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Tougher rules for UK energy suppliers 'too little, too late' to relieve Big Six

Toughened rules for new entrants into the U.K.'s fiercely competitive retail energy market, proposed following the collapse of a rash of smaller household suppliers over the past 18 months, are seen as unlikely to bring respite for the country's embattled largest players, known as the Big Six.

Britain's Office of Gas and Electricity Markets, or Ofgem, said on April 11 that it will roll out more stringent tests for companies applying for an energy supply licence beginning in June to reduce the risk of supplier failures. Since January 2018, roughly a dozen smaller firms with close to a million customers among them have gone bust amid rising wholesale costs, leading the regulator to step in to assign customers to rival companies and prompting criticism that entrance rules were too lax.

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New entrants have gained market share with strategies including 100% renewable supply offers.
Source: LightsourceBP

Analysts said the new controls, which were floated to market participants over the last few months, are unlikely to provide much-needed relief to the U.K.'s biggest energy firms, who have seen their profits slide in recent years as new competitors have steadily chipped away at their market share.

"This is unlikely to reduce the closing gap between the Big Six suppliers and the small and medium suppliers," Robert Buckley, head of retail at energy market consultancy Cornwall Insight, said in an email. "This is due to the fiercely competitive nature the energy market has now [adopted], with the small and medium suppliers looking to gain market share by challenging the status quo of these larger suppliers."

The number of domestic suppliers has ballooned from just 20 at the end of 2012 to around 70 last year, after Ofgem sought to increase competition by loosening entry requirements. New entrants have since drawn customers with cheap deals and offerings like 100% renewable energy tariffs. As a result, the combined power-and-gas market share of smaller and mid-tier companies has risen from less than 2% to around a quarter over the last seven years, according to industry group Energy UK.

More recently, a cap on the most expensive standard variable tariffs, or SVTs, has also hurt profits at the entrenched suppliers, with market leader Centrica PLC issuing a string of profit warnings while SSE PLC and Germany's Innogy SE cancelled the planned merger of their U.K. supply businesses. The two companies cited the price cap and a "changing market environment" as reasons for terminating of the deal, which would have created the second-largest supplier in the country.

The Big Six also include E.ON SE, Electricité de France SA and Scottish Power, a subsidiary of Iberdrola SA.

Under Ofgem's proposal, potential new suppliers will need to show they have enough funds to operate for their first year and outline their strategy for complying with regulatory and market obligations. Ofgem said directors, senior managers and major shareholders of those companies will also have to demonstrate they are "fit and proper" to hold a licence.

In addition, the regulator will launch a consultation this summer on how to raise standards among existing suppliers, which could include new reporting requirements and rules around how suppliers manage customer credit balances. It will also review current procedures for suppliers that fail.

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Deepa Venkateswaran, a utilities analyst at Alliance Bernstein, said the tough rules for new entrants were "too little, too late" to make a difference for the Big Six, whose largest challengers — which include OVO Energy Ltd., Bulb Energy Ltd. and Royal Dutch Shell PLC-owned First Utility Ltd. — have partly benefited from recent defaults by taking over failed suppliers' customers.

"Tougher entry for new suppliers will stop that number from growing [but] the total number of suppliers is dropping anyway," Venkateswaran said in an interview. After reaching a high of 73 in June of last year, the total number of active suppliers dropped to 69 in September, as exits outnumbered new entrants for the first time in 11 years, according to Ofgem data.

Venkateswaran added that the coming rule changes for existing suppliers could, however, have an impact. "That will weed out the really small players, so it will reduce the churn rate and it will reduce the pressure on the non-SVT customers," she said. "But it depends on how stringent these new rules are."