Strategies for Competitive Advantage in a High Price Environment

Europe has become a high price environment as wholesale energy prices soar. This brief looks at strategies that have been used previously by energy companies to mitigate the difficulties associated with this. Each strategy is categorised and analysed, with their likely benefits in today's climate assessed by Datamonitor's energy experts

Report Highlights
Competition across Europe is increasing, and suppliers will have to compete as never before to retain existing customers and attract new ones. The cost of gaining - or losing - customers is significant and suppliers will have to take new initiatives to preserve margins already trimmed by rising wholesale fuel costs

Consumers are becoming increasingly aware of energy costs. Suppliers must evolve their positions to meet the changing demands of their customers. Corporate responsibility drives consumers to source green energy, rising wholesale fuel prices make this more commercially viable

Price competition becomes less important as propositions become more sophisticated - the relationship between price and market share breaks down even in a high price environment, and the benefit of a strong brand is confirmed through analysis of the price/market share over time
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Wholesale energy prices have increased dramatically in the last 12 months, and price rises are expected to continue 2
Wholesale European gas prices have continued on an upward trajectory 2
European power prices have increased due to the rising cost of generation fuel 3
Despite rising gas prices, potential margins from gas generation have increased as Spark Spreads increase 4
Despite rising coal prices, potential margins from coal generation have increased as Dark Spreads increase 5
As wholesale prices rise sharply, energy companies' profits reduce as they attempt initially to absorb the price rises 6
Energy companies will need to adopt new strategies and innovations in order to cope with the new high priced environment 7
There are three main strategies that players can adopt to gain competitive advantage in a high price environment 7
PBIs focus on how energy is sold to consumers 7
ICBIs focus on how the administration processes work 8
ECBIs focus on mitigating risks from outside factors 8
Datamonitor assess each potential strategy against six criteria and rate the benefits of each 9
PBIs allow companies to market energy in different ways in order to appeal to different customers 10
Price capping has the disadvantage of being expensive and binding for the supplier 10
Tracker products inherently have a greater cost to serve, and while passing on savings is popular, passing on costs is less so 11
Loyalty schemes can show benefit at low costs, and can be applied to a large segment of the customer base 12
Charity affiliations help target specific attractive demographics, and raise company profile for a low cost 13
Additional services, which can be standalone products or affiliated to a supplier, will become increasingly important as energy prices increase 14
Green products hold an important position in the market, as awareness of the environmental impacts associated with energy is increasing 15
ICBIs aim to increase margins by reducing costs 16
New sales channels are alternative ways of targeting more profitable customers and may offer lower costs of acquisition 16
Reductions to administration or other costs to serve grant greater margins and increased profitability without increasing retail prices 17
Managing customer losses allows targeted retention of profitable customers, and reduces unrecoverable administration costs 18
ECBIs help to manage or mitigate the risk that external cost factors pose to a company 19
Diversification of generation portfolio allows a company to source energy from the cheapest possible wholesale fuel, or to take advantage of low Spark Spreads 19
Green generation or subsidized generation is good for the company brand, and can also be profitable as traditional wholesale fuel prices rise 20
Strategies impact a company in many ways; financial benefits may be at the expense of brand image 21
Strategies which offer advantages in one area may incur benefit or detriment in others 22
A case study: retail price and market share in the UK are not related as would be expected in a classical proportional model 22
A case study: lower prices do not consistently show an increased market share 23
Price competition in liberalized markets such as the UK is failing as other factors take precedence 24
APPENDIX 25
Appendix: aggregated scores for initiatives 25
Ask the analyst 26
Datamonitor consulting 26
Disclaimer 26
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Table 1: Aggregated analyst scores for strategies 25
Figure 1: Gas prices have increased with oil prices 2
Figure 2: Wholesale power prices have tracked wholesale fuel prices closely 3
Figure 3: UK Spark Spreads 4
Figure 4: UK Dark Spreads 5
Figure 5: Retail prices against wholesale spot price 6
Figure 6: Categories for scoring each strategy 9
Figure 7: PBI: price capping 10
Figure 8: PBI: tracker products 11
Figure 9: PBI: loyalty schemes 12
Figure 10: PBI: Charity affiliations 13
Figure 11: PBI: additional services 14
Figure 12: PBI: green products 15
Figure 13: ICBI: new sales channels 16
Figure 14: ICBI: reductions to administration or other costs to serve 17
Figure 15: ICBI: managing customer losses 18
Figure 16: ECBI: diversification of generation portfolio 19
Figure 17: ECBI: green generation or subsidized generation 20
Figure 18: Brand benefit against financial benefit 21
Figure 19: Deviation from average market share against deviation from average retail price over time 22
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