However, with so many smaller suppliers entering the market and competing for the fifth of the market not monopolised by the Big Six, many of them have fallen by the wayside, leaving hundreds of thousands of customers without a supplier.
However when a supplier does go bust, Ofgem steps in to transfer over all the accounts to a new supplier. Much like the effect of collective switching, this can provide smaller suppliers with a swoon of new accounts when a rival goes bankrupt. One of the biggest suppliers to have fallen from grace was GB Energy in 2016, when 160,000 customers were moved over to Co-Operative Energy.
Small energy suppliers are still more vulnerable than larger rivals
Larger suppliers are having to implement bigger changes in response to heightened competition and the rapidly-changing environment, but smaller suppliers are still highly vulnerable in ways the Big Six are not – and a lot of it is because they lack the scale or the generation capabilities of the Big Six. Others have been dogged by poor customer service or by a lack of billing and online infrastructure.
With fixed-rate tariffs becoming increasingly popular over the heavily criticised standard variable tariffs that the majority of UK households are on, the margins that smaller suppliers can come under threat when wholesale prices rise, for example. This also impacts their ability to compete as effectively when it comes to freezing prices.
One example was demonstrated by David Bird, the chief executive of Co-operative Energy, who said in October last year that the price cap on variable tariffs could see ‘unintended consequences’, such as forcing firms to take drastic action like moving jobs abroad in order to maintain margins and cut costs.
Are the large energy suppliers losing share because more customers are switching accounts?
Ofgem and the government have taken steps to encourage as many UK households to switch energy accounts in order to find a better deal, including introducing measures to make it easier to move from one supplier to another – although switching is still one of the four key things customers complain about the most, in addition to customer service, billing and metering.
Collective switching has been one of the more significant developments in the market, where large groups of customer accounts are moved in one go. There are a number of schemes that have popped up, that pool together large volumes of accounts in order to hold a better bargaining position with suppliers, to therefore achieve a better deal for households than would otherwise be possible for an individual household moving supplier.
Still, there is a misconception that more UK households have started to switch energy suppliers since the market opened up to smaller companies.
Between 2007 and 2009, when the Big Six virtually controlled the entire market, over 5 million households were switching their electricity supplier on an annual basis, with around 4 million changing gas suppliers. Importantly, all these switches were being made from one of the dominant players to another.
Between 2010 (when competition began to heat up in the market) and 2016, switching levels of both gas and electricity have remained considerably lower than before the entrance of smaller rivals. On average, 4.4 million households changed their electricity supplier annually over the six year period, while 3.2 million switched their gas.
The change has come in how customers are switching, with more and more leaving larger suppliers for small and mid-sized ones, with a lower proportion moving from one Big Six member to another.
However, there are concerns that those customers currently switching are savvy shoppers seeking a new deal as their contracts run out, rather than those on the most expensive deals that have the most to save by switching accounts.
A measure has been recently outlined by Ofgem to tackle the issue, and break the two-tiered system between the Big Six and smaller suppliers, which has been one of the reasons why the industry keeps finding itself under the spotlight and facing pressure from the government. The idea is to force the Big Six to pass on details of customers that fail to switch supplier after a certain period of time, allowing rivals to approach them and make an offer to entice customers to switch, with one of the Big Six already reportedly passing on 50,000 customers who have not switched for at least three years.
How have the Big Six energy suppliers performed?
The Big Six suppliers make their profit from three core areas:
- Supplying energy to residents
- Supplying energy to business and industry
- Generating energy
On average, generating electricity has proven to be the most lucrative activity, but profits have dwindled in recent years to see a more balanced profit ratio between residential supply and power generation.