Despite successive governments attempting to open up the energy market, the supply of electricity and gas to our homes and offices is still dominated by a handful of household names – 82 per cent of UK households are supplied by one of the ‘big six’: British Gas, EDF, E.ON Scottish Power, SSE and npower. The rest of the population receives its energy supply from 63 other smaller suppliers, a number which has grown significantly over the past decade – in 2004 there were just seven.
A small number of consumers, a fraction of one per cent, pay companies tied to their local councils to provide energy – and councils would like that to happen more often.
Since the establishment of the National Grid in the late 1940s, responsibility for the supply of energy to households and businesses has moved back and forth between the state and private companies. In the 1990s, a slew of private firms – many spun out from existing state-supported regional energy suppliers – began to dominate after a government-mandated opening up of the energy market.
The strategy was meant to be a shot in the arm for the sluggish energy market, driving down prices, increasing competition through choice and inspiring consumers to switch suppliers more regularly. In reality, customers remained (and remain today) loyal to their current suppliers; new entrants struggle to compete on price and the glut of smaller companies set up post liberalisation have yet to gain a foothold in the market.
Yet Ofgem, the UK’s energy regulator which has oversight of the supply market, continues to encourage independent utility providers – including welcoming local councils – to start delivering energy services to customers. In theory, the companies are not-for-profit, ploughing any profits back into improving services and reducing prices.
“No local authority wants to become an energy supplier,” explains Katy Roellich of Leeds University, who has investigated the impact of municipal suppliers in the supply market. “They are using it as a tool to do something else.”
The motivations differ: Nottingham’s Robin Hood Energy and Leeds’ White Rose Energy (which uses Robin Hood energy to deliver its supply) are both trying to alleviate fuel poverty; others focus primarily on changing the energy mix away from fossil fuels towards sustainable alternatives. White Rose Energy hopes to supply the 58,000 council properties in Leeds, according to Leeds City Council’s Peter Leighton-Jones, who has overseen the establishment of White Rose Energy. “We give the company exclusivity over our council house voids,” he explains. “We switch in suppliers when the property becomes empty, put a smart meter in and the new tenant who comes in will benefit from a smart meter and in theory a cheaper tariff, too.”
But because of their desire to be an issue-led, rather than profit-focused firm – and the intransigence of regulation of the energy supply market, smaller, council-supported suppliers often struggle to gain a foothold in the hypercompetitive open market. White Rose Energy has attracted just 6,500 customers in the 18 months it has been operating. “We would have hoped for more, but it’s a new initiative,” says Leighton-Jones.
White Rose Energy earns what Leighton-Jones calls “a small financial consideration” from Robin Hood Energy to reflect the fact that they’re bringing customers to the company. Most of that goes into operating expenses and marketing. “It’s not designed to be lucrative,” he says. Robin Hood Energy is run on a not-for-profit basis, says Scholes, with reported margins of three per cent (the aggregate margin for the whole market is around 4.5 per cent).
But where a handful of suppliers – including Bristol Energy, White Rose Energy, Robin Hood Energy and Our Power – have led, few others seem likely to follow. While there are 364 councils across the country, “it’s unlikely you’d have 364 council-run energy companies,” says Roellich. The half dozen dominant energy suppliers have a stranglehold on the market. And the political situation has changed, even in the last few years. “The landscape now is about budget pressures,” says Gail Scholes, CEO of Robin Hood Energy. “Councils are spending taxpayers’ money in setting up energy firms, so you have to be fully accountable. The figures in the business case need to stack up.”
The best chance for success among municipal energy suppliers is likely to be in London, reckons Laurie Laybourn-Langton of IPPR, a think tank. “For a city the size of London and the resources it can draw upon for energy assets on Transport for London (TfL) land, having a fully-licensed supplier and paying the startup costs would be a good thing,” he says.
Sadiq Khan pledged to create a municipal energy company, Energy for Londoners, in his election manifesto to be London Mayor. To date, Energy for Londoners is little more than a pipe dream; in January City Hall applied for and secured a junior electricity licence, dipping its toe in the water of the energy supply business. The project is on a miniscule scale – supplying just two TfL depots – and is emblematic of the magnitude of the so-called municipal energy revolution.
In reality, these energy suppliers haven’t so much shaken up the market as they have continued the same old standards. Customers like the idea of green energy, but they’re not willing to pay the added cost of ascertaining whether their energy came from a sustainable source. “You can create a more stable market for renewables,” says Roellich. “But then there’s a tradeoff: does it become more expensive or variable in price?”
That is one of the major challenges for municipal energy suppliers. Gas at the UK National Balancing Point, the trading hub for the commodity, has skyrocketed from 38.2p per therm in July 2017 to nearly 57p per therm this summer. “The emergence of some of these companies has happened at a time when energy prices were low, and rises could disrupt the model,” says Laybourn-Langton. Another barrier to entry is the requirement on new suppliers to install smart meters – adding further costs to the company setup. While there’s plenty of political risk involved: for councils where political affiliation changes regularly, steadfast support from one ruling authority can disappear at the ballot box.
Robin Hood Energy is the rare success story in the municipal energy world. And though it has managed to gain more than 185,000 supply points since it was set up by Nottingham City Council in September 2015, establishing a successful energy supplier involves spending a lot of money upfront. The company posted £7.6 million in losses in its most recent financial report, and had nearly £11m of net debts.
The company claims to have broken even this year, with the company valued at between £30m and £40m – double the initial investment made by Nottingham City Council, Scholes says. “I think we’re fairly healthy.”
While Robin Hood Energy is now one of the cheapest energy suppliers in the Midlands, the fear is that – as belts tighten and the losses mount – the council-run companies that set out to differentiate themselves from the rest of the market start to look like the firms they purported to replace.
“I think for new councils looking to enter the market now, it’s a tougher job than when we entered three-and-a-half years ago,” says Scholes.
“Councils usually have a brand that’s more trusted than the big energy companies,” says Laybourn-Langton. Just 58 per cent of people trust their suppliers to charge them a fair price for their energy. That heightened trust, combined with low prices as an initial offering to consumers, helps some get a foothold. “But if prices go up later,” he adds, “it could damage that and put people off and they would just associate them with the big energy companies again: getting ripped off, being told the prices would be cheap, and being lied to.”
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