Bloomberg -- Britain’s energy retail market is poised for a price war as suppliers look to shore up their share before the government brings in legislation to cap power and gas bills.
Suppliers are concerned the new regulatory regime may stifle competition and probably want to grab every customer while they can, according to Agency Partners. Ministers will publish a draft bill giving regulator Ofgem powers to curb energy prices for households on Thursday, but the new system’s unlikely to come in before late next year.
“There’s a better-than-even chance that we’ll see a price war for market share,” Agency Partner’s Lakis Athanasiou in London said by phone. It’s like “musical chairs” -- when price competition winds down under the cap plan, utilities want customers on their books, he said.
The policy may mean less price competition in the future because utilities won’t be able to use profit from their highest tariffs to finance their cheapest plans so rates will gravitate toward the price cap, said Athanasiou. The plan may eventually cut profit margins for utilities by almost half, according to Investec Securities.
Centrica, the nation’s biggest supplier, extended declines to a 14-year low on Monday after Prime Minister Theresa May last week relaunched her plan mooted during the general election campaign.
Iain Conn, the company’s chief executive officer, snapped up shares worth 173,000 pounds ($227,000) on Monday, while Chairman Rick Haythornthwaite bought 57,077 shares.
The company rose for the first time in six days on Tuesday, advancing 1.9 percent to 176.1 pence at 12:15 p.m. in London.
The Windsor, England-based company and the five others that make up “The Big Six” get about 25 billion pounds ($33 billion) from households annually. The government has come under increasing pressure from the opposition Labour Party and consumer groups to revamp the market and curb prices for the most vulnerable consumers. The legislation will target the highest-priced contracts, known as standard variable tariffs.
The average SVT will drop by about 15 percent in a scenario where the cap is set based on protections already installed for the most vulnerable customers using pre-payment meters, Investec said.
The Department for Business, Energy and Industrial Strategy didn’t immediately respond to emails seeking comment on the potentially lower levels of discounting after price limits are installed. The level of the cap, which will be set by energy regulator Ofgem, must account for the need to “preserve competition,” a spokesman said by email.
The Big Six have lost more than 2 million customers to smaller providers since 2010 and there are now more than 100 energy suppliers in Britain. Domestic power prices were 4.9 percent below the European Union average last year, according to Eurostat.
A price war may not be an effective strategy for the biggest providers, according to Roshan Patel, an analyst at Investec in London. “The smaller suppliers could discount even harder.”
Utilities may also react by lowering operating costs and cutting spending on equipment, Beatrice de Taisne, a credit analyst at S&P Global, said in an emailed note.
Once the caps are in place, “you’ll just see some of the better-priced deals go away,” John Musk, an analyst at RBC Europe in London, said by phone. “It’s not good for competition.”
As supply contract rates bunch near the level of the cap, customers will be less likely to shop around, said Athanasiou at Agency Partners.
“Where politicians have been dishonest is when they imply the cap will merely remove the most-expensive tariffs,” he said. “What they don’t explicitly say is that it removes the cheapest tariffs as well.”