UK Energy Company Costs:

Catalyst Commercial Services Ltd — Mon, 28 Jan 2008 23:28:44 +0000

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.

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UK Energy Company Costs:

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