The true state of the market an analysis of dual fuel switching in the UK energy market

The true state of the market an analysis of dual fuel switching in the UK energy market

Introduction

Energy competition has been a feature of the UK landscape for more than 10 years, yet official OFGEM statistics create the impression that only 50% of the market have embraced competition by switching supplier. Our structured analysis shows that the true figure is much higher. Retailers and regulators need to know the true position when considering policy and strategy options.

Scope

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
SOURCES 1
ANALYSIS 2
There has been a high level of switching in the UK since market opening 2
The OFGEM Domestic Retail Market report indicates that roughly half the market has switched supplier since market opening 2
There are two markets in the UK: the dual fuel market and the electricity only market 3
In the dual fuel market customers can embrace competition in three ways 4
Taking dual fuel customers into account, 80% of UK households have switched supplier since market opening 5
Companies have benefited from market opening to differing degrees 6
In electricity British Gas is the market leader with 22% of the market 6
Looking at the relative success of each company in retaining its historical customer base there are marked differences in retention rates 7
At the group level there are different balances between retention in area, and acquisition outside area 8
The gas market is still dominated by the presence of British Gas 9
Datamonitor analysis allows us to look at the split between gas only, electricity only and dual fuel contracts in the market 10
83% of British Gas's new contracts are based on a dual fuel proposition 11
Based on these dual fuel assumptions a similar in and out of area picture can be calculated 12
British Gas has been the most successful player in gaining dual fuel customers 13
Customers using both gas and electricity have demonstrated the highest propensity to switch supplier 14
Analysis indicates that around 80% of households that have both fuels available have indeed embraced the competitive market 14
At the overall market level, 70% of households have switched supplier 15
SSE and Scottish Power are the winners in the game of customer acquisition and retention over the last 5 years 16
SSE has consistently used price to gain market share, exploiting their cost to serve leadership in the market-place 18
Companies are innovating in order to retain and win back customers 19
Companies have invested in building differentiated win-back capabilities to try to stem the losses of customers 19
The churn experience has also started companies looking for signs of 'propensity to switch 20
Losing high numbers of customers has led companies to provide different tariff options 21
Suppliers face a challenging dilemma 22
APPENDIX 23
Methodology 23
Ask the analyst 23
Datamonitor consulting 23
Disclaimer 23
List of Tables
Table 1: The vast majority of companies' new dual fuel contracts are out-of-area 11
Table 2: BG has gained 4.9 million dual fuel customers 'in area' 13
List of Figures
Figure 1: Dual fuel households outnumber electricity households by over four to one 3
Figure 2: British Gas accounts for almost half of the UK's electricity market 6
Figure 3: SSE has retained 80% of its incumbent share 7
Figure 4: All of British Gas's customers are out-of-area 8
Figure 5: British Gas's accounts for 47% of the UK gas market 9
Figure 6: Gas only households represent a minute proportion of the market 10
Figure 7: All of British Gas' gas customers are 'in area' 12
Figure 8: Dual fuel customers are more likely to switch than electricity only customers 14
Figure 9: SSE has seen its share of total electricity customers increase by 5 percentage points 16
Figure 10: SSE has seen its share of total gas customers increase by 7 percentage points 17
Figure 11: SSE was 23 cheaper per annum than EDF Energy in 2007 18