Analysis: Independents’ day

The big six still dominate the energy supply market, but they are steadily losing market share to small independents who are targeting their niche markets to great effect. By Saffron Johnson.

A new breed of supplier has been born. Plucky independents with business models that challenge the traditional players have taken the market by storm to offer customers a different energy experience. Many focus on being green, some keep operating costs to a minimum and others work on being smart suppliers.

As well as being ahead of the curve, challengers are often considered to be the cheapest, and as a result have seen tremendous growth. First Utility has quadrupled in size, increasing its customer base to 950,000 in the past four years. Meanwhile, Spark Energy is due to complete a management buyout that is expected to “significantly increase access to growth capital”.

With customer growth comes market share, and independents have snatched 2.2 million customers from the big suppliers in the 12 months to June 2016, according to data from Cornwall Energy. Its research showed that one in six (17.4 per cent) dual fuel customers are now with an independent supplier, compared with one in eight last year – an average growth of 9 per cent each quarter. The dual fuel market share of the big six has dropped by 16.7 percentage points since 2011, from 99.3 per cent to 82.6 per cent.

Switching figures are also soaring for independents, with the latest data from Energy UK showing that of all switches so far this year, 39 per cent were from large to small and mid-tier suppliers, compared with 12 per cent from small and mid-tier to large suppliers.

Despite warnings from Morgan Stanley that independents may struggle as the market becomes more uncertain, and stern words from GB Energy Supply founder Luke Watson who told Utility Week that it “may be too late” for new entrants, they continue to grow.

With more than 40 players, some will get lost in the crowd. Here, Utility Week looks at the independent suppliers trying to get themselves noticed in a market still undergoing profound transformation. For these new entrants, specialising in niche markets seems to be the common strategy.

Octopus Energy

Octopus Energy claims to be “building a business that’s fit for the 21st century” and even encourages customers to contact them through Facebook Messenger with a query or issue. A mainly online business, it began signing up customers in April 2016.

“We’re using technology to create a leaner business model, one without all the notorious bureaucracy the industry is known for,” it says.

The firm also has a focus on being green, building 154 solar farms in the UK since 2011. The farms it has funded generate 40 per cent of the UK’s large-scale solar energy and the company invests in other renewable technologies including wind and anaerobic digestion.

Other innovations from Octopus came this year when it offered customers a Nest thermostat for £6.99 per month. Customers can get hold of a 100 per cent renewable electricity tariff and full carbon offsets for gas with no locked-in contracts.

GnErgy

Launched in 2014, this unusual supplier is managed by a community of 200 former Gurkhas. It aims to operate with “efficiency, commitment, simplicity and honesty” and promises that their customer service team speak English, Nepali and Hindi.

The ex-Gurkhas based in Hampshire invested £600,000 to set up the provider and the company aims to target the 80,000 Nepalese energy consumers in the UK. It offers tariffs which it claims are 5 per cent cheaper than the rest of the market and invites customers to visit its head office to discuss services face-to-face.

LoCO2 Energy

Running since 2009, LoCO2 Energy was founded on the back of a passion for hydropower. Dr Bob Middleton founded the firm – which has a sister business TLS Hydro – and decided to begin selling energy directly to consumers when his generation volumes became larger. LoCO2 has a network of nine hydropower stations, which supply 40 per cent of its energy.

The company also ranked 12th on a table of the cheapest average lowest tariff for dual power, according to figures from My Offers Research.

The supplier came under fire from national press in 2013 when it raised its energy tariffs by 9 per cent. Middleton blamed the rise on the business being “forced to absorb a 10 per cent increase in costs from a variety of sources”.

Zog Energy

Zog Energy takes an efficient approach to business. The supplier was started up in 2013 by two entrepreneurs who realised how difficult it was to work out the best rate from the big six providers, and that gas accounted for the highest proportion of a customer’s annual fuel bill.

Its business model appears to be successful because Zog has rocketed in customer numbers to around 7,000, from just 2,000 in March 2015.

Zog Energy director Andrew Cleveland says: “Being an independent supplier without legacy systems, Zog Energy can react to changes with speed and without incurring the typical large cost of change.”