You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
A shakeout looms for retailers, and familiarity may be an edge.
Industry consolidation may whittle the number of electric and gas suppliers in the United Kingdom to just a handful by 2005, if the expectations of U.K. utilities are correct. Further, many predict that these mega-suppliers will include non-traditional competitors with trusted names - maybe even supermarkets or banks.
Nearly three-quarters of the respondents in a survey of 95 U.K. utilities say they expect just five or seven major power suppliers to emerge during the next five years. The survey was conducted in May by information technology services company ICL.
"The real issue is that size matters," says David Loughran, ICL's vice president of utilities in North America. While size isn't as crucial on the distribution side, Loughran says, thin margins on the deregulated residential supply side make reducing production costs through consolidation essential for survival.
"In the U.S. we expect to see a similar picture," he adds, noting that the United Kingdom is a few years ahead of the United States in energy deregulation. Other analysts predict that about 20 U.S. mega-suppliers will emerge, Loughran adds.
Corporate image and brand recognition will be increasingly important as price competitiveness narrows. "The problem for utilities is that for years, utilities viewed customers as consumers, and in turn, customers didn't really take any cognizance of the brand," says Loughran. "But if a company with a trusted household name in, say, retailing, enters, they'll have an advantage."
In fact, Loughran says, brand names may carry even more influence in the United States than expected in the United Kingdom. "In the U.K., there's not a great deal of movement between suppliers among residential customers, whereas in the U.S., people are more used to changing suppliers through years of experience with the telecoms."
Consolidation is well underway, and the ICL survey reports that the business plans of U.K. utilities suggest it will continue (see chart). Nearly 70 percent of respondents expect alliances to be part of their business plans in the next five years, while 56 percent also cited more aggressive acquisition as a strategy. In addition to increasing their customer bases through such alliances, utilities aim to strengthen customer relations.
The utilities' IT priorities are further evidence of these strategies. In fact, 15 percent of respondents cite the development of customer management systems as their key priority, more than any other factor.
"I think what's going to happen is you can't view utilities as a single market," says Loughran. He expects IT needs at utilities to diverge, depending on how they position themselves in the market. "It's really about [them] deciding on strategic intent and determining their needs from there."
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