Municipal Energy Companies – What place do they have in the market?
Over the last two years, local authorities have been quick to follow the leads of Bristol Energy and Nottingham’s Robin Hood Energy in launching their own municipal energy companies. The market has thus seen the formation of LECCy, Angelic Energy, Great North Energy to name a few.
So, why such a growth in the emergence of these companies?
The energy market has traditionally been uncompetitive and heavily dominated by the ‘Big Six’. Therefore, municipal energy companies aim to tackle this issue by enabling electricity and gas to be supplied at more competitive prices. Such low prices are affordable as there’s no need to appease the profitable desires of shareholders, and allows the authorities to tackle social issues such as fuel poverty.
At the launch of Great North Energy, the Doncaster mayor Ros Jones outlined these societal motives: “reducing the cost of living for people has long been a priority, so this is our opportunity to ensure that the people of Doncaster are getting a fair deal on gas and electricity”. The fact that, in 2015, 2.5 million people lived in fuel poverty is what many authorities believe justifies the creation of these energy companies.
Is this societal led motive being translated into lower energy prices?
Largely, yes. Since Robin Hood Energy was launched in September 2015, it has become one of the cheapest suppliers in the East Midlands. Some tariffs are more than £200 cheaper than the average offered by the Big Six. But, is being ‘one of the cheapest suppliers’ really going to justify further municipal energy ventures? On average, they may be cheaper than the Big-name players, but offer little differentials in price from some of the smaller suppliers.
Some may argue that municipal energy companies can never be the cheapest option, particularly if they intend to invest profits into community-based renewable generation and renewable heat supply projects as well.
Surely if these companies fail to consistently offer the lowest prices, they are failing in their aim of tackling fuel poverty? Such questions do little to address the fears that councils are stepping into the energy space with ulterior motives rather than a pure social focus. Are councils actually aiming to create new revenue streams and/or rebuild their public perception?
What has been the reaction of their competitors?
It’s fair to say that the competition seems relatively unfazed by the burgeoning popularity of municipal energy companies. With the Big Six still accounting for 80% of market share, they simply regard their arrival as being further “competition”. Interestingly, EDF did suggested that government/council-owned companies were “not appropriate at a larger scale as it risks distorting the market and deterring private investment”.
The Big Six’s lack of concern is probably justified. Independent suppliers still struggle to consistently beat them on price because of the way the wholesale market works. Additionally, the implementation of a price cap may inhibit smaller suppliers being able to vastly undercut their offerings.
So maybe it's the market outside of the Big Six that should have cause for concern. As David Hunter of Schneider Electric points out, customers being charged too much are usually the ones “who had not switched suppliers”. Evidence suggests that a large proportion of households have never switched energy deals, so there are many customers who will benefit from municipal companies directly challenging their energy outgoings.
As such, it appears that in the short term, the biggest impact of municipal energy companies will likely be upon smaller independent energy suppliers. Bristol Energy, now the biggest publicly owned energy supplier, already has 110,000 customers, and thus will threaten smaller competition. But while such firms are proliferating, most are simply re-branding off Robin Hood Energy rather than setting up as fully licensed suppliers which can buy energy on the wholesale market. This approach means that the likes of Angelic Energy have less power to offer something new and different compared with the 50-plus private firms already in the market.
For these municipal companies to be truly successful, they will need to address this issue and make sure the potential social benefits are clearly outlined. Only then do I think that we may see a shift in the structure of the energy market.
I’d be interested to find what you think, is there a place in the market for municipal energy companies?