Mon. Dec 6th, 2021

UK Energy Updates

Challengers are meant to shake up the incumbents and bring strong competition to oligopolistic markets. Tell it to British Gas owner Centrica, who’s forced to pick up the pieces while Johnny’s competitors have been collapsing amid rising gas prices.

Attempts to increase competition, coupled with counter-intuitive pricing, have failed in all respects. It’s déjà vu again, as baseball coach Yogi Berra allegedly said. The experience serves as a further warning about the danger of light touch that the banking sector learned in 2008. Metro Bank, a challenger launched with great fanfare, was – just like its share price – terribly disappointed.

New entrants have a lot of pixie stuff, but can overlook the basics – in the case of gas newcomers, that means they would not successfully shield themselves from wholesale prices. It is good if it is flat or falling; suppliers can trade in customer accounts. As they rise, as they do now, new players are pinched and they become busy. Hence the 350,000 customers of failed People’s Energy move over to British Gas.

Emergency funds used by regulator Ofgem will cover the switch, rather than falling to British Gas. The resulting increase in customers reverses the year’s declining market share, which last year dropped to just over a fifth from almost a third five years earlier.

Problems in the top line were exacerbated by margin-crushing caps on the energy bills introduced in 2019. Centrica, reduced to cost cuts and assets, dropped its share price by nearly 90 percent from a peak in 2013.

The implosion of challengers reverses Centrica’s crash. The ranks of UK energy suppliers have fallen from a peak of 2017 to 70 to below 50. More will disappear. One of the largest, Bulb, with 1.7 million customers, is already seeking emergency funding.

Further regulatory intervention is on the map. This time around, it could be to British Gas’ advantage, given its forced role as the ultimate provider of energy to stranded customers of sacked challengers. The incumbents are back and determined not to waste a good crisis.

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