Consuming Issues: Energy giants are milking a £25bn oligopoly
Saturday 25 September 2010
It doesn't take a genius to work out that oligopolies – where a few large companies dominate a market – tend to exploit customers, nor that, in energy – one of the biggest areas of consumer spending – Labour's constant boasts about taking "tough decisions" turned out to be flaccid words.
After the Conservatives privatised energy 20 years ago, suppliers laid off staff and cut bills. Politicians became complacent because customers were receiving cheaper power than state-owned suppliers on the Continent. They didn't worry there was too little investment, meaning that power stations now require a £200bn overhaul. Nor did they mind that ownership of the industry was concentrating in ever fewer hands. Of 20 electricity and gas suppliers in the early 1990s, just six remain: British Gas, EDF, Eon, npower, ScottishPower and Scottish & Southern. They supply 99.5 per cent of homes, more than their counterparts in banking and food, where oligopolies are also emerging.
Two years ago the six biggest current account providers – Barclays, HBOS, HSBC, Lloyds, Nationwide and RBS – had 84 per cent of the market. With Santander's inclusion following the Lloyds-HBOS merger, the big six now have about 90 per cent. The Co-op, Yorkshire and Clydesdale banks are sizeable rivals.
Asda, Co-op & Somerfield, Morrisons, Sainsbury's, Tesco and Waitrose have 81.6 per cent of grocery spending; Marks & Spencer and Budgens are alternatives.
All this goes some way to explain why energy firms, which have no hefty competitors, have mediocre prices and confusing bills. In theory, their poor performance should attract new entrants, and two new firms have indeed arrived. But despite undercutting the Big Six, First:Utility and Ovo are having difficulty growing.
Take First:Utility. It says that despite being a £30m-a-year business, it finds it difficult to buy wholesale power. Generators offer it the same volume of power day and night ("a flat baseload") when it wants most during the day when it is used. Another problem is that the unit of sale is equivalent to 25,000 customers. That is fine if you have millions of customers, but not so good if you have 45,000. First:Utility has to engage in a complex financial manoeuvre requiring collateral to buy any fuel at all, tying up working capital and constraining growth.
Any supplier reaching 50,000 customers must join the Carbon Emissions Reduction Target (CERT) . The industry-funded scheme for lagging low-income households is good in principle, but First:Utility does not have many low-income customers, nor does the scheme take account of its voluntary installation of smart meters. Administration costs are high, meaning – First:Utility says – that its 50,000th customer would cost it £2.5m. There are other problems too complex to outline here. But overall, First:Utility is finding it harder to succeed in energy than its former business, telecoms.
Its finance officer, Darren Braham, says: "Two years of [our first] five years were taken up sorting out accreditation and finding someone to buy the energy from and getting the smart meters. So the set-up phase was about two years, whereas with with telecoms it was six months. After five years, we have 40,000-plus customers. Five years after we launched telecoms, we had 500,000 customers. There are massive new issues for any entrant in terms of growing the business."
Chris Huhne, the Secretary of State for Energy has ended suppliers' "outrageous" right to take 65 days to notify a price rise. He might also want to remove some of these barriers in his Energy Bill this autumn.
Heroes and villains: Catering giant makes free-range promise
Hero: Westbury Street Holdings
From next month Westbury will use only free-range eggs in its catering companies, such as Caterlink, Holdroyd Howe and Baxter Storey, which cook meals for such clients as Aston Martin, Barclays and, appropriately, Egg. Seven million eggs a year will come from Staveley's Eggs in Chorley, Lancashire.
Villains: Food firms
Forty-two suppliers and retailers have failed to honour the most important promise they made five years ago to reduce waste. They dumped less food between 2005 and 2009, but the annual volume of plastic, paper and other packaging stayed at 2.9 million tonnes. The voluntary deal is known as the Courtauld Commitment.
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