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Energy Firm Price War

22nd Apr 2014

In recent weeks we have seen independent suppliers challenging the superiority of the Big Six. They have started a price war, led by OVO Energy and First Utility. They have both pledged that their domestic dual tariff will be below £1,000 per annum. However, the Big Six have yet to counter this market shift by the smaller suppliers. The questions now are: will the Big Six react to this new challenge? Will this price war leak over into the non-domestic market?

The Small Four Vs The Big Six?

OVO, First Utility, Spark and Flow Energy are offering the best fixed dual fuel 12 month contracts for the domestic market. This is being welcomed by many people and hopefully will continue in the future. However, can smaller suppliers maintain these promotions? In the short-term yes, in the long term, it is hard to tell. We have seen no involvement from the Big Six yet. Though in the coming months expect to see the Big Six strike back against the smaller suppliers. One tactic they may employ could be the undercut technique. As they are larger companies, they can easily undercut the competition and offer an extremely low rate for dual fuel bills. This could see customers from the smaller suppliers shift to the Big Six. Another technique that could be deployed would be the increase of the wholesale market price. As most of the Big Six harvest and extract fuel, they could increase the price by stating that processes are becoming more complex and costly. This would then boost the price of energy for smaller suppliers, whilst the Big Six keep their prices stagnant. There are so many techniques that could be used, but we shall have to wait and see what will happen in the domestic market.

The Non-Domestic Market

As non-domestic contracts are normally for a fixed period, businesses will not see the immediate benefits of the price war. When their contract is due for renewal then they will be subject to changing prices. That is of course if the price war lasts. Some businesses customers are locked into a contract for up to four years. This means they are not subjected to price rises or declines throughout those years. Therefore, a price war is not likely to affect the non-domestic market as much as it would the domestic market. So you may see a little change but nothing substantial. This is due to domestic contracts primarily being rolling contracts and business contracts being fixed by buying energy for up to four years in advance. However, if a contract is negotiated early before the contract ends, then a possible cheaper deal could be made. This can be done through energy consultants and brokers. For instance, they can negotiate a new price for your renewal 2 years prior to your end date, which means you can take advantage of better prices before the market changes. However, this can be subject to higher premiums due to risk of predicting prices. Consultants will preferably look around six months – one year prior. For example, our preference would be to look around one year – six months prior to ensure minimal risk and lower premiums.

In conclusion, it is probable that the Big Six will react and the way they react could damage the independent side of the energy market. This would then leave the Big Six in a more dominant position within the market. However, this is still uncertain and their strategy for the price war could be completely different. What we do know is that the Big Six will want to maintain their strength within the market. Could we see the rise of the Big Seven, Big Eight or even the Big Nine? What we do know is that this price war is unlikely to have much effect on the non-domestic market, unless a business’s contract is due for renewal now.

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