The UK competition watchdog has provisionally approved a merger between two of the country's Big Six energy companies - leading consumer groups and other organisations to worry it could lead to price increases for consumers
The Big Six energy companies in the UK look set to become the Big Five, after the Competition and Markets Authority provisionally approved a merger between Npower and SSE.
Npower parent company Innogy SE said the decision put it on track to complete the transaction by the beginning of 2019.
In a statement, the company confirmed that an executive committee, chief executive and chief financial officer were in place for the upcoming listing of the merger firm, which will further slim the number of major UK energy suppliers.
The Big Six energy companies are SSE, Npower, British Gas, E.ON, EDF Energy and Scottish Power, having formed in the 1990s following the privatisation of Britain’s electricity and gas supplies.
In the third quarter of 2017, they held a combined market share of 81% for electricity and 80% for gas supply – although this has gradually dwindled due to the emergence of more than 60 smaller rivals in recent years.
Here we look at how the merger arose, what made the CMA land at its provisional deciion, and how the deal will impact on consumers and market disruptors.
Npower-SSE merger is response to changing UK energy market
Martin Herrmann, COO Retail of Innogy SE: “Our plans for a new British retail energy company are clearly on schedule and today’s announcement that the CMA has given provisional clearance to the planned merger is another important milestone.
“We believe that the new organisation will combine the best from both companies to meet evolving customer expectations and address advancing market challenges.”
SSE chief executive Alistair Phillips-Davies said: “The scale and pace of change in the GB energy market continues to be significant and requires us to evolve to stay relevant, competitive and sustainable.
“The planned transaction presents a great opportunity to create a more agile, innovative and efficient company that really delivers for customers and the energy market as a whole.
According to Innogy SE, it will have a 34.4% stake in the new firm while SSE de-merges its 65.6% share among its shareholders.
It added that the time of the deal’s completion was subject to the CMA giving its final approval of the merger.
CMA investigation: Big Six energy companies merger does not raise competition concerns
The UK competition watchdog approved the merger, following an investigation in which it found the two firms “did not compete closely” on standard variable tariff prices.
The CMA added that few customers switched between the two providers, instead going to other suppliers on the market.
In reaching its decision, the watchdog said it looked at evidence from energy suppliers, customer groups and regulators.
Inquiry group chairwoman Anne Lambert said: “It is vital that householders have a range of energy suppliers to choose from so they can find the best deal for them.
“With more than 70 energy companies out there, we have found that there is plenty of choice when people shop around.
“But many people don’t shop around for their energy. So, we carefully scrutinised this deal, in particular how it would impact people who pay the more expensive standard variable prices.
“Our analysis shows that the merger will not impact how SSE and Npower set their standard variable tariff prices because they are not close rivals for these customers.”
Ms Lambert added that plans to introduce a temporary standard variable tariff price cap by the energy regulator Ofgem would also protect customers.
The CMA is now accepting views on its provisional decision and will publish a final report on the merger by 22 October.
The expected green light has caused some to worry about the impact of the merger on consumers.
Shadow energy minister and Labour MP Alan Whitehead said: “This provisional decision to allow SSE and Npower to merge is concerning and comes at a time when the big energy companies are not meeting the needs of the public.
“Given that both of these companies already struggle to provide good customer service, job losses in customer care as well as other departments must be avoided at all costs.
“Maintaining existing jobs and investing in new jobs in energy supply should be a priority.”
Analyst: ‘Big Six energy companies have to address threat from small suppliers’
Approval of the Npower-SSE merger has come in an era of emerging energy suppliers entering the energy market to address consumer irritation with the major firms.
One analyst suggested to Compelo that Big Six energy companies like Npower and SSE were likely to merge as a way of handling growing market competition.
A study published by uSwitch earlier this month found that green energy tariffs, which are often supplied by challenger energy firms, were up to £267 cheaper than Big Six standard variable tariffs.
GlobalData power industry analyst Ankit Mathur said: “Just six energy suppliers have monopolised the UK energy market since the gas and electricity networks were privatised, but over 60 smaller rivals have recently emerged as effective competition.
“Amid the strong competition introduced by the smaller players in terms of pricing, they have been able to gain consumers by tapping into the lack of satisfaction that consumers have become accustomed to receiving from the Big Six, such as poor customer service.
“Many have created unique selling points by providing a niche service to the market, such as solely providing prepaid energy or only supplying 100% renewable energy to cater for greener consumer trends.
“Consolidation was indeed needed to sustain the competitive onslaught by the small fragmented suppliers. The merger of these two companies will synergise their complementary skill sets, best practices and improve services across the client base while lowering their costs.
“Although the Big Six gained advantages from their scale and balanced portfolios, it is now imperative for them to curb customer losses and tackle the growing threat from the smaller suppliers, who in turn have to carve out unique positions in the market with new offerings to attract customers.”
Small energy firms have fared well against the Big Six energy companies in customer service rankings.
Clean energy supplier and market disruptor Octopus Energy scooped the 2018 uSwitch supplier of the year award, beating major suppliers on satisfaction and value for money.
Chief executive Greg Jackson said: “Consolidation alongside legacy companies is a natural transition – we’ve seen it in airlines and now we’re seeing it in energy.
“If the Big Six becoming the Big Five does anything for customers, it will need a fundamental shift in opaque practices such as loyalty penalties and one-sided contracts with exit fees.”
‘The Big Six energy companies becoming the Big Five is not good news for ordinary families’
The CMA’s provisional approval of the Npower-SSE merger has put energy consumer interest groups on alert.
Consumer group Which? said it will be watching closely for any increases in energy bills that could result from the merger.
“The Big Six becoming the Big Five is not good news for ordinary families. It will be a miracle if they manage to merge their billing systems and back offices without some major errors.
“The Big Six aren’t exactly well known for their agile use of technology. There’s an outside chance the merger might allow them to reduce their cost base but whether that will be passed on to consumers in reduced prices remains to be seen. We are highly sceptical.”