As consolidation in the domestic energy supply market continues, a new report has been commissioned by Shoosmiths and produced by Cornwall Insight. It considers what is driving the consolidation, whether this looks set to continue and the outlook for the market.
At its peak in 2018, there were 62 suppliers of domestic energy in the UK market. Since then, challenging market conditions has led to a sharp rise in the number of exits - some strategic and planned, others down to unsustainable business models or a lack of differentiation in market offering. Consequently, at 30 April 2021, the number of suppliers had dropped to 47 – down by a quarter in just 3 years.
Further consolidation expected
Four exits have already occurred since the start of the year, the most recent being the departure of Hub Energy via the Supplier of Last Resort (SoLR) process. Rising energy prices, together with a raft of new regulatory changes, are likely to put pressure on the small suppliers meaning further exits are anticipated in the coming months. This is expected both via the SoLR process and by way of acquisition, Ecotricity having already made a bid for Good Energy Group.
When combined with the introduction of more stringent entry requirements for new suppliers earlier this year, we are likely to see fewer new entrants to the market and consolidation looks set to continue.
One consequence of consolidation is that there are fewer players in the market which can lead to less competition, particularly around price. Not good news for consumers. But is this as bad as it sounds? Recently published statistics show a decline in switching of energy supplier by householders, and whereas historically price has been the most important buying criteria for consumers, going forwards, a switch is more likely to be driven by other compelling factors. The pandemic has contributed to a change in consumer behaviours and priorities, with a new emphasis on environmental, social and governance issues. It seems inevitable that those suppliers focussing on energy efficiency and the delivery of renewable energy are going to be best placed to attract consumers.
Suppliers who offer good customer service and have the ability to provide a quick and efficient onboarding process are the ones likely to gain market share. However, ultimately the long term winners will be those who look beyond supply and embrace 'energy as a service'.
As price becomes less of a differentiator between suppliers, the ability to diversify and embrace technology will become key, such as analysing demand in order to offer innovative service-led and time of use tariffs. Consumers expect good customer service but by embracing tech, suppliers can engage with the end users and deliver their improved business models in new ways. A market where price is the only differentiator inevitably ends up in a race to the bottom and this has certainly led to the early demise of a number of new entrants. Moving away from this should favour those suppliers prepared to innovate, which can only be a good thing for consumers.
Collaboration is also going to be a key driver and as our world becomes increasingly electrified we could well see, for example, EV manufacturers getting together with electricity suppliers to offer innovative product offerings or housing associations and suppliers joining forces to provide residents with a more localised and community focused offering.
Wherever suppliers in the domestic energy market choose to focus their attention, the market is set to look extremely different in five years' time.
Key findings of the report include:
- Suppliers are required to diversify their revenue streams to
gain sufficient margins to reinvest in their business. Those that
fail to go beyond selling energy will not be sustainable in the
- International growth and expansion into other markets is common among today's leading suppliers.
- Those able to access and invest in the technologies to streamline their business will be the ones who remain.
- As the retention of customers becomes critical to a business' survival, creating a reason for customers to engage beyond energy supply will be key.
- The role of prosumers in a future energy system is considered
to become increasingly important as the heat and transport sectors
- Some interviewees consider self-generation at the household level as niche, with its growth subject to the development of larger scale renewable plant and community energy.
- Regulation can limit a supplier's ability to provide a niche offering.
- Further market exits are expected, through both Ofgem's
SoLR mechanism and mergers and acquisitions.
- These could include suppliers exiting with larger numbers of customers than we have seen to date.
- However, over the next few years as market entrants are few and far between, we may see less competition and a corresponding impact on energy prices and switching rates.
Our new report, produced with Cornwall Insight - Consolidation in the domestic energy market – shows that if suppliers fail to shift their business models for the new world, long-term stability may not be likely. Please click here to read the insight paper.
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