SSE and Npower and the failed merger: devil in the detail

The merger between retail functions at SSE and Npower has failed and maybe that’s no surprise. It’s perhaps the worst time for a merger of the industry’s big players – no matter how much both the players want the chance to rethink and relaunch their retail brands.

The Price Cap has been cited as one reason for the decision. That’s been coming for a long time, and you might think that SSE and Npower would be well-prepared for it. But there are new uncertainties for retailers. The hiatus in the Capacity Market means suppliers stop collecting CM levies and the Price Cap may fall to account for that. But if the CM is reinstated, or in other circumstances (there may be a market ‘escrow’ account to provide some certainty for all parties) the retailers will have to pay the levy again – possibly backdated over the gap. How exactly will retailers collect that and pass it on? There are big cash flow and margin issues here. Bear in mind, customers are switching all the time and the CM payment by retailers is per MWh. So there is considerable cost in untangling who owes what for each day.

Confused? So is the market.

And Npower has another problem. It is embroiled in a long-running dispute with the regulator over whether it will have to take part in a trial intended to dislodge customers who have never switched from a standard variable tariff (SVT). In a similar trial earlier this year, Ofgem found that it could get on average 20% of customers to switch, with a combination of personalised quotes and reminder letters from their supplier. A massive 29.6% of customers switched, if the advice came from their current supplier to do so – actually, a better rate than those whose letter came from the regulator, which says interesting things about trust in the industry.

Scottish Power took part in the earlier trial, with 50,000 customers. Ofgem has been to court to force Npower to join the next, this winter, with 100,000 of Npower’s customers involved. The court supported the regulator, and letters have duly gone out to 100,000, but Npower has dug its heels in and asked for a fuller hearing.

I might also mention the slow car-crash of Brexit, and the potential uncertainties in energy trading as we pass the end of March (and the different impact on energy companies ultimately owned in the UK and Europe).

Individually, each may be relatively small beer for a member of the ‘big six’. But they are just three examples of the risk around an electricity supply industry that is currently a white-knuckle ride for participants.

SSE is clearly not wrong when it says the merger would face “very challenging market conditions, particularly during the period when it would have incurred the bulk of the integration costs”.