SSE and npower merger is abandoned

Two of the big six UK energy suppliers have decided to quit plans to merge, despite being given the green light by the Competitions and Markets Authority (CMA).

In a move which would have reduced the big six to the big five, npower and SSE have decided to abandon their plans to merge into one company. The deal, which was approved in October, would have seen the creation of the UKs second largest energy supplier.

The companies raised doubt over the deal in November, after poor performance by both companies and massive customer losses. They also cited the new energy price cap as being one of the reasons they decided to shelve the agreement.

More capital was required

The merger was cleared by the CMA following an extensive period of investigation and should have gone ahead in April 2019.However, following the latest quarter’s results, both companies admitted that the merger was not going to be as easy as they thought.

Martin Herman, of npower’s parent company Innogy, said that due to worse financial performance that initially expected, more capital would be required in order to set up the new business. This would require a reworking of the original agreement formed in November 2017 and could have meant further scrutiny by the CMA was necessary.

Subsequently the two companies have been unable to reach an agreement and have decided to abandon the merger plans indefinitely.

SSE are still keen to break their household energy division away from the same group and have since said that they are looking at a standalone demerger. This could lead to a sale of this arm of the business, or to an alternative merger or transaction being considered.

Massive customer losses

The quarterly figures from SSE showed a loss of 460,000 customers over the 12 months to September 2018. They currently supply around 6.48 million customers, but fully expect that number to further reduce at the next assessment.

Npower also lost business, with 530,000customers leaving the firm during the same period. This equates to around a 10%loss of business, which is no small figure even for a large energy supplier such as themselves.

Elsewhere, customers are also moving away from the big six, with British Gas acknowledging a loss of 350,000 customers in the first half of 2018. In total, around 2.35 million customers were expected to switch away from the big six energy firms by the end of 2018.

Both npower and SSE have lost money in the past year, with npower posting a loss for the fourth consecutive year.

Market conditions too challenging

Both companies were concerned about the cost implications of setting up the new company. As with any new venture, the interim period where the two entities are integrating inevitably comes at a cost, as both operations and infrastructure are optimised and merged.

When this is coupled with what npower have referred to as ‘very challenging market conditions’, the cost is less easy to absorb.

In particular, SSE and Innogy were concerned about the energy price cap, which came into effect at the start of January. Designed to protect customers from being stuck on expensive standard variable tariffs, or default tariffs, this new regulation could eat into the profits of larger energy suppliers.

However, it’s not just the big firms who are feeling the pinch. Spark Energy and Extra Energy who went bust late in 2018both cited the price cap as partial reasons for their failure. Other small energy firms are reporting a squeeze on their profits as they adjust to the new requirements.

While the merger of these two energy giants has become a casualty of the current market conditions, the consequences for smaller firms can be much more severe. Already one supplier, Economy Energy, has folded this year, and there are likely to be more over the coming months.

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