The strategic dilemma(?) of alternative Energy Suppliers

The opening up of energy markets to competition has led to the emergence of new energy suppliers. They are not producers. They are not distribution network operators. Their model seems unprecedented on a national scale. I often hear large utilities disdain them as they don’t find, in these alternative players, the technical know-how that made their own past glory.

Are they really to be scorned? Don’t they have a nuisance power for historical suppliers? Aren’t they on the way to deeply change the energy markets?

As for electricity, the times are favourable in Europe: it is cheaper to buy electricity than to produce it. Wholesale prices are low, persistently low. But to establish itself as a reference supplier, two main strategies are possible:

• A low-cost strategy. Its impact is limited by a share of the price of energy rarely exceeding half the total price paid by the consumer. The fees paid to transmission and distribution operators, taxes, various levies for financing renewable energies are the same for all suppliers and reduce the share of the price on which it is possible to differentiate.

Some large consumers are price sensitive and are the first to be attracted by these new suppliers. Nevertheless, the acquisition costs of these customers remain high, margins reduced and building a profitable business is not easy.

Households are less receptive, unless the historical supplier has crystallized on him a lot of resentment by a service that has been failing for a long time. Again, the margins are low and the profitability is sensitive to the slightest uncertainties.

In any case, the volume sold and the market share are determining factors for these alternative suppliers who do not hesitate to redouble their efforts to gain ground, even if they penalize their margins a little more.

• A strategy of differentiation, notably by services. Energy services require a technical and commercial competence that takes time to develop. Offers require sustained efforts to establish themselves on the market. These alternative suppliers rarely have the strength to follow this path. Those who, nevertheless, try to differentiate themselves, remain timid, limited by their means.

Alternatively, however, customer service, the quality of the support and the relationship, initially little developed among the historical suppliers. They show an extraordinary inventiveness and dynamism to investigate new access to the customers, they import from other sectors, commercial methods that have proved themselves. But how to attract even faster new customers who have not yet tested this service? Some independent labels and awards allow to make known to an enlarged audience the remarkable performances of the supplier’s service team but the growth generated is often slow.

In any case, the strategic dilemma of alternative energy suppliers, and even more so for electricity than for gas, is to find the right mix between growth and the cost of acquiring market share. Beyond this dilemma, the threat to historical suppliers is very real and the protection afforded to their margins through regulated tariffs may well end shortly.