UK utility Scottish & Southern Energy said Thursday it now has around 8.5 million customers, making it the UK’s second largest supplier of electricity and gas. In an interim report on its performance, mainly covering the April to December 2007 period, SSE said that it had gained 650,000 customers in the last nine months of 2007, taking its total base to 8.4 million at the end of 2007. It then gained further in January 2008. The biggest supplier is Centrica, which markets as British Gas. It has just under half of British homes signed up for gas and about a quarter for power. SSE said its customer complaint numbers were down too. The number of complaints to Energywatch was 495, down 22% from the same nine months of 2006. Financial results for 2007-08 as a whole are expected to be in line with the current consensus of brokers’ forecasts.

More than seven million Powergen customers are facing the prospect of big increases to their gas and electricity bills next month. The energy company, owned by E.ON, the giant German utility, was putting the final touches to a double-digit price increase for its 7.4 million British customers yesterday that could come within days. Industry sources said that E.ON’s sales teams had been called in for a briefing, fuelling expectations of an announcement soon. E.ON, with 4.7 million electricity and 2.7 million gas customers in Britain, is the country’s third-largest energy supplier, after British Gas and Scottish & Southern Energy. Three other groups, npower, British Gas and ScottishPower, have raised prices this year, blaming soaring wholesale energy prices and increased costs, caused by network upgrades and investment in low-carbon power generation. A spokesman for E.ON declined to comment. The prospect of further price rises came as rumours of a proposed merger between EDF, of France, and Iberdrola, of Spain, forced a brief suspension of Iberdrola’s shares. Such a deal would unite the fifth and sixth-ranked energy suppliers in Britain, EDF Energy and ScottishPower, which is owned by Iberdrola.

Britain’s second-largest energy company could be created from a merger between EDF Energy and Scottish Power, a move that would spark competition fears in the UK and outrage from consumer groups which are already warning about soaring electricity and gas prices. It has emerged today that EDF, the giant French energy monopoly that is London’s main electricity provider, could be poised to launch a takeover bid for Iberdrola, the Spanish group that bought Scottish Power 15-months ago. That would create the UK’s secondlargest household energy provider after British Gas and cut the number of major market suppliers to five. A tie-up in Britain between EDF Energy and Scottish Power would create a company with more than 10m gas and electricity customer accounts, over a fifth of the residential market. It would overtake Southern Electric group Scottish and Southern Energy, which has about eight million customers. German groups E.On (which used to trade as Powergen) and RWE, the owner of npower, share the remaining 25% of the UK market. Consumer watchdog Energywatch is already warning the Government that competition between the existing six major suppliers is not operating properly.

Reporting a 44 per cent rise in first-quarter profits, Frank Chapman, the chief executive of BG Group, warned yesterday that gas prices in the UK would continue to rise as the country runs out of its own supplies.Reporting a 44 per cent rise in first-quarter profits, Frank Chapman, the chief executive of BG Group, warned yesterday that gas prices in the UK would continue to rise as the country runs out of its own supplies. “Customers have enjoyed low gas prices in the UK thanks to the reserves in the North Sea and the liberalised market here. These have delivered much better prices than our European counterparts have had,” Mr Chapman said. “But UK reserves are going down and there will be upward pressure on prices from now on. There is no longer a surplus of reserves and we will have to import gas from much further afield. The reality of bringing in gas from overseas means it costs more, which will put pressure on prices.” The group said it raised gas prices by an average of 9 per cent around the world over the first three months of 2005, helping to lift operating profits in its exploration and production division by 47 per cent to £387m. Its figures were announced one day after Centrica, the former retail arm of BG, told its customers to expect higher gas bills as a result of higher wholesale gas prices. But Mr Chapman said UK customers should still expect a fair price for their utilities. “The deregulated market for gas in the UK means competition will ensure customers get the lowest feasible price. Companies are also spending a lot of money investing in new sources of supply,” he said. Liquefied natural gas (LNG), for example, is proving to be one of its most successful new investments. The group saw profits from its LNG division, which cools gas into a liquid to ship around the world, rise 80 per cent to £27m. BG’s profits were also boosted by an increase in production and higher oil prices. Exports from the group’s operations in the giant Karachaganak oil and gas field in north-west Kazakhstan and production rises in the Scarab Saffron gas fields in Egypt helped BG boost volumes by 7 per cent to 43.7 million barrels of oil equivalent. It produced its first gas from the Simian Sienna fields in Egypt for export, while the Rosetta field produced its first gas for the Egyptian domestic market. BG also benefited from higher oil prices over the first quarter, with the average price of a barrel of oil up 48 per cent to $48.24 against the same period last year.

As UK energy suppliers have similar cost bases, room for price differentiation is limited. The Sunday Times has claimed that the Big Six UK energy firms are keeping their domestic bills high. However, UK retailers have very similar cost bases, which means that their prices will rise and fall together. Like the fuel retailing market, there is very little that firms can do to differentiate themselves on price. As a result, average price differentials are small between the major suppliers. Similar cost bases lead to similar prices among the UK’s energy retailers. All retailers need to buy wholesale energy, use the transmission and distribution networks, charge their customers VAT and recover the costs of mechanisms designed to combat climate change, such as the Renewables Obligation and the Carbon Emissions Reduction Target. While different wholesale energy procurement strategies and timings will have an impact upon the wholesale cost base of the main suppliers, there are certain rules that all of the major companies will follow. For example, they will all secure a large proportion of their wholesale gas before winter arrives. Abandoning such practices would be a huge gamble that would not be appropriate for a publicly quoted company to take. Therefore, to date, the major differentiating factor between the Big Six UK energy suppliers has been their controllable cost base or, in industry speak, their cost-to-serve. These are the costs associated with metering, billing, collecting payment and offering customer service, and they account for 10% to 15% of the retail bill. It is in these areas that suppliers’ prices can be differentiated. These issues aside, when one company puts its prices up, the others are sure to follow, as their cost bases will have changed in broadly the same way. Without taking imprudent gambles, the most likely way for a supplier to differentiate its prices is through changing the way it sources its energy.With increased foreign ownership of UK energy retailers (of the Big Six suppliers, only Centrica and Scottish & Southern Energy remain UK PLCs) there is the potential for different wholesale procurement strategies to emerge. For example, UK retail prices are currently marked-to-market on a local basis, which means that the transfer prices used for retail tariffs are from the UK market. However, it may be possible for pan-European companies to begin using pan-European transfer prices in local markets as a strategic option. This could provide a retail pricing advantage for companies where the wholesale price of gas or electricity is lower in their home market than it is in the UK. This would allow pan-European companies, such as French firm EDF’s UK arm EDF Energy, to become more competitive.

Asda, the supermarket group owned by Wal-Mart, is to explore selling electricity to its UK business customers through its power services company Power4All. Rivals Tesco and Sainsbury both considered entering the UK retail energy market as the sector underwent deregulation in the late 1990s, but scrapped the idea amid concerns over risks to their core brands. Power4All would build on its expertise developed by Wal-Mart in the US, where it set up its own energy services group in late 2004 to supply energy to its stores in Texas. The terms of Power4All’s licence from the UK’s Gas and Electricity Markets Authority restrict it to reselling power to business and commercial customers. Andy Bond, chief executive, told the Financial Times on Sunday that in the “medium term” the retailer hoped to extend to Asda’s customers a programme initially set up last year to provide its stores with “low-cost energy and energy from totally sustainable sources”.

The cost of household electricity bills is expected to rise by up to 15% if Britain is to meet compulsory climate change targets announced yesterday. Under the European Commission’s proposed measures for renewable energy supplies and lower carbon dioxide emissions, Britain will be required to increase its proportion of renewable energy from 1.3% in 2005 to 15% in 2020, the equivalent of 20,000 wind turbines being erected in the countryside and offshore if Britain is to meet the target. The investment required to get Britain’s energy supplies anywhere near the target mean that electricity prices are likely to rise 10-15% by 2020 even before other inflationary factors are taken into account. Britain’s 15% target is below the average 20% for the European Union’s 27 member states but it is the toughest in Europe because it requires the greatest level of change. Britain now has the third-lowest levels of renewable supplies and only Malta and Luxembourg are worse.