SSE and Npower in Talks to Create Giant UK Energy Supplier
New business would combine the two electricity and gas companies’ 13 million customers
SSE and npower, two of the UK’s biggest energy companies, are planning to combine their household energy supply businesses in a potentially seismic shake-up of the market.
The two firms said they were in well-advanced talks to create a new independent energy supply firm. The new business would combine the nearly 13 million customers they currently supply with electricity and gas.
If the move goes ahead it would see the end of two of the biggest brands in the energy retail market, and is likely to raise competition concerns as the so-called big six that own 80% of the energy market shrinks to the “big five”.
The combination of German-owned npower and UK-listed SSE, Britain’s second biggest supplier, would create a behemoth of a similar size to the current market leader, British Gas.
SSE’s share price jumped by more than 3% as the possible deal was announced.
Both companies have opposed the government’s plans for a price cap on energy prices, which Theresa May has said she is imposing to end “rip-off” standard variable tariffs. Among the big six, SSE has the highest percentage of customers on such poor-value tariffs.
The firms said the new company would be listed on the London Stock Exchange but stressed no final decisions had yet been taken.
“The discussions between SSE and [npower owner] Innogy are continuing and are well-advanced but no final decisions have been taken and no binding agreements regarding the terms of any combination have been entered into,” SSE said in a statement to the Stock Exchange.
The company added that it was mindful of the impact on staff and customers, and would inform them of developments as soon as possible.
The big six suppliers have been haemorrhaging customers over the past few years in the face of cheaper, more digital savvy and greener energy companies. These new operators now have 20% market share, up from 1% a decade ago.
But the big six have still been piling up the profits as the companies cut costs and charged higher prices to customers who had not switched away from standard variable tariffs.
While SSE made a substantial profit margin of 6.9% in 2016, npower reported an operating loss of £90m last year as it lost nearly 80,000 customers and struggled to get a grip on costs. Industry figures had previously said the brand had become so tarnished that a rebrand was likely.
Experts said that SSE stood to benefit the most. “We see this as a positive move for SSE and Innogy, although the relative scale of the UK supply operations within both entities means SSE is significantly more exposed to any upside,” said analysts at RBC Capital Markets.
If the merger does go ahead, the newly-created supplier would have nearly 12.7 million customers, putting it within touching distance of the current biggest supplier, British Gas, which has 13.7 million.
Industry figures said that because the new entity would not be bigger than British Gas, it was unlikely to be blocked by the government’s competition watchdog.
They said that the move was probably driven by an attempt to cut costs through economies of scale but warned the two firms were likely to face problems integrating their IT systems.
This week SSE wrote to Greg Clark, the business secretary, informing him that from the next financial year it was going to stop rolling customers on to standard variable tariffs when their fixed deals come to an end. In the longer term, it said it was considering dumping standard variable tariffs entirely.
One comparison site said the move could potentially benefit npower customers. “This merger could in fact be good news for customers. SSE currently have lower prices than npower as well as better service levels,” said Mark Todd of Energyhelpline.
Octopus Energy, a challenger supplier, said the mooted merger cemented the case for price caps. Greg Jackson, the firm’s CEO, said: “This clearly strengthens the need for government action on pricing in energy. Both of these companies are ones with questionable customer records – npower has the highest standard variable tariff, and SSE have the highest proportion of customers on standard variable tariffs.”
A spokeswoman for energy regulator Ofgem said it would not rule on the potential merger: “Our role is to represent the interest of consumers. It is not part of our jurisdiction to decide on a merger. However, we would advise relevant authorities if we were concerned that a merger would not be in consumers’ interests.”
The announcement comes as industry data shows that more than 600,000 people switched energy supplier in October, up 10% on the month before. A third of those switching moved to smaller suppliers.
A poll by Opinium for challenger firm PurePlanet has found that half of customers with the big six are considering ditching them for another supplier. For households with British Gas, which hiked its prices in September, 29% are thinking of leaving in the next six months, the research found.
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Who are the big six?
SSE
Number of customers: 7.7 million
Who owns it: UK-listed
Chief executive: Alistair Phillips-Davies
Where it is based: Perth, Scotland
Profits last year (earnings before interest and tax): £1.54bn
What they’re in: Energy supply, generation and networks
Scottish Power
Number of customers: 5.2 million
Who owns it: Iberdrola (Spain)
Chief operating officer: Keith Anderson
Where it is based: Glasgow
Profits last year: £1.25bn
What they’re in: Energy supply, generation and networks
npower
Number of customers: 5 million
Who owns it: Innogy (Germany)
Chief executive: Paul Coffey
Where it is based: Swindon
Profits last year: £90m loss
What they’re in: Energy supply and generation
British Gas
Number of customers: 13.7 million
Who owns it: Centrica
Chief executive: Mark Hodges
Where it is based: Staines-upon-Thames
Profits last year: £574m (NB £1.46bn for parent company Centrica)
What they’re in: Energy supply and generation
EDF Energy
Number of customers: 5.2 million
Who owns it: Électricité de France (France)
Chief executive: Simone Rossi
Where it is based: London
Profits last year: £8m loss
What they’re in: Energy supply and generation
E.ON
Number of customers: 6 million
Who owns it: E.ON (Germany)
Chief operating officer: Michael Lewis
Where it is based: Coventry
Profits last year: £337m
What they’re in: Energy supply and generation
Sources: https://www.theguardian.com/business/2017/nov/07/sse-npower-talks-merged-energy-supplier
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