It was recently announced that SSE and Npower were in advanced talks over merging their two retail business to form one, giant ‘independent’ energy company.
In recent years, the ‘Big Six’ energy companies have come under much pressure, both politically and socially, over their standard variable prices. Such overinflation has triggered Theresa May’s Government into introducing a price cap in a bid to prevent such profit-mongering. Due to their fairer and clearer business models, smaller energy companies have been taking customers away from these big conglomerates, therefore increasing their own market share against the Big Six.
How it looks right now
SSE, which consists of various acquired companies, such as Southern Electric, is Britain’s second largest energy supplier. It has a customer base of around 7.8 million households, which is only bested by British Gas. Npower, although a little smaller, also has a huge customer base of 4.8 million households.
Chief executive of SSE, Alistair Phillips-Davies, has commented on the matter that, “The scale of change in the energy market means we believe a separation of our household energy and services business and the proposed merger with Npower will enable both entities to focus more acutely on pursuing their own dedicated strategies, and will ultimately better serve customers , employees and other shareholders”.
Alongside that, comments have been made by the other related party, Npower. Chief executive of Germany energy giants Innogy, who own Npower, has said that it is a “logical step” given the current circumstances facing the two companies in the energy market today. He went on to say, “we have made great progress in restructuring Npower over the past two years and have improved our performance considerably however, when we look at the competitive landscape and the uncertain political environment for energy retailers in Great Britain, it is clear that Npower would be better placed to offer value to our customers and our shareholders as part of a new company with the ability to succeed in the face of the challenges that lie ahead”.
What would the new company look like?
Looking at industry data, the new combined company would have a 23% market share in the electricity market, which would overtake current market leader, British Gas. They would also have a 19% market share within the gas market, which, although does not overtake British Gas’s 33%, still puts them in a much more prominent position.
SSE office in South East England. Source: SSE
As this is only in the preliminary negotiations phase at present, there is no way of knowing the exact structure of the new company; however, they have made it clear that they want to act under the title of ‘independent’. How this will work is extremely unclear. Being an independent supplier would mean that they fund themselves with no external financial backing, but however they compose their new structure, financial support will always be there if needed, which defeats the object a little.
In recent years the ‘independent’, smaller status has become an attractive attribute for many, as this has begun to be associated with lower prices, better customer service and better deals. As such, it is obvious as to why this new merger would be looking into this option, but reputation precedes the two companies individually, so why wouldn’t it when they become joined?
How will this affect current market conditions?
SSE have said that the new company is expected “to deliver enhanced value and ultimately enable the company to be an efficient competitor in its markets”, and that they “think it’s very good for competition and customers. There are over 60 companies competing in the market and back in 2011 there were only eight”.
Co-founder of Bulb, Hayden Wood, however, has a different take on the matter. He says that “We don’t see how turning the Big Six into the Big Five will help consumers. Fewer suppliers mean less competition and less competition means higher prices”. Essentially, following this merge, it would turn the Big Six into the Big Five; however, if they were to act under the ‘independent’ status, would they be even included in this elite group?
Removing a big supplier from the market that holds such a prominent position within it could perhaps be seen as a damaging force towards market conditions. Given the expansion of market competition, however, it may not have come as such a shock to the majority of industry experts. With the increasing competition and price disparity, a merge of this ilk was just a matter of time.
What have customers and shareholders said about it?
Supporters of the merger believe that in the absence of generation requirements, the new independent company will be able to flourish under its new, unitary mission. Its restructure will also mean a new, more competitive strategy. Given Npower’s status as worst energy supplier for customer service in Which?’s 2017 review, and SSE’s placing at number 15, an emphasis really needs to be added on customer service in order for it to fit the characteristics of an ‘independent’.
Customers have expressed their concern as to what will happen to their current SSE and Npower tariffs, but there doesn’t seem to be much to worry about. It would appear that customers’ current tariffs will be seen out until the end of their contract and thereafter switched to a standard variable, much like what would happen anyway, but to the new supplier, if nothing is put in place to switch.
When will the merge take place?
This deal is subject to shareholder and regulatory approval, which will take around 12 months. SSE have stated that they are hoping to have the deal finalised by the final quarter of 2018 or the first quarter of 2019, at latest.