Letter from the Editor: The bell tolls for the big six
Is it the beginning of the end? As Centrica’s share price plummeted this week, industry sages who had long prophesied the demise of yesterday’s energy behemoths must have felt vindicated.
For years they haves warned that a more radical energy system transition than companies have allowed for, coupled with declining public trust in large institutions, would erode the business models of industry giants to a point where they could come crashing down.
Now Centrica seems to have become a living case study for their argument. Nearly £1.4 billion was wiped off the company’s stock market valuation following a profit warning, triggered by radically deteriorating margins in its North American business supply arm and the loss of 823,000 customers from its UK domestic retail business, British Gas, in the space of just three months.
Furthermore, the recent sharp cut in Centrica’s earnings per share is merely a dramatic addendum to a year that has seen its share price fall by almost a third. And other big energy players are suffering similar fates. Over the past five years, EDF, RWE and Eon have all reported declining market value.
Of course, these multinational, multi-billion pound organisations are not going down without a fight. They have strategies – broadly centring on the disposal of old generation and E&P assets and the growth of service-based business and smart technology.
In Centrica’s case, this shift includes the launch of Local Heroes, an online platform for connecting UK consumers with independent tradespeople for household jobs including plumbing, gas and electrical work. More trades will be added soon.
The attraction of this kind of enterprise for UK energy suppliers is that compared with the punitively squeezed retail margins of around 3 or 4 per cent in their core businesses, home service provision can offer much higher returns. Home Serve, which snapped up Eon’s boiler services business in 2015 and recently confirmed its full acquisition of Checkatrade (by far the UK’s dominant platform for trade referrals), says home service margins are nearer 20 per cent.
This said, energy supplier home services platforms are unlikely to significantly ease painful retail profit gaps. While the margins for service may be higher, gross earnings are tiny compared with the money being raked in from energy bills – especially while standard variable tariffs endure.
A transition to service-based enterprise may well enable the survival of our big integrated energy suppliers. But not on the terms they, or shareholders, have been used to.
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