Analysis: small supplier slowdown

Independent suppliers have risen rapidly, with lower prices resulting in healthy customer growth. But is the honeymoon over? Saffron Johnson reports.

If market share is a measure of success, small suppliers have reason to celebrate. In March, figures from Cornwall Energy revealed that the big six firms had lost 3.6 per cent of their overall market share in the past year. By June, new entrants had taken 2.2 million customers from the big six suppliers in 12 months, and currently there are more than 40 suppliers in the market.

However, Morgan Stanley Bank has warned that market conditions may make it harder for independent suppliers to make further gains. That warning was echoed by independent supplier GB Energy Supply, which said that suppliers must grow fast and hit a critical mass of customers to survive.

The once stable market they entered two years ago suddenly looks a lot more volatile. As wholesale prices recover from record lows the new players face a reality check. They can’t all be the cheapest, and sometimes, being the cheapest isn’t sustainable.

A decline in wholesale gas and power prices in 2015 gave smaller suppliers an advantage over larger ones. Independents were able to buy energy at short notice, whereas larger suppliers tend to purchase energy one or two years ahead. This led to cheap tariffs, which some may now struggle to sustain.

Ovo Energy had to react to increasing wholesale prices in order to protect its bottom line. In June this year, it announced a 7.6 per cent price rise and claimed the move was necessary to cover a 23 per cent growth in wholesale gas prices and 16 per cent increase in wholesale electricity prices.

Green Energy chief executive Doug Stewart remembers a similar situation: “The last time we had a very volatile market in 2005 there were ten small suppliers, and only three were still around at the end of it.”

Independent business supplier Yu Energy recently floated on the stock exchange to help it cope with its growth. “We were growing so quickly that we couldn’t and wouldn’t take a risk on our purchasing procedures,” founder Bobby Kalar said.

“The easiest and most daring way is to buy energy on the spot market, but that’s risky. So we floated the business, released equity, and now we are able to manage our risk potential.”

GB Energy Supply says suppliers are relying on their hedging strategies for success, but if they don’t reach critical customer numbers within two years it will be very hard to break even.

Technology also poses a problem. As customer bases grow, suppliers need new IT systems. This can disrupt customer service and harm consumer trust as complaints and confusion mount. Extra Energy blames this for its problems in June when it performed worst among the UK’s 20 largest suppliers for dealing with customer complaints.

Managing director of operations Ben Jones says the firm believes “the energy market badly needs disruptors” to “break the stranglehold of the big six”, and he is confident about the future of independents. He also says Extra Energy will be “investing heavily” to avoid repeating its mistakes.

Ofgem’s faith in small suppliers looks to be less than absolute. The regulator is to consult on a safety net for consumers that protects any credit in their account should a supplier go bust. It will also appoint a supplier it considers best placed to protect the consumer’s credit balance. The proposals will be beneficial for consumers, but Green Energy’s Stewart says suppliers failing could be detrimental to consumer trust and costly for suppliers who have to pick up the pieces.

“Our biggest concern for independent suppliers is that some people may not make it through the winter. People’s faith will be undermined by a failure and perhaps they will retreat to the safety of the big six because they don’t want to be part of a messy wind up,” he says.

It is not all bad news, though. Disruptors and innovators are opening up the market and there is space for new business models. Energy branding expert Fridrik Larsen said: “There is an opening in the market for some abstract terms like fun and exciting. Great brands own a feeling or a whole set of feelings in the minds of consumers.”

First Utility has proved the potential of independents. In just four years the firm has quadrupled its customer base to 950,000, cementing its position as a strong challenger to the big six.

The political uncertainty post-Brexit is reflected in the outlook for independents. Watson predicts that in the short term, some independents will be “merged with larger players, bought out, or just fall away”. Yu Energy takes a slightly different stance, predicting that the big six will cease to exist and that the UK may look more like Germany in the future, with 100 different suppliers.

The suppliers with a unique business model tend to show longevity, and as the market moves forward new entrants must be prepared to move with it. For small suppliers it will be a case of survival of the fittest: they have made a space for themselves, but their ability to grow that space will relay on canny adaptability and reslience in a hostile market.