale of cor­rup­tion in the king­dom is un­known but there are wor­ry­ing holes in its fi­nan­cial re­port­ing of gov­ern­ment rev­enues. The LSE paper by Gulf-based aca­demic Omar Al-she­habi also claims that Saudi Ara­bia could be miss­ing a to­tal of $325bn – equal to 60pc of its cur­rent for­eign re­serves – in un­ac­counted cash be­tween 2002 and 2011 based on the dif­fer­ence be­tween the value of its oil ex­ports and of­fi­cially de­clared pub­lic oil rev­enues.

But busi­ness doesn’t gen­er­ally like the in­sta­bil­ity that has been caused by the rapid pace of change, or the un­cer­tain fu­ture of some of the king­dom’s most prom­i­nent busi­ness lead­ers. High-pro­file in­ter­na­tional in­vestor Prince Al­waleed bin Talal – owner of the Savoy ho­tel and once a ma­jor owner of Citibank stock – is also

‘The scale of cor­rupt prac­tices un­cov­ered is very large. At least $100bn has been mis­used over decades’

things: scale and skill,” he says. Innogy con­sid­ered tap­ping fresh ap­proaches by pluck­ing smaller ac­qui­si­tions from the new wave of up­start en­ergy min­nows to build its scale. But team­ing up with the 8m-strong might of SSE is cer­tainly a quicker way to achieve this goal.

To­gether, he says, the ven­ture will be far more than the sum of its parts.

Not all are con­vinced. Steven Day is one of the founders of Pure Planet, a new mar­ket en­trant with heavy green cre­den­tials and the back­ing of oil ma­jor BP. “This merger shows that the Big Six model doesn’t work, and doesn’t serve any­body. It hasn’t served cus­tomers nor, seem­ingly, has it served them­selves,” he says. Day is no stranger to the ebb and flow of an in­dus­try in flux. He was once part of the team of tele­coms pi­o­neers who democra­tised the mo­bile phone mar­ket with the launch of Vir­gin Mo­bile in the late Nineties. He then fol­lowed for­mer Vir­gin Mo­bile boss Tom Alexan­der to Orange where trans­for­ma­tion was on the cards again. This time, Orange, the na­tion’s num­ber three mo­bile net­work at the time, com­bined with its clos­est ri­val T-mo­bile un­der the EE ban­ner.

“It wasn’t enough to say, ‘we will now have Orange and T-mo­bile on one com­bined plat­form’. For us, it meant launch­ing a new brand, cre­at­ing a fresh nar­ra­tive, and a fresh po­si­tion in the mar­ket for cus­tomers to reap­praise from scratch,” he says.

If SSE and Npower are to emerge as vic­tors from an in­dus­try on the brink,

They are al­ready gi­ants and they are fail­ing to in­no­vate so it doesn’t fol­low that in­no­va­tion is in­evitable

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