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 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