The CMA has given the green light for the merger between Npower and SSE Energy Services, but what does it involve and what will it mean to the wider energy industry?

In an era when the energy market is becoming increasingly competitive, and the largest six energy suppliers are ­rapidly losing their stranglehold on a retail sector they have dominated for so long, two of the biggest players have teamed up to ­create an even bigger player. So, how will this affect competition in the market?

Well, the Competition and Markets Authority (CMA) doesn’t have a problem with it. It has given the £3 billion merger the green light after a “thorough” review found it wouldn’t make much of a difference whether there were six big companies or five.

The “big six” are fast losing market share anyway, as was spotlighted by Ofgem in its latest State of the Energy Market report. The regulator revealed the cohort – which together held 99 per cent of the gas and electricity markets until around 2012 – now holds just 75 per cent, its lowest ever.

The creation of the “big five” doesn’t mean a shrinking energy market or less choice for consumers, claims Stephen Murray of price comparison website MoneySuperMarket.

Some argue that, amid calls for re-­nationalisation from the likes of Labour leader Jeremy Corbyn and at a time when the very legitimacy of the sector hangs in the balance, now may not be the best time for two of the most dominant companies to forge a union.

Others say it won’t make a difference to competition, what with the government’s recent decision to impose a price cap. Utilities analyst Nigel Hawkins tells Utility Week the CMA’s ruling is “no real surprise” since the pivotal standard variable tariff is protected both by the price cap and by emerging competition; hence, the CMA’s “hands-off stance”.

PA Consulting energy expert Ted ­Hopcroft suggests it is feasible that the “big five” could become the “big four”, referring to a planned asset swap between Innogy’s parent company RWE and rival company Eon. However, he says, more likely the move could “accelerate the evolution of retail energy suppliers into businesses that are delivering a broader range of services, with higher value and greater customer focus”.

The news has brought some complaints from smaller suppliers. Igloo Energy, for example, says it is “surprised” the merger has been given clearance, given that both providers have “notoriously given customers a lacklustre service alongside some of the highest tariffs”. Chief executive Matt Clemow sent around a statement following the news of the clearance urging billpayers to “vote with their feet” and “put an end to the big five ruling the roost”. For most of the industry, though, the news didn’t come as much of a surprise. The CMA had already provisionally cleared the merger at the end of August.

When the merger was proposed in November 2017, the seemingly snap decision sparked speculation it could be an exit strategy for SSE and Npower – because earnings from the domestic retail market are continually subjected to regulatory and government interference. For big power players, retail energy supply makes relatively little money – and is messy because large numbers of customers are involved. A market expert told Utility Week: “For SSE, whose finances are becoming somewhat stretched, regulated energy networks and renewable power – backed by subsidies – are the two main cash earners and investment priorities.” And both companies have been losing market share to “strong competition”. In June 2018, there were 73 licensed energy retailers supplying domestic customers in Great Britain.

Hopcroft suggests this merger marks a “pivotal point” in the evolution of an energy supply market ripe for change and SSE and Npower should be “given credit” for recognising this and instigating a major move. “On the ‘get big, get niche, get out’ spectrum, getting bigger is clearly a viable option. The question is, can they make it work?

“The key challenge for SSE-Npower will be to blend agility with scale. It is a highly dynamic market and suppliers already have many issues to address – not least the need to drive their smart meter rollout programmes. The risk with mergers is always that the internal work required can distract from what’s going on in the market. But this merger must be a sprint not a marathon.”

The companies have given scant detail on what happens next. SSE says it is continuing to work towards completion in the first quarter of 2019, and that “more information will become available “in the coming months”.

Until the transaction is complete and the new company lists on the stock exchange, SSE Energy Services and Npower remain “entirely separate companies” and will compete as normal. Even with CMA clearance in place, competition law continues to apply while the two are separate entities. So, for now at least, the big six lives on.

What is it?

The merger will be between Npower – Innogy’s UK retail company – and SSE’s household energy and energy services business, forming a “major, independent British retail energy company”.

The new company will have a premium listing on the London Stock Exchange. Innogy will hold a minority stake of 34.4 per cent, with SSE’s shareholders (not SSE itself) ­holding the remaining 65.6 per cent stake.

Based on the most recent Ofgem figures, the merger will create the UK’s largest electricity supplier and the second-largest gas supplier behind British Gas, with market shares of 24 and 19 per cent respectively.

Why now?

In short, economies of scale. SSE and Npower say the main reason for the merger is that the energy retail market in Great Britain is becoming “increasingly competitive and changing rapidly”, and more needs to be done to lower costs, further improve customer service and engage with those that are vulnerable. They say combining the two firms will create a new British energy company, which can ­“better face the challenges – and deliver on the opportunities – of the British energy market”.

One market analyst told Utility Week any benefits of the merger are unlikely to be seen for a while. “[It] will likely create increased challenges in the short term, as the integration and customer migration will be complex and take a number of years. It’s probable that this will have an impact on service, which will likely cause a number of customers to exit.”

They also suggest the merger will not necessarily stave off the threat of losing market share to smaller rivals. “Retention will only happen by offering customers a great service at a price that doesn’t make them want to shop around.” If Innogy and SSE can make the merger a success, the results are likely to be seen in the longer term, creating a “sustainable supply business with the ability to invest in new products and services and supporting the employment of thousands of people”.

Three questions that still need answering

• What is the merged company’s name?

No decisions have been made yet about the name of the new company. SSE and Npower say they expect to continue to operate under their existing brands in the short to medium term.

Although a merger of the two names (“SENpower”) has been speculated about, this is unlikely to actually be the name, as the two businesses have made it clear they want to distance themselves from their parent companies and create an entirely new independent brand.

For now, the merged company has been catchily named the “Combined Retail ­Company”.

• Will there be any job losses?

Npower’s website says the new company will employ around 15,000 people.

Currently Npower employs around 11,500, while SSE (as a whole) employs more than 20,000 people.

However, a spokesperson for Npower told Utility Week in May that all of the company’s employees will be with the new merged company before the RWE-Eon mega-deal completes in late 2019.

• When will the merger complete?

This is, as yet, unknown. SSE says it is continuing to work towards completion in the first quarter of 2019, and “more information will become available in the coming months”.

Until the transaction is complete and the new company lists on the stock exchange, SSE Energy Services and Npower remain “entirely separate companies” and will ­continue to compete as normal.

Who’s in charge?

Katie Bickerstaffe, chief executive designate

Katie Bickerstaffe was previously chief executive of the UK and Ireland division of multinational electrical and telecommunications retailer Dixons Carphone – a role she had held since 2015. While chief executive of Dixons, she helped oversee its £4 billion merger with Carphone Warehouse, so she is familiar with the challenges of executing mergers between industry heavyweights.

Furthermore, as a non-­executive director of SSE – a role she has held for seven years – she has considerable experience of the UK energy industry, and insight into the challenges businesses in the sector are negotiating. Part of SSE and Innogy’s rationale for hiring Bickerstaffe is to capitalise on her knowledge of customer-facing businesses.

Martin Read, chair designate

Martin Read is ­currently chair of logistics ­company Wincanton and the ­government’s Senior Salaries Review Body.

Read has held positions as chair of the Low Carbon Contracts Company and the Electricity Settlements Company – the bodies responsible for the administration of contracts for difference and capacity market contracts – and as chair of the Renumeration Consultants Group. He has also held roles as chief executive of IT services company Logica, in which he oversaw its merger with CMG in 2002, and chair of electronics and technology firm Laird.

Gordon Boyd, chief financial officer designate

Gordon Boyd joined the energy sector in 1989 and has held senior finance leadership positions at utilities including British Energy and EDF Energy, as well as overseeing the initial public offerings of both Drax and Infinis.

The executive committee:

Jason Scagell, business-to-business director designate

Responsible for all aspects of large business energy supply and services. He is currently director of corporate affairs and development at Npower.

Stephen Forbes, chief commercial officer designate

Responsible for all commercial aspects of household and small business energy supply, including pricing, marketing, and development of energy-related products and services. He is currently chief commercial officer at SSE Energy Services.

Chris Pilgrim, chief human resources officer designate

Responsible for all people- and employment-related matters. He is currently HR director at Npower.

Tony Keeling, chief operating officer designate

Responsible for household and small business customer service, digital services and metering, including the smart meter programme. He is currently chief operating officer at SSE Energy Services.

Simon Stacey, transformation director designate

Responsible for corporate strategy, transformation, and the tracking and delivery of integration benefits. He is currently managing director of home and business at Npower.

What is the Eon-RWE mega-deal?

Innogy’s parent company RWE – the ultimate owner of Npower – has agreed to exchange its 76.8 per cent stake in Innogy for a 16.67 per cent stake in Eon, as well as Eon’s renewable portfolio and €1.5 billion in cash. Innogy’s renewable division will be returned to RWE.

In accordance with Germany’s stock market regulations, Eon has also offered to buy out the other Innogy shareholders at a total value of €40 per share – consisting of an offer price of €36.76 plus projected dividends of €3.24 across 2017 and 2018.

At the time this asset swap was announced, there were concerns it could affect the SSE-Npower retail merger. Analysts at investment firm Jefferies say Eon’s future ownership of Npower “could make obtaining the necessary regulatory clearance more complex”. However, in its final report, the CMA said it considered that the completion of the Eon/RWE transaction is “insufficiently certain to be part of the counterfactual”.

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