In the luxurious pursuit of heated homes, cooked food, and fully charged devices, we are conscripted into the service of energy providers. In exchange for much of our earnings, electricity and gas suppliers reward us with access to the basic need of modern society of power. Energy companies operate to generate electricity, tap and transport gas and sell it to us. Some only perform two out of three, but the most powerful brands are adroit at all. There are many types of suppliers in the sector, from weighty multinationals to smaller regional providers running a single site, but 95% of the nation put all their energy needs in the hands of The Big Six. British Gas, E.ON, EDF Energy, npower, Scottish Energy and SSE supply the vast majority of UK households and businesses with the provisions to avoid having to cook by campfire and work by candlelight. But as costs to bill payers continue to rise, smaller outfitters come to market, and renewable alternatives gain more clout in the industry, the front-runners could see their monopoly swiftly diminish over the coming years.
The humble origins of the UK’s energy monoliths began in 1989 when the nation was thrust into the future of privatisation. Britain’s Central Electricity Generating Board was carved into individual bodies: Powergen, National Power, Nuclear Energy, and the National Grid, charged with production and distribution. Over the coming years, a quick succession of mergers and acquisitions led to the official household names we recognise today. True to the ideology of privatisation, the competition led to healthy growth in the sector; innovation advanced, and supply was rarely interrupted. The choice supplied to customers led to improved costs and services, with providers incentivised by the credible threat that if the deal is not good enough, the public could move their patronage elsewhere. But as switching slumped in the early 2010s, the Big Six advanced on their position and began to cash in on their monopoly.
The few firms at the top of the chain benefit enormously from their lofty position, buying and trading energy between each other and keeping the vast majority of energy dependents within their network. Sustained by a massive chunk of the market, the companies are at liberty to ‘tease and squeeze’ more profits from their unsuspecting patrons. Behind the earnest and alluring ‘low low’ energy prices advertised from TV screens, website sidebars, and magazine advertorials flush with CGI penguins and celebrity stars, is a 12-month lull before the real cost comes into effect. One year after signing up to one of the energy providers tasty 12-month fixed deals, customers are automatically moved onto a Standard Variable Tariff (SVT), the default tariff for customers who stay longer than a year, that is almost always so high they are never marketed. An analysis in 2016 by Octopus Energy, an independent new-comer to the energy sector, unearthed the real costs of such bills. At the beginning of the two years of the study, four out of five of the best deals were from the Big Six, but 18 months in they’d slumped to positions between 7th and 15th. 24 months after signing up to the best deal two years ago, the bills of all main providers had increased by 20 to 30 per cent, making them between £250 to £300 more expensive than the cheapest deal now on the market. The Big Six bank on the British public’s aversion to the rigmarole of changing providers and the brand loyalty that comes from seeing a logo often.
Free of opponents, the Big Six are in the comfortable position to hike up energy costs to consumers without fear that they can go elsewhere that offers lower prices. This year, dual fuel costs are expected to rise by up to 9%, adding up to £100 to bill contracts. As of June 2018, the SVT’s of the leading competitors rose £34 from the average cost the month prior, to £1,172. The cheapest tariff also made headway to £797 from £788. Four of the six raised their prices in the month previous, SSE increased their rate in July, and EON and EDF have announced their prices will rise in August. Such choreographed rises, defended by the industry as the knock-on effect of rising wholesale costs of energy and shamelessly pushing blame onto the government for environmental levies, has been criticised for exploitation of their dominance in the market to raise their prices. In 2014 after swift price hikes across the boards of the Big Six, Ofgem, the UK’s energy watchdog, referred the entire industry to The Competition and Markets Authority to look into “possible tacit co-ordination” based on the extent and timing of price rises. The 18-month investigation found the hikes to be unfair but did not accuse the major energy firms of colluding over prices. Yet today the blatant profit-maximising that threaten the most vulnerable households continues, leaving the Big Six under constant scrutiny by their regulating authorities.
Such massive hikes in costs are now a regular occasion, with British Gas raising their electricity prices by 12.5% last year just as their parent company Centrica reported a drop in profit before tax of £639m for the first half of the year, down from £688m a year earlier. The government was in strong opposition to the rise, rejecting the companies suggestion that it was in response to political pressure, with the news of the increase coming days after Theresa May’s announcement that the energy market was “manifestly not working for all consumers”.
Yet the prices are apparently working for some as the CEO’s of the Big Six and their holding companies are rewarded handsomely. Centrica chief executive Iain Conn’s yearly earnings vaulted from £3.02m in 2015 to £4.15m in 2016, enough to pay 4000 customers bills on British Gas’s standard tariff. The boss of SSE received a 72% increase in the same year, taking his total to a cosy £2.3m just as the company was under fire for extortionate household bills. All the while, over 2.5 million households live in fuel poverty; where people are forced to decide between buying food or putting the heating on. This number is expected to rise as fuel costs increase this year.
Such flagrant abuse of power has led to privatisation’s staunchest supporters to question the position of the firms. In July this year, the Conservative government announced new legislation to cap “rip-off” standard variable tariffs, arguing consumers are collectively paying £1.4bn too much for gas and electric. The measure will introduce a permanent relative price cap, limiting the gap between the cheapest and most costly tariffs. Theresa May announced the move while referring to her previous condemnation of the largest companies for creating a ‘broken market’ that puts the onus on the public. Under the new measure, 11 million households could have their rising prices capped for as long as five years, with the government claiming it could save individuals up to £100 a year, each year. In a blow for the Big Six, hundreds of millions of pounds have been wiped from SSE and Centrica’s market values since the announcement of the regulation.
Yet such attention through the years hasn’t weakened the Big Six’s resolve to strengthen their position further. Over the past couple of years E.ON, npower and SSE have become tangled in a series of acquisition attempts that threaten to bring the UK’s predominant energy suppliers down to the three horse race. A confirmed merger between npower and SSE was lambasted last year for failing to maintain the competition aspect on which privatisation was founded. In the midst of more investigations from Ofgem and the Competition and Markets Authority, E.ON proposed the acquisition of the company that owns npower, Innogy SE. Such a move would put all three British energy providers into the hands of German firm E.ON AG could resort the competitive landscape to little more than an elite club.
Today, even while the Big Six are still intact, their manoeuvres to consolidate their position even further has led to severe criticism of the effectiveness and fairness of a basic modern need of electricity and gas to be managed by companies who dedicate a significant amount of their earnings to big bosses paychecks and shareholders dividends. But that dominance is drooping. Official statistics from Ofgem show that the influence of these providers has been steadily declining over the last few years, with small suppliers getting increasingly more attention. Since 2014, all six companies have been in a regular slump, with smaller suppliers picking up the slack. If these trends prevail, it won’t take long for independent and regional electric and gas providers to eclipse the less predominant of the major players. In 2004, the Big Six enjoyed almost 100% of the combined market share in gas and electric in the UK, which by the first quarter of 2018 has been steadily whittled down to 78% in electricity and 77% in gas.
In 2004 there were just 13 firms on the energy market, last year there was 80. The increasing numbers of independent and regional suppliers are eking out confidence from the Big Six by offering cheaper deals and better customer service. A Which? survey this year of the 31 better known names in electric and gas supply ranked providers on their customer service, clarity of bills, and most crucially, value for money. On these principles, 21 firms ranked higher than the first Big Six name on the list, with npower taking the participatory prize at dead last. The lesser-known names like Utility Warehouse, Flow Energy and Octopus, the top 3, are gaining credence in the eyes of budding consumers as they challenge the stronghold the big companies that have been around the block position on the market. With support from the government through exception from the Energy Company Obligation, the savings made can then be passed onto the customer, giving smaller companies more of a competitive edge in a bottle-necked market. The risk associated with smaller firms that without market clout they could go bust quickly is assuaged by Ofgem’s automatic switching service that comes into effect if the worse were to happen, making sure you’re not resigned to card games by the gas stove for light and heat. June this year saw a record number of customers switching supplier, with 53% of almost 500’000 switches moving custom from large suppliers to small and mid-tier firms. In comparison with last years June, which saw just 19% of customers switch, there is clearly a fundamental shift occurring in the traditional monopoly of the energy sector.
The most critical threat to the long-established energy companies though is the steady overhaul in the sources of power. As renewable energies take a serious stand at replacing the likes of oil, coal, and gas for energy, the reserves that the Big Six have poured money into may soon become obsolete. As the large names struggle to move their enormous weight towards new energy technologies, smaller firms like Octopus and Bulb are swooping in and catching the public interest in greener pursuits. With smaller competitors able to offer customers the two-for-one deal of saving money and the planet, the oil-slicked offices in British Gas and npower and all the others in between may see the competition slide away from underneath them. And as decentralised power sources that can be rigged up in our own back gardens like independent wind turbines and solar powers become more popular, all energy providers could see themselves fall foul to left field of renewable innovation.
The means to heating our homes, charging our electronics and cooking food is essential in today’s modern era, and these corporate giants have profited from that need for decades. Technological developments in not only power sources, but also digital devices like Hive Smart Home tracker and artificial learning smart metres come to market, are transforming a once passive consumer base into an aware and active cohort more than willing to chop and change for the best deal. As energy providers persist in naively banking on the restless loyalty of existing customers, they are in jeopardy of pricing themselves right out of the market.