The UK energy market is the most competitive in Europe. In other European countries, the state owns a large stake in the companies. For example, EDF (Électricité de France) is largely owned by the French government; they owned approximately 85% by the end of 2008. The British market is the prime example of free market capitalism.
What does this mean for Centrica‘s (LSE: CNA) British Gas? In a nutshell, probably that its share of the market will gradually decline for gas and electricity. As of 2012 British Gas had 20 million business and domestic customers, SSE had 9.6 million customers, npower had 6.5 million customers, EDF had 5.7 million customers, E.on 5.3 million customers and Scottish Power had 5.2 million customers.
British Gas’ share of the domestic gas market is now under 40%. Other companies seem to be targeting the gas and electricity market aggressively, and in different ways to British Gas. For example, npower sponsored the Football League, and E.on the FA Cup. All the other big six companies also advertise heavily on TV. There is the added threat of new smaller energy companies offering cheaper prices. I’m with First Utility, who are the cheapest for my usage in my area. 40 per cent of switches in January 2014 were to a smaller supplier.
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What I would say based on personal experience, however, is that there is an amount of brand loyalty towards British Gas. Some people take the view that they always have been supplied by British Gas and always will. I know it’s a generalisation, but a large proportion of these people are over fifty. Since energy bills are such a popular news topic, and affect so many people I predict that the amount of people switching will only increase.
Here are the key British Gas results for the year ended 31 December 2013:
|
|
FY 2013 |
FY 2012 |
Change |
H2 2013 |
H2 2012 |
Change |
|
Adjusted operating profit (£ million) |
|
|
|
|
|
|
|
Residential energy supply |
571 |
606 |
-6% |
215 |
261 |
-18% |
|
Residential services |
318 |
312 |
2% |
183 |
187 |
-2% |
|
Business energy supply and services |
141 |
175 |
-19% |
63 |
82 |
-23% |
|
Total British Gas operating profit |
1,030 |
1,093 |
-6% |
461 |
530 |
-13% |
So I think we can describe British Gas’s share of the UK energy market as managed decline. Overall I would say that its customer service has improved over the past ten years, and employees are treated well.
Remember, though, British Gas is only one part of Centrica. Centrica is making efforts to expand into the USA, in terms of both increasing customer numbers and storage and supply capacity. At the current share price of 312.3p, with a yield of 5.44% and a P/E ratio of 13.1, Centrica is at least a solid hold, and a reasonable buy for a long-term ‘buy and hold’ investor.
