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Profits, market share slide for UK Big Six energy suppliers as competition grows

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Profits, market share slide for UK Big Six energy suppliers as competition grows

The U.K.'s six largest energy suppliers lost 10% in profits in 2017 and saw their market share fall faster than in previous years to reach a new low as more customers switched to smaller rivals over the past year.

As of June 2018, the Big Six saw a net year-on-year loss of approximately 1.4 million customers, meaning their combined market share fell by approximately five percentage points in both gas and electricity, compared to four percentage points on average during the previous four years, according to energy regulator Ofgem's second annual market report, released Oct. 11.

The six companies served 75% and 76% of the gas and electricity markets, respectively. Competitive pressure from midsize and small rivals meant aggregated domestic supply revenues for the Big Six declined by £1 billion, from £23 billion in 2016 to £22 billion in 2017. Total domestic supply profits across the companies, measured as EBIT, fell for the first time since 2014, from £1 billion in 2016 to £900 million in 2017, Ofgem said in a release.

Putting a further lid on profits will be a price cap Ofgem is planning to introduce before the winter after the British government promised to rein in high-priced standard variable tariffs.

As of June 2018, 73 active licensed suppliers competed in the U.K. retail market, up from 60 in 2017, of which 64 were dual fuel, seven gas-only and two electricity-only. But only the traditional six largest suppliers captured market shares above 5%, with 60 suppliers capturing less than 1% each.

Centrica PLC subsidiary British Gas Ltd. is the largest supplier, serving 30% and 20% of the British gas and electricity markets, respectively, according to Ofgem. The picture at the top is rounded out by Scotland's SSE PLC, German utility E.ON SE, French state-owned Electricité de France SA, Spanish utility Iberdrola SA subsidiary Scottish Power, and German firm Innogy SE's subsidiary, NPower.

Profit margins varied widely across suppliers, which Ofgem partly put down to their different operating costs and the extent to which these are passed on to consumers.

Unlike in the previous year, both E.ON and ScottishPower saw their margins decline significantly, to 5% and 0.5%, respectively. EDF recorded a positive margin of 0.9% for the first time since 2009, and NPower reduced its losses to -5%. British Gas and SSE made similarly high margins of 8% and 7%, respectively, which were mostly unchanged from 2016.

The structure of the retail market in Britain is changing after oil giant Royal Dutch Shell PLC snapped up First Utility Ltd. in December 2017 and SSE and Npower announced a merger of their retail businesses, which was cleared by the U.K.'s competition watchdog Oct. 10. The inquiry by the Competition and Markets Authority had focused on the deal's potential effect on residential households but concluded the two energy providers do not compete closely on standard variable tariffs. The two companies have said they aim to complete the deal by the first quarter of 2019.

"If the [SSE/NPower merger] were to go ahead, the current market structure would change to one where there are two large suppliers of similar size, controlling almost 50% of the market, followed at some distance by three large suppliers and a fringe of many smaller suppliers," Ofgem said.

Average household energy consumption continued its long-term decline in 2017, falling by 5.5% for gas and 3.3% for electricity, which was driven by better insulation, milder winters and cost-consciousness among consumers, Ofgem said.

The regulator also noted that the single biggest contributor to emission reductions in the U.K. was its carbon price on coal, gas and oil generation, which accounted for around half of the reductions.