Ovo/SSE and the dawn of a new era

What does Ovo's potential takeover of SSE mean for the big six and does it signal a new era of consolidation in the energy retail market? Adam John talks to experts including former Npower boss, Paul Massara.

For years the undisputed goliaths of the energy retail sector were British Gas, EDF, SSE, Npower, Eon and Scottish Power – collectively known as the big six.

However, with regulatory interventions such as the price cap, demands for more diverse services and the rise of challenger brands, their dominance has waned.

Which makes the news of a potentially game-changing deal between medium sized retailer Ovo Energy and big six firm SSE’s retail arm, such a significant development.

If successful this would see Ovo jump forward several places and sit as the second largest supplier, second only to Centrica-owned British Gas.

But what is there to benefit from such a deal and what are the potential pitfalls?

Former Npower boss and chief executive of Electron Paul Massara says Ovo appears to be taking advantage of a “depressed market” in a move he described as “audacious and bold”.

“If someone has got a long-term vision or strategy then this probably isn’t a bad time to be buying something.

“I see this as Ovo believing that the future market will be one that sells services and electric vehicle (EV) charging and essentially maximises and optimises homes.

“They have got a view that they will be more innovative. They want to essentially be able to integrate EV charging, batteries, solar, water heaters and manage all of that for somebody’s home and if you want to do that you need to have scale and so this is a chance to get scale in one swoop.

“Essentially they have structured a deal which is a cheap way in terms of getting a big base.”

Massara does however have concerns about SSE’s IT systems and how this could be potentially problematic for the prospective buyer.

He adds: “It is a big challenge for them, let’s put it that way. Working out the IT around the system will be a big challenge for them.

“You are talking about a total new system and to me that’s the big question – what are they going to do and how are they going to manage the IT systems for those customers?”

Taking on thousands of customers too quickly has, in some cases, led to the demise of challenger firms. Ovo would have the even bigger task of transferring millions should it acquire SSE’s retail arm.

SSE has 5.7 million energy customers which means if it is successfully sold to Ovo, the latter would have 7 million in total.

Ted Hopcroft, energy expert at PA Consulting, agrees there are questions to be answered over how a larger customer base could affect Ovo’s “agile approach”.

He says: “The fascinating question in the evolution of the market will be whether Ovo can continue its highly innovative and agile approach with a much larger and more conservative customer base.

“Can it continue its bold push into smarter energy, or will it struggle, as many of the big six have done, and begin to resemble just another big six provider?”

Undoubtedly the move will shake up the market if it goes ahead and the big six will see its latest member inducted into the club. But does that mean we are about to see a complete overhaul of the large players?

Nigel Hawkins, utilities analyst at Hardman and Co, does not seem to think so.

Hawkins says only two companies, Ovo and Shell Energy retail (lately First Utility), seem to be ahead of the rest and that the other big six players have issues of their own to focus on.

“The big six have all got far bigger issues than playing around with the UK supply business”, he says.

“I think the deal is quite likely to happen and it may well be that others come into the bidding, but if you look at the big six, the two German companies are retreating back to Germany where there is tremendous potential in transmission and distribution.

“EDF has far more important issues at hand in nuclear, they have got massive nuclear debts in France, they have got new nuclear stations, Hinkley Point C, plus a vast amount of expenditure in France to sort out some of their old nuclear plants’ life extension and so forth.

“Iberdrola is making really good money on renewables, they don’t make much money on generation or indeed on supply, as far as they’re concerned renewables is their real bag –  it is making really good money in the states and Spain.”

Hawkins further points out that Centrica, which recently announced chief executive Iain Conn would be stepping down next year, will be on the hunt for a new chief as a priority, rather than seeking to acquire a new business.

Massara echoes Hawkins’ points and believes the deal is “probably a one off”.

“I think you’ve still got Npower wanting to get rid of its retail business and I think the only mid-market company that can probably do this deal is Ovo.

“The only other question is whether you have somebody like one of the oil majors who decides they want to get into retail like Shell buying First Utility.

“I think the challenges that the big players are facing are not going to be dramatically changed by this”, he adds.

While both Massara and Hawkins share the opinion that a successful transaction of SSE Energy Services won’t have much affect on its fellow big six players, the potential deal is a sign of the times – they are a changing.

Upon completion of any such deal with SSE, Ovo will become a major force in the energy sector and if it taps into the services market successfully, one whose impact will be felt for some time to come.