Small Is Efficient In The Electricity Sector
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Small Is Efficient in the Electricity Sector
Overview
A trend is emerging in the UK business electricity market that mirrors the supermarket sector, particularly in competitive practices.
Similar to supermarkets, the electricity retail market is dominated by a few major companies that control about 96% of the market. Instead of directly competing for market share, they focus on attracting a small percentage of peripheral customers.
These companies entice new customers with introductory rates that quickly revert to standard or higher rates after a contract period, akin to supermarkets using loss leaders to draw customers who then buy more expensive goods.
Market Evolution
Although both sectors now exhibit similar market structures, they evolved differently. The grocery sector was fragmented until supermarket chains consolidated power. In contrast, the electricity market was monopolistic with regional suppliers, and deregulation has only slightly reduced supplier numbers, fostering limited national competition.
The supermarket industry has seen increased concentration, with the top three chains now holding over 50% of the market. Electricity, however, has struggled with barriers to entry and the dominance of established suppliers.
The Impact of Dominance
The effects of supermarket dominance are debated, but their success is attributed to their efforts. In contrast, the electricity sector's power dynamics, dominated by the "big six" like British Gas and Npower, have been inherited rather than earned, potentially stifling competitive drive.
Evidence shows that for 90% of businesses not switching suppliers annually, price changes are minimal and quickly matched by competitors. The argument that supermarkets lower prices through economies of scale doesn't apply to electricity, where bigger suppliers often seem inefficient and shielded from competition by tough barriers.
Opportunities for Smaller Suppliers
Some smaller suppliers have overcome these barriers with greater efficiency through smart technology investments. Unlike supermarkets, increased scale doesn't yield efficiencies in electricity, as most retailers procure from the same wholesale market. Larger suppliers weather market instability through upstream activities, a strategy unavailable to smaller ones.
Businesses shouldn't avoid major suppliers out of sympathy or fear but because better deals are now available with smaller suppliers. These smaller companies avoid mimicking the big six, ensuring they retain new customers by offering consistent value.
Conclusion
Switching to smaller, independent suppliers can lead to significant savings and improved service for businesses. This shift could compel larger players to innovate, potentially leading to a more competitive electricity sector in the future.
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