Mu
ch maligned Big 6 energy supplier nPower, who are as yet to follow the herd in cutting domestic energy prices have hit back at the increasing populism of political attitudes to UK energy policy with Chief Executive Paul Massara’s letter to Energy Minister Matthew Hancock being leaked.
Massara’s note said:
“Political factors have…become increasingly significant over the last few years, particularly as we approach the UK general election. Any change in prices in the short term will inevitably have to take account [of] potential outcomes after May this year.
There can be no denying that given the barrage of populism from all sides of the House, whether Miliband, Osborne or Alexander.
Yet Massara’s opinion was somewhat more contentious regarding the behaviour and built in benefit of being a small / independent / new entrant energy supplier. Massara claimed:
“The proportion of customers on fixed-price contracts is much higher for smaller independent suppliers than it is for large suppliers. This allows them to claim that they are reducing prices when in fact they are simply offering a new lower price fixed-price contract for new customers”.
In all honesty we’re not sure what that statement is intended to tell Hancock. Is it that independent suppliers have pioneered fixed prices and offer low prices for longer in an effort to please their customers? That’s surely a positive isn’t it? Or is it the essence of a built in commercial advantage gifted to smaller suppliers? You can imagine the ironic laughter amongst Opus, Ovo, CNG and the rest at that one. But Massara went on to say:
“Which may in part explain your [Hancock’s] perception that they [the smaller, independent suppliers] may have moved [decreased prices] earlier.”
Now that one really has us confused. The smaller suppliers have acted earlier. Perhaps there is safer ground to argue on the magnitude of falls but our own BJMMI analysis shows that the non-Big 6 suppliers tend to pass through wholesale costs quicker than the Big 6 (but not necessarily to the same amount).
Indeed if Massara seems to be off-key in those protestations he went further saying:
“Actions by both government and the regulator means that small suppliers have significant benefits in terms of exemptions from licence conditions and also in terms of passing through the cost of social and environmental levies.”
Given all energy suppliers and supplies are subject to the same social and environmental levies is beyond doubt. It is true however that some smaller suppliers, whose portfolios are below specific customer number levels, have some derogations from the provision of braille bills and the like but in truth the material cost of that to the Big 6 does not explain away any price differentials. Neither does the somewhat misguided government schemes such as CESP which maligned large suppliers and generators with additional, though again not commercially disastrous costs for the Big 6 (apart from the inevitable fines for failure from Ofgem).
Massara could have been on safer ground not trying to differentiate the benefit of being a smaller supplier in the market, given that for every small derogation there is a massive obstacle, whether credit collateral to access the wholesale energy markets, super efficient sales arms of the Big 6 and huge marketing budgets it is anything but easy for small suppliers to make headway in the market.
That doesn’t mean they can’t, but it does mean they have to do a number of things: be innovative, provide (relatively) good service levels and offer attractive pricing. Quite frankly there are no freebies from Ofgem or the government to small suppliers. What they achieve is through sheer force of commitment, not a free ride.
Massara is quite correct that the burden of environmental and social obligations is ridiculous in the energy market, particularly the business energy one and with over 30% of the cost of energy making its way to the government. As a result the House is on thin ice in claiming it’s the suppliers’ responsibility to pass through price falls as they increase taxes and levies.
Indeed Massara would also have been well advised to instead stress this collective burden and the benefits of suppliers’ protective strategy of hedging the costs of energy that allows them to insulate customers from the worst excesses of the volatile wholesale price.
Sadly though he didn’t, and all too like the politicians he’s tried to influence, this latest missive has failed to focus on the real issues and move the debate forward to a sane and helpful conclusion.