With or without Brexit, Britain is surely the toughest market for European utilities to make money in right now.
After years and years of surging bills, disgruntled homeowners are abandoning the nation’s biggest energy suppliers at an alarming rate. In strikingly somber tones, utilities from Innogy SE to Centrica Plc have dished out bearish outlooks detailing their woes in recent weeks. Some have lost hundreds of thousands of customers in the past year alone, while Innogy also booked huge impairment charges for its activities in the U.K.
The market has traditionally been dominated by six big utilities, but their share is shrinking with smaller and more nimble rivals undercutting prices. In a far cry from Margaret Thatcher’s liberalization drive decades ago, lawmakers from all parties have turned against the traditional suppliers, with Conservative Prime Minister Theresa May introducing a price cap to stop what she called “rip off” contracts.
And while the utilities say they are committed to the U.K. market even with the government setting a course set to exit the European Union, the wild swings in the pound since the referendum in 2016 are making it increasingly difficult for energy companies to forecast or rely on earnings from British units.
“Today, being a utility in Britain is a complete nightmare,’’ said Elchin Mammadov, a utilities analyst at Bloomberg Intelligence in London. “Almost all parts of the industry face increased regulatory scrutiny, intervention and intense competition, which is putting pressure on earnings. And that’s before any Brexit uncertainty.”German utilities EON SE and RWE AG in the early 2000s flocked to the U.K market where light-touch regulation and low business rates offered a profitable alternative to increasing competition and higher taxes in Germany.
But that calculation has been turned on its head by the government-imposed price controls and intensifying competition. Ironically, the companies that the government is trying to rein in are the same it needs to help rebuild what the International Energy Agency calls one of the oldest electricity systems in the world. The government has estimated it needs investments of 100 billion pounds ($133 billion) to keep the lights on after 2020.
Innogy, which lost as many as 657,000 British customers last year, said on Wednesday that further customers losses will hold back the sums it’s willing to invest. The company, headquartered in Essen, Germany, wrote down the value of its U.K. retail business Npower by more than 1.5 billion euros ($1.7 billion), dragging overall profits lower.
“It’s not that we plan to lose customers,” Chief Financial Officer Bernhard Guenther said at a press conference on Wednesday. “It’s just that a very aggressive price strategy is being followed in the U.K. market, where power is even being sold to customers below wholesale price. We’re not following that strategy.”
He also told analysts that Innogy doesn’t exclude any options for Npower, including winding down the unit. That’s in line with December comments, when executives abandoned a plan to merge the company with SSE Plc’s retail arm, partly because of the poor outlook for the market.
But Npower’s fate could also become a question for EON’s Chief Executive Officer Johannes Teyssen. Last year, he struck Germany’s biggest ever utility deal with RWE CEO Rolf Schmitz, a move that includes EON taking over Npower. They aim to complete the deal late this year.
EON’s customer solutions unit will this year see profit “significantly below’’ 2018, mainly because of a negative triple digit million impact from the U.K. price cap, CFO Marc Spieker said on a call on Wednesday. The company’s British customer base shrank by 200,000 to 6.6 million last year.
Centrica, the nation’s biggest supplier to homes and a child of Thatcher’s privatization in the 1980s, plunged to a two-decade low in February after delivering its second profit warning in three months, which it blamed mainly on the tariff cap.
Like its Big Six brethren, Centrica is losing domestic customers — 742,000 in 2018 alone — to a wave of new players. CEO Iain Conn said the cap will cut pretax profit by 300 million pounds, putting the utility’s cash-flow target “under some pressure.”
Regulator Ofgem has increased the cap by 10 percent to 1,254 pounds, a limit that will come into effect in April for customers on standard tariffs. While the hike may look like good news for the utilities, Morgan Stanley said last month that rising bills could in practice could prompt further customer defections.
And a squeeze on disposable incomes has given retail customers further incentive to shop around for a cheaper deal. A record one in five households switched supplier last year, up 6 percent on 2017, according to Energy U.K., the lobby group.
The public largely supports the price cap, according to Matthew Goodwin, professor of politics at the University of Kent. There are also signs U.K. voters are open to other state interventions in utilities, including nationalization, he said. That’s an idea already floated by Labour leader Jeremy Corbyn. Grid companies are “notorious” for over-charging, he said last year.
“Britain is more open to economic interventionism than many people think,” he said.