Memorandum submitted by Opus Energy
BACKGROUND
Opus Energy is an independent supplier of electricity
to business customers. Formed in April 2002 Opus Energy now supplies
electricity to in excess of 40,000 customer sites in the UK. By
any normal financial analysis, such as profitability or return
on invested capital, Opus Energy is the most successful small
supplier. We believe this gives us a unique insight into overcoming
the barriers to entry and understanding the problems facing a
small supplier.
REDUCING ACCESS
TO POWER
GENERATION
Opus Energy believes that new entrants and small
suppliers are a necessary and important element to a competitive
supply market. Whilst in practice their market share remains small
they increase competition and provide innovation. A simple example
of this is Opus being the first company to provide free smart
meters to all of its business customers. Furthermore, new entrants
seek to drive a regulatory agenda that promotes competition rather
than favouring incumbents. An example of this has been the efforts
of Bizzenergy in changing the regulatory structure regarding objections
in the business supply market.
Current market conditions do allow for properly
funded, well managed, innovative new entrants, such as Opus Energy,
to thrive. However, we believe that the conditions which have
allowed new entrants to prosper have, and continue to be, eroded.
The key market condition required is to be able to purchase electricity
on a long term market related basis. If a supplier cannot access
market related power then it is impossible to operate. In order
for there to be competitive access to power there needs to be
competition in the generation market.
When Opus Energy entered the market in 2002
we reviewed possible providers of electricity. This list included
generators and intermediaries, such as energy trading desks at
larger international energy companies. At that stage none of the
investment banks had trading desks sufficiently developed to deal
with our requirements. Eight companies were willing or able to
provide Opus with competitive access to the energy products to
meet our customers' needs. We signed a long term arrangement with
Magnox Electric Plc (now part of the NDA). That arrangement concluded
in late 2005, due to the decommissioning of the Magnox nuclear
plants. We then conducted a further review of the market place
and the number of potential counterparties reduced from eight
to five (including two investment banks). A number of generators
had exited, in the main through acquisition by the Big six. In
May 2006 Opus signed a long term power purchase agreement with
International Power Plc. Since 2006, with the imminent exit of
British Energy, the number of possible counterparties has decreased
even further.
This reduction in the number of counterparties
will have a massive impact on the number of new entrants entering
the market. We have also seen independent generators entering
the supply market. Haven Power Limited, Smartest Energy and International
Power Retail Limited have all either recently entered the market
or have applied for supply licences. The trend has seen the Big
six suppliers buying generators and now generators entering supply.
The ultimate conclusion of this is that it will only be realistically
possible to compete as a vertically integrated electricity company.
This would produce an enormous barrier to entry. New entrants
would need to own generation assets prior to entering the market.
This would severely reduce the number of new entrants and significantly
reduce competition.
POSSIBLE SOLUTIONS
Opus Energy believes that competition in generation
is key to a competitive electricity supply market. We believe
there are two possible solutions:
Firstly, The Government or Regulator could restrict
the further sale of generation or even force divestment from the
Big six suppliers. This would encourage a broader ownership of
these assets and would bring benefits of competition with it.
However, we do not think this is a realistic option, due to the
financial impact and distortion of asset values it would produce.
Secondly, and more realistically, legislation
could be introduced that would require, on a regular, long term
basis, for all generators to publicly auction a certain percentage
of their output, say 5-10%. These auctions would need to be carried
out on defined industry terms. This would provide a liquid market
with pricing transparency. Whilst small and large suppliers would
be able to participate in the auctions, it would also encourage
intermediaries such as investment banks. They would then be encouraged
to provide the products and services that the suppliers and new
entrants require.
This would provide price transparency, liquidity
and long term access to power generation. These are the conditions
required to allow good suppliers to thrive and encourage new entrants
into the market.
IN CONCLUSION
— New entrants are necessary for
a competitive supply market.
— Innovative suppliers can thrive
in the current market.
— Those conditions are significantly
worsening due to increased vertical integration.
— Competition in generation and
access to electricity is vital for competition in supply.
— Requiring generators to auction
part of their output would provide a liquid, transparent and accessible
wholesale market to new entrants, current suppliers and intermediaries
alike.
If you require any further information please
feel free to contact me.
19 May 2008
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