Macquarie to Spar With Centrica in Energy Market Revolution

Businesses are dramatically changing the way they buy energy in Britain and beyond as new technology makes it easier and cheaper to generate their own power.

Home furnishings giant Ikea Group now gets almost half of its U.K. electricity from renewables, while Toyota Motor Corp. taps solar energy to build engines in Wales. Australian bank Macquarie Group Ltd. will unveil on Wednesday a service to help businesses cut energy costs and pollute less, competing with existing suppliers including Centrica Plc.

More and more British businesses are seeking to save money by using locally sourced power, sidestepping utilities and sparking a global market for decentralized energy that’s expected to expand more than 50 percent to $110 billion by 2021. That shift threatens to cut revenue at the biggest traditional power providers, which typically control everything from generation to distribution.

“The Big Six are going to have to significantly change the way they operate,” said Nick Boyle, chief executive officer of Lightsource Renewable Energy Holdings Ltd. in London. “It’s going to be a challenging time for them. They are aware they need to reinvent themselves.”

In so-called distributed generation, power plants are connected to a local network, cutting the costs associated with using the main grid. Companies can also reduce expenses through energy efficiency measures, which can save business consumers 3.9 billion pounds ($5.2 billion) a year in the U.K. alone, according to the Policy Exchange research group.

Macquarie, which bought the U.K. government’s Green Investment Bank Plc in August, will offer companies financing for new generation and energy saving equipment under supply contracts that may be as long as 15 years and have no up-front costs, said Richard Braakenburg, senior vice president of the energy unit. Traditional energy supply agreements usually last one to three years.

Providing the capital up front entices companies to embark on measures they might otherwise put off and the bank’s willing to work alongside traditional utilities, said Braakenburg. “You can bring forward a whole chunk of the investment program rather than having it drip fed.”

Carbon Budget

Distributed energy and consumption savings go hand-in-hand with efforts to tackle climate change. In Britain, the government is legally obliged to reduce emissions by 80 percent from 1990 to 2050 using a succession of five-year “carbon budgets.”

In Europe, renewable-energy developers are being forced to find new customers as lower subsidies from governments squeeze their profit. The cheaper green technology has encouraged more companies to invest in their own generation and efficiency programs.

In the U.S., a key driver of the trend has been companies like Google and Amazon.com Inc. seeking to demonstrate their shift to cleaner activities, said Bruno Brunetti, head of power strategy at S&P Global Platts. Enel SpA, Europe’s biggest utility by market value, started work earlier this month on a wind farm in Nebraska to power a new Facebook Inc. data center.

“Back in the days a utility had absolute control from generation all the way down to retail,” Brunetti said. “Things are changing as end-users are getting more proactive.”

Ikea Independence

Globally, the market for distributed generation will expand by 9.5 percent a year through 2021 from about $70 billion in 2016, according to a report byBCC Research LLC, an energy analysis company based in Wellesley, Massachusetts.

Ikea plans to be “energy independent” by 2020 and globally plans to spend about 2 billion euros ($2.4 billion) to achieve that target, said Hege Saebjornsen, U.K. and Ireland country sustainability manager. The retailer is already selling energy solutions to its own customers.

But all isn’t lost for Britain’s existing utilities, according to Centrica, the biggest household energy supplier. The utility, which issued a profit warning last week, has responded to the changing market with longer-dated contracts to satisfy customers insisting on bigger cost savings than they’ve enjoyed in the past, including help with finance for new equipment and generation.

Utility profit margins for decade-long contracts can be closer to 10 percent than the near-zero level on some traditional supply agreements, said Gab Barbaro, managing director of Centrica’s British Gas Business unit. And that’s after the energy supplier and business or government customer share cost savings between them, he said.

“It’s all about volume and energy efficiency,”  Barbaro said. Traditional contracts have been “done to death.”

— With assistance by Rachel Morison

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Time for the UK to come clean on green energy taxation

Britain’s “big six” energy providers are feeling the heat. Theresa May’s pledge to end “rip-off” fuel bills could lead to a cap on the standard variable tariff paid by a majority of households in the UK. The sector is likely to face a more radical shake-up, should Jeremy Corbyn’s Labour party come to power.

Power suppliers are showing considerable agility in countering the immediate threat of regulation. Two of the biggest, SSE and Npower, are to spin off and combine their UK retail businesses to reduce their exposure to the market. Now Centrica, the parent of British Gas, has said it will scrap its standard variable tariff, replacing it with an “emergency” 12-month default tariff for customers who fail to shop around for a cheaper fixed-price deal.

Whether regulators step in, or whether companies act to pre-empt them, it seems plausible that the gap between the cheapest and most expensive tariffs will narrow, and that price-savvy customers will no longer receive such a large cross-subsidy from the apathetic majority as they have in recent years. It is questionable whether consumers need such protection from their own inaction. But even if there is little change in the average household bill, there is a real benefit in making people more confident that they are paying a fair price for energy.

Public trust in the system is especially important because the UK, like countries worldwide, is grappling with the problem of how to fund the necessary switch to clean energy. At present, there is a damaging lack of transparency over the costs of this transition.

Centrica’s chief executive, Iain Conn, argues that “green taxes” and other government policies that are funded through levies on energy suppliers are the main cause of rising household bills. He and others in the industry want the government to end this practice and meet the costs from general taxation. He has a point.

The true cost of UK policies to support green energy is hotly contested. Centrica says environmental and social policies accounted for £135 of an average power bill of £1,112 in 2016. Independent analysts, and the government’s own advisers on climate change, have different forecasts suggesting the costs are much lower. A great deal depends on the timeframe selected, how one accounts for the carbon tax and whether one factors in renewable energy’s impact in lowering wholesale prices.

A recent review of UK energy costs by the economist Dieter Helm suggests that UK households in fact pay less than the European average for energy — and less on taxes and levies. But green subsidies are significant and they have been higher than initially forecast: a “levy control framework” introduced in 2011 was supposed to cap the costs of three of the main schemes supporting low carbon investment, but costs are likely to exceed the cap in every year to 2021. The Helm review argues it would have been possible to achieve as much at lower cost.

At a time when poorer households are struggling with stagnant wages, cuts to benefits and rising prices for food, transport and other essentials, it will not be surprising if they begrudge paying for decarbonisation policies. Nor is it surprising that energy suppliers resent being blamed for high prices when the government has failed to regularly quantify and explain the impact of its green policies on household bills.

If the government is to win public support for the essential transition to cleaner energy, it must begin with greater transparency over the costs of its policies. Only then can it justify the costs and determine the fairest way to meet them.

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SSE and npower in talks to create giant UK energy supplier

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

Topics

Business energy comparison

Fast-growing, energy-hungry businesses can consume a lot of fuel; and if you don’t keep track, those gas and electricity costs can really stack up.

Savvy business owners will constantly shop around for a better deal – as there are always better deals to be had. Don’t pay more than you need to because of inaction, get comparing, find yourself a better deal, and change suppliers today.

Below, we’ll compare business energy suppliers, look at what’s covered by your gas and electricity providers, what you should be looking for with your business energy tariffs, what you need as a small business and what you should expect from a business energy quote.

Gas for businesses

Whether it’s for hot water and heating your premises, or fuelling kitchen equipment, gas is an essential fuel for the daily running of your business.

Unlike domestic customers, businesses are able to access gas at a lower per kWh price because they generally use more of it; however, they will usually pay a higher rate of VAT.

Electricity for businesses

Providing light and the power for any hardware and equipment you need to run your business on a daily basis, businesses tend to use a lot of electricity.

Like with gas, this means they can afford to negotiate a better deal on their electricity contract though may be hit by higher wholesale prices.

Business energy prices

Business energy prices can vary wildly from supplier to supplier and no two firms’ energy usage is going to be the same. Many factors – including your size, location, business type, sector, and even credit rating – influence how much you will be paying and which provider will be best suited to your needs.

Unlike domestic energy costs, business energy prices are driven by the market, meaning they can vary wildly even from day to day. Using an expert comparison service is the best way to ensure you get a good deal on your business energy.

You could pay by unit pricing, which is based on the size and consumption of your company, or a fixed business gas price plan, with which you pay a set price for a fixed period of between one and three years.

Generally, businesses will be subjected to a 20% rate of VAT on their energy bill, though this can be reduced if you meet the low energy consumption requirements. A business is regarded as having low energy consumption if its consumption of electricity is less then 33kWh per day or 1,000 kWh per month on average, and below 145kWh per day, or 4,397kWh per month for gas.

Electricity costs for business

The table below provides an idea of how much you’ll expect to pay for electricity, depending on the size of your business.

Business type Average annual usage Average electricity price (per kWh) Standing charge (daily) Average annual price
Micro business 5,000 – 15,000 kWh 13p – 13.5p 26p – 30p £650 – £1,800
Small business 15,000 – 30,000 kWh 11.8p – 13p 24p – 26p £1,900 – £2,900
Medium business 30,000 – 50,000 kWh 11.3p – 11.8p 21p – 23p £3,300 – £5,000

Gas costs for business

The table below provides an idea of how much you’ll expect to pay for gas, depending on the size of your business.

Business type Average annual usage Average gas price (per kWh) Standing charge (daily) Average annual price
Micro business 5,000 – 15,000 kWh 4,1p – 4.5p 23p – 26p £300 – £700
Small business 15,000 – 30,000 kWh 3.8p – 4p 21p – 22p £800 – £1,400
Medium business 30,000 – 50,000 kWh 3.5p – 3.7p 18p – 20p £1,500 – £2,000+

One thing to be aware of when you compare business energy suppliers is that the cheapest offer may not necessarily be your best option – there are other factors. Take a more holistic view of the potential benefits offered by a supplier before making your selection.

Business energy tariffs

A business energy tariff is the payment plan your provider will put you on depending on your consumption, needs, and size. Work with your supplier to tailor your plan accordingly.

Unlike their domestic cousins, business energy tariffs tend to be set at a higher price as business energy usage is harder to predict. In order to get the best deal, you should be armed with as much information as possible about your average energy usage before comparing quotes.


Business energy suppliers and consultants

While the ‘Big Six’ energy suppliers (British Gas, EDF Energy, E.ON UK, npower, Scottish Power, and SSE) have traditionally dominated the UK energy market, changing attitudes and energy watchdog Ofgem’s referral of the industry to the Competition and Markets Authority (CMA) have resulted in a significant shift towards independent energy suppliers over the last few years.

In 2013, independent Warwick-based supplier First Utility became the seventh-biggest supplier in the UK, but it has since stopped taking commercial contracts. Likewise, OVO Energy, another independent energy supplier, has also since ceased its business dealings and sold any business customers to multi-service provider Verastar in 2016.


BAS energy

BAS energy logo
BAS Energy is an energy consultancy the on a mission to help UK businesses achieve optimal energy efficiency. It advises clients on the most reliable suppliers with competitive prices and claims to have helped more over 200,000 businesses save more than £42m since 2006.

Its other services include gas and electricity procurement, invoice validation, data management, portfolio management, carbon management energy audits and compliance. BAS Energy was acquired by Smarter Business in July 2017.


Power Solutions

Power Solutions logo
Founded in 2005, Power Solutions is an independent energy consultant that has helped UK clients across 10,000 sites cut their costs and save. It also provides energy efficiency and utility solutions to help businesses become more energy efficient.

Its advice and consultation are free, with suppliers paying a fixed commission fee when a customer is placed.


Smarta Energy

Smarta Energy logo
With more than 15 years of experience in the energy sector, Smarta is able to offer its customers very competitive pricing structures thanks to the strong relationships it has formed with energy suppliers, both independent and established.

Smarta can also help with the installation of a new meter.


Make it Cheaper

Make it Cheaper logo
This energy procurement company was founded in 2007 and helps its customers find the best prices for their utilities. In 2015 it embarked on a commercial partnership with the Federation of Small Businesses (FSB) to launch an energy switching service dedicated to its members.

In addition to its energy procurement services, it offers insurance, phone, broadband, and finance.


EDF

EDF energy logo
One of the UK’s leading energy suppliers, EDF claims to be the largest producer of low-carbon electricity and the biggest supplier of electricity by volume in the UK. It offers a range of competitive fixed contracts rates for business, as well as a flexible, short-term electricity contract for new businesses or those moving into new premises.

For customers that don’t want to commit to a fixed term contract, EDF’s Freedom for business tariff gives the option to move onto a different tariff at any time, with variable price, no fixed end date and no notice to leave.


British Gas

British Gas logo
The UK’s largest supplier of energy, British Gas for business claims to supply gas and electricity to more customers than any other business energy supplier (400,000 businesses).

The company offers both gas and electricity in one package or separately, and has a range of fixed term and variable price plans.


Bulb

Bulb energy logo
One of the newest kids on the block, Bulb is a 100% renewable electricity and 10% renewable gas supplier that claims to offer prices around 20% lower than the Big Six. All the electricity comes from independent renewable generators across the UK.

Founded in 2015, the company doesn’t currently serve sole traders but expects to be able to in the near future.


Yu Energy

Yu Energy logo
Founded in Nottingham in 2014, Yu Energy is an energy supplier focused on providing gas and electricity to small and medium-sized businesses. It offers fixed, market-based prices and gives each customer its own personal account manager in a bid to provide a more customer-centric experience than its larger rivals.

Yu Energy floated on the London Stock Exchange’s Alternative Investment Market in a significantly oversubscribed IPO in March 2016.


Small business energy

Many providers offer tariffs that are specifically targeted at small businesses. Generally, the bigger your business is the better value you are getting for your energy as you can buy it at closer to the wholesale price.

Fixed rate gas and electricity contracts usually represent the best deals on small business energy. However, though you may be insulated from sudden spikes in energy prices, you will also be unable to take advantage of sudden drops in prices and it can be very expensive to exit a contract.


Business energy quotes

Make sure you’re informed about the most important elements included in a business energy contract so you can understand whether the deal you’re getting is a good one. Here’s what you should be looking out for:

  • Unit rates – this is the set amount your business will pay per unit (kWh) of energy that it uses
  • Standing charge – this is a fixed daily cost that covers the expense of repairing and maintaining a businesses’ energy facilities
  • Agreed supply capacity – the maximum demand that a business needs from its supplier, ensuring that amount (and no more) is continuously available
  • Maximum demand (MD) – measured in kWh, this is the highest value of energy a business could use in a half-hour period, taken from the highest demand recorded during a calendar month or billing period and multiplied by two to give an hourly MD. Penalties can be incurred for exceeding this
  • Cooling off period – a period of time after signing a contract in which they can cancel without financial penalty (rarely offered to business customers)
  • The billing period – the period of time that a bill will cover, which can be negotiated for favorable terms with your supplier
  • The renewal window – this comes at the end of your contract and is a 60 or 120-day window, giving you time to find a better deal or stick with your current supplier

In order to get the best energy quote for your company, you should have the following information to hand:

  • Do your research – you need to understand energy contracts if you want to get the best deal
  • Read reviews – See how other consumers have rated potential suppliers. There are plenty of credible online sources where you can compare
  • Know your current numbers and consumption pattern – work out when your peak energy consumption times are and find out your Meter Point Reference Number (MPR) for gas and your Metering Point Administration Number (MPAN) for electricity
  • Shop around for quotes – don’t just go with the first attractive offer, keep shopping around for a better one and make sure you get the best deal for your business

Once you’ve agreed to a business energy contract, you’ll be locked in for the stated time, so make sure it’s definitely the right one for you before committing.


Compare business energy quotes

Reducing your business energy costs can significantly improve your bottom line so it’s essential you are always on the lookout for a better deal.

However, making sense of the varying prices and plans from different suppliers, as well as understanding the quotes can be tedious and time-consuming

 

Big energy firms make £1bn profit despite loss of millions of customers

The UK’s biggest energy companies made a profit of £1bn last year and have increased their profit margins in recent years despite losing millions of customers to challenger firms, according to Ofgem – the Office of Gas and Electricity Markets.

The energy regulator said the big six suppliers enjoyed a healthy margin of 4.5% on average in 2016 by charging higher prices to consumers who have not switched, with the gap between the best and worst tariffs widening to £300 a year.

Almost half of people who are unemployed or in low-skilled work have never switched supplier, a new report by the regulator found (pdf). For other customers, the figure is below a third.

“Supplier margins have been rising fairly significantly over the last seven years or so,” said Joe Perkins, Ofgem’s chief economist.

“Some of that increased margin is clearly down to increased cost efficiencies but the level of [consumer] engagement also plays a role.”

The regulator found that if energy suppliers made the same profit on poorer-value standard variable tariffs as they did on cheaper fixed-term deals, the big six would have posted a loss of 6% last year.

British Gas made the biggest profit margin last year, at 7.2%, followed by E.ON with 7%, SSE with 6.9% and Scottish Power with 5.2%. Npower and EDF both made a loss.

“Less-engaged consumers appear to allow suppliers to offer very competitive prices to engaged consumers and still make a profit after deducting their operating costs,” the report said.

Theresa May has cited the higher prices for those who have not shopped around as the reason for her price cap on standard variable tariffs.

A spokesperson for the Department for Business, Energy and Industrial Strategy (BEIS) said: “The regulator’s report shows there are still millions of people paying too much for their energy.

“While it is positive to see 1 million fewer people are on poor-value tariffs this year, it is not right that the majority of people remain on them.”

First Utility, one of the biggest challenger firms, said the report was further evidence of why ministers were capping prices.

“It [a cap] is the inevitable consequence of the big six’s lack of regard for their customers and they only have themselves to blame,” said Ed Kamm, the company’s chief commercial officer.

However, the £1bn profit is down from the peak of £1.2bn, with smaller suppliers driving the big six’s market share down to 80%.

“Profit in absolute terms has been falling for the six largest suppliers as they’ve been losing customers to smaller firms, so whilst they’re making a stable or increasing margin on revenues they earn, that revenue base has fallen somewhat as new entrants are coming in,” said Perkins.

Ofgem said it was pleased that households were using a fifth less energy than a decade ago, largely because of improvements in energy efficiency such as insulation and better boilers.

But the regulator is concerned that some people are rationing their use of gas for heating, such as by turning down the thermostat. It believes a third of the reduction in gas consumption over the last 10 years is a result of consumers limiting their heating in response to price hikes.

“Self-rationing is a particular risk for low-income consumers,” said Perkins.

While May’s wider cap is unlikely to take effect until 2019, Ofgem said that a narrower cap on 4m vulnerable households had reduced typical dual fuel bills by £60 a year since being imposed in April.

However, the regulator found the cheapest tariffs had been withdrawn and most suppliers had converged with pricing just under the cap. It would not be drawn on whether May’s cap would have the same effect.

Richard Neudegg, head of regulation at comparison site uSwitch.com, said: “Prices have converged around the level of the prepayment price cap and Ofgem acknowledges that some consumers have seen their bills rise due to the cheapest deals being withdrawn.

“One of the risks of applying a cap to the wider retail market is that the competitive forces which drive prices down will be squeezed out, leaving customers with nowhere to go to escape expensive tariffs or poor service.”

Ofgem’s state of the market report also said the cost of keeping the lights on in recent years could have been cheaper for consumers if National Grid had more accurately forecast the number of power stations required to be on standby during winter.

Another area where households had sometimes paid “a higher cost … than necessary” was for policies cutting carbon emissions from energy, the report said.

“This hasn’t come cheap,” said Perkins, of the subsidies paid by consumers to support windfarms and solar panels in recent years.