Group Energy Buying hits the UK Headlines

Energy costs form a significant element of most households’ budget, and there has been much talk of market oligopoly in the UK, where six large providers dominate the market. So now “people power” is emerging as an interesting development – featured on the main BBC TV news programme this morning.

It showed a group of people in a Lincolnshire village who have formed a local buying consortium to negotiate deals for heating oil. It appears to be working well at that local level, and in a market where there are many small distributors of the product; but could it be successful on a larger scale with electricity and gas supplies?

Well, the long-established consumer magazine Which? is trying to find out.  It has got 275,000 people from across the UK signed up to participate in a reverse auction this month for gas and electricity. However, the 275,000 have not committed to switching – you can decide whether to switch once you see the new negotiated price.

So immediately you can see why firms might have some hesitation – and two of the largest providers, British Gas and SSE have already said they won’t participate. They may be conceptually unhappy about the whole group buying / auction idea, but they may also have legitimate concerns that they could offer a good price, which might undermine their normal pricing strategy, then find that they don’t even get many of the theoretical 275,000 customers in return.

Anyway, we will see if the other firms play ball – and if so, will they really approach the auction in a truly competitive spirit, with pencils sharpened and margins slashed?

Meanwhile, the politicians are getting in on the act. Nick Clegg, the deputy Prime Minster, supported the idea of collective negotiation and switching in a recent interview, and, as the Guardian reported last week, “Labour is considering organising the bulk purchase of cheap electricity to sell at a discount in a move designed to help squeezed households and show that the party is focused on more than just winning elections..”

Ed Milliband, the Labour Party leader, said it was “an outstanding idea” and they could do it through the Party’s “grassroots network”.

There are all sorts of questions here – we certainly wouldn’t reject the idea out of hand, but group buying initiatives fail more often than they succeed in our experience. There are certainly some critical success factors to consider, so we’ll have some further thoughts shortly on the whole concept.

But there’s also another obvious question, particularly for the Labour leader – if the market isn’t working, and you think we need a more centralised, government-driven approach to get value – then why not re-nationalise the market(s) and take production and distribution back into public ownership?

I suspect it might have pretty wide public support as a policy, and you could argue that we haven’t seen many apparent benefits from privatisation, other than for the bosses of the companies making their huge salaries. (Sam Laidlaw, for instance,  “whose package at Centrica was worth a potential £4.3 million last year)...

Anyway, we’ll come back to the group buying issues and whether it might work in the consumer energy market next week.

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Voices (4)

  1. John Diffenthal:

    It will be interesting to see how much work goes into sharpening their pencils. In a conventional reverse auction the cost of sale and the cost of supply are both low which allows the suppliers to argue that there is a justification for keen pricing. If I read your article correctly, the cost of sale is low but the cost of supply is unchanged with up to 250,000 meters and invoicing points to service.

    That said, wholesale electricity pricing changes on a seasonal time of day basis and if someone has a gap in their load curve which just fits the likely demand characteristics of of 250,000 households then their pricing might well be keener than a supplier which has to make spot purchases to fill gaps in their curve.

  2. Dr Gordy:

    Yes, I saw the clip and was impressed. However, I was surprised with the commentator who said this wouldn’t catch on by basically saying the energy companies would form a cartel – I wonder if the OFT picked up on that and plan to comment!

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