The Big Switch: Finding the words to compare a market

Switching figures are a common gauge of the health of the energy retail sector, with the flow of big six to challenger and vice versa inevitably the focus. However, with several substantial mergers having drastically altered the make up of the "big six" and challenger brands now serving millions of customers, are these labels still fit for purpose? Adam John asks the experts.

Utility Week is regularly bombarded by publicity hungry switching firms with press releases about consumer behaviour. Earlier this year one sent us a release about how consumers were deserting challenger brands “en masse”, as fears about supplier failures turned them back to the “big six”.

The same company has this week been proclaiming an “energy exodus” from the biggest names of the sector as belt-tightening customers are lured to the start-ups.

So, which is it? And to what extent does it come down to those ambiguous two words – big six?

Getting the definition right is important as switching figures are vital to measuring customer engagement with the market. In addition, effective competition is one of Ofgem’s prerequisites for recommending the removal of the price cap and accurate switching figures will be one way to measure this.

There are opposing views on defining which companies are “big” and if there are “six” of them, with ElectraLink still considering Ovo Energy as a challenger brand, despite the fact it is now the UK’s third largest electricity supplier. It continues to class British Gas, SSE, Scottish Power, Npower, Eon and EDF as a big six. In its latest switching release, ElectraLink says it recognises how the market has changed recently and is consulting with the sector as to how best to report on the larger players.

Trade body Energy UK however uses the term “larger suppliers” and includes British Gas, Ovo, Eon, EDF and Scottish Power, reflecting the recent mergers.

In the most recently available data, both Energy UK and ElectraLink posted relatively similar figures when it comes to larger suppliers losing customers. In July Energy UK had large suppliers losing 232,000, while ElectraLink had 230,000. In the same month, Energy UK recorded more than 53,800 switches from challenger to large while ElectraLink recorded 58,000.

ElectraLink says it tries to take a view on the market from the perspective of a consumer looking to switch for the first time, arguing that the “big six” from a household perspective still has relevance.

The company points to the way the brands operate in the market, with SSE’s retail business still operating as a standalone brand in marketing. Similarly Npower continues to be branded separately from Eon.

“Until both mergers are more advanced and the company branding is updated to reflect the outcome of these M&A processes, customers are still under the impression that they can switch to Npower and SSE as suppliers”, says Paul Linnane, head of energy market insights.

Linnane also points to Ofgem’s consolidated segmental statements (CSS) which large vertically integrated energy companies are required to publish.

“There is an increased focus on these particular companies reflected through the CSS reporting, and while this continues, it remains a factor in how we categorise switching within our reporting.  If and when Ofgem begins to reflect the changing nature of the market, we will revisit this indicator and how we reflect the market”, he adds.

There is also the question of switching dynamics, with ElectraLink highlighting how just under 50 per cent of the market have not switched from their supplier since 2012, it is still relevant to use the term ‘big six’ to represent the significance of that legacy, which it says still exits.

However Lakis Athanasiou, a utilities analyst at Agency Partners, sees three differentials that set apart the biggest companies from the rest of the market. He explains that while Ovo is not an integrated business, neither is Centrica anymore.

He tells Utility: Week: “Really it should be the ‘big five’ and Ovo are in it. There are three differentials that define these companies; market share, the types of customers they have and the ability to hedge in advance, determined by credit worthiness.

“Customer stickiness, which often defined the big six, is however very difficult to understand as it can only be measured via customer surveys. And it has eroded over time, accelerated in some cases by inept pricing approaches, such as that used by Npower – high prices to existing high value ‘sticky”’ customers, driving them away,  to fund discounts to acquire of low value, highly motile customers.

“Meanwhile hedging periods have diminished. Suppliers now only need to hedge eight months in advance for the price cap, compared to two or more years previously.”

Ben Bugg principal, strategy and transaction advisory, BFY Group, thinks the core group should be referred to as a big five.

“If you are having a conversation about domestic suppliers then I agree that Ovo should be included as part of the big five. If you are talking about the full energy value chain, Ovo doesn’t play in the same areas as the others – generation, wholesale, transmission and nor do they have a large I&C/SME portfolio.

“But Ovo are also focusing on alternative customer value propositions and therefore are building a different kind of integrated energy supplier which, for now, makes a like for like comparison biased.”

Then there are the challenger brands which have grown rapidly in recent years. Octopus and Bulb are two examples of very large disruptor brands, both exceeding well over 1 million customers each. Earlier this year Octopus even gained unicorn status when it revealed it was valued at more than £1 billion. Furthermore both companies now have a global presence, with Octopus’ Kraken platform being outsourced in countries such as Germany and Australia, while Bulb has a presence in Spain and the US.

For the moment, they are referred to by Energy UK as “mid-tier” and ElectraLink as “challengers” but a new definition may be needed soon to reflect both their scale and global presence.

While pitching plucky challengers against the might of the “big six” may make for eye-catching press releases, it simply fails to reflect reality. The energy retail sector is becoming increasingly nuanced and they way we map it needs to keep pace.