Energy giant SSE's price ploy 'just smoke and mirrors'

Scottish and Southern Energy breaks with 'big six' rivals with move to open up the market by auctioning its electricity

Tom Bawden
Thursday 13 October 2011 00:00

Analysts and rivals lined up to attack Scottish and Southern Energy (SSE) yesterday over its plan to shake up the energy industry by auctioning on the open market all of the electricity it generates. One detractor rejected the move as "smoke and mirrors".

SSE's proposals would see it breaking away from its major rivals, who effectively sell most of the power they generate directly to homes and businesses in a process that makes it extremely difficult for smaller, independent players in the utilities sector to break into the market.

However, critics said SSE's plans would do virtually nothing to increase competition or lower prices. Darren Braham, a director of Britain's largest independent electricity supplier, First Utility, said: "We reject SSEs moves as 'smoke and mirrors' that will have negligible impact on newer entrants growing in the market, competition and consumers."

Mr Braham said the idea would be ineffective, in part, because SSE would auction its electricity in the "day-ahead" wholesale market, rather than further ahead of time in the "forward" market. Electricity suppliers typically buy only a very small portion of their energy the day before – just 1 per cent in the case of First Utility, which buys the rest up to two years in advance.

The "big six" – Centrica, E.ON, SSE, NPower, EdF and ScottishPower – generate about 80 per cent of Britain's energy and supply 99 per cent of household consumption. This has resulted in a very illiquid electricity market which makes it very difficult for small independents to compete.

SSE says its proposals, which it described as "the most significant change to the GB electricity market since 2005",will make it easier for smaller players to compete by increasing transparency and liquidity in the market. It expects at least some of its larger rivals will follow suit. But while many applauded SSE's move as a symbolic step in the right direction, they said it would need to auction its electricity further in advance to be of any help to smaller companies, who need to agree their costs months in advance.

Ofgem, the regulator, also welcomed the move but said it "doesn't doexactly what we want... we want to see liquidity further out in the curve".

A spokesman for Centrica said SSE's proposals "will do little to increase liquidity in the forward power market". He added: "If all power was traded on a day-ahead basis as SSE proposes, that may well increase volatility in prices. If so, this could actually exacerbate the risks for suppliers and could lead to more price volatility for customers".

Nigel Mason, of Co-operative Energy, another large independent, said: "It is a step in the right direction, but we all need to stock up in advance. In order for this to be an effective move, contracts need to be of the right duration, not just one day ahead."

SSE said it was introducing the measure to satisfy a particular claim that the day-ahead market lacked liquidity, which it sees as the biggest barrier to new entrants to the market.

Q&A power market

Will energy prices go down?

Unfortunately not. Even if the rest of the big six follow SSE's lead it will not make much difference. The biggest players will still dominate the market while, despite popular opinion, their energy generation businesses are barely scraping a profit. In fact, with increasing environmental requirements and a much-needed infrastructure overhaul looming, prices are only going to go up.

Will it increase competition?

The widespread adoption of SSE-style auctions could increase competition slightly. While this will not lower our bills, it could force existing operators to become a bit more customer-friendly.

What makes SSE different?

Traditionally, the big six have sold the energy they generate to their trading arms, which sell it on to their supply arms, which pass it on to their customers. SSE's generation and supply operations will now buy and sell through the open market.

How political is all this?

Very. Everybody hates the energy providers – and since they raise prices quicker than they drop them, they have some cause. But the big six do not have scope to lower prices much, while they have to be seen to be doing something to satisfy politicians and customers.

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