UK power market ripe for more mergers after SSE deal

• 6 years ago (2017-11-09)
• David Flin

Distribution 107 Europe 1061

---

A deal to merge the British retail power businesses owned by SSE and Germany’s Innogy could pave the way for more industry consolidation.

SSE and Innogy said on 8 November that they planned to combine operations in Britain to create a company with £10.7 billion in sale. This would reduce the number of major providers in Britain from six to five if the deal is approved by competition authorities. The new company would be the second largest player in Britain’s retail power market, with a 23 per cent market share, second to Centrica’s British Gas which has 27 per cent.

Experts have suggested that the pressures of new rivals, low wholesale energy prices, an increase in renewable energy production, and the possibility of a government cap on energy prices could result in more deals.

Neil Wilson, Senior Market Analyst at ETX Capital, said: “The big six are losing customers at a record pace to smaller suppliers. They also face a hit from price caps. Consolidation has its appeal in this type of environment.”

A senior banking source said: “There is maybe room to go down to four from five, but certainly not beyond. The others may consider alternatives, such as combining with a smaller company to avoid the regulatory challenge that comes with consolidation.”

Jeffries Investment Bank said that Europe’s biggest power firms face challenges. The 12 biggest have written off over $116 billion of assets since 2010 by shutting or mothballing loss-making coal and gas plants.

In Britain, power firms face additional regulatory pressure from the government to reduce high energy bills. Retail margins are already very thin, and not expected to improve in the near future. E.ON, for example, said that its profit margin in the UK supply business shrank to 2.8 per cent after the first nine months of 2017 from 4.9 per cent last year. New, smaller suppliers now control 20 per cent of the market, compared with less than 1 per cent a decade ago. In total, there are about 60 energy suppliers currently operating in Britain.

SSE and Innogy said that they were confident the deal would be approved by the Competition and Markets Authority (CMA), which last year found that competition was not working in some parts of the retail market.