Power play: Ovo Energy's 10-year journey from tiny to titan

September 13, 2019
When Eversmart Energy went bust earlier this month, leaving thousands without a supplier, it was reportedly the sixth UK power company to get snuffed out so far this year—with more businesses in the sector predicted to fail in the coming months.

The UK energy market is a mess. First, the country's energy suppliers operate in a competitive landscape, which already puts pressure on pricing. Add to that increasing wholesale prices and tougher regulations on tariffs, and many are struggling to keep the lights on. But somehow, Ovo Energy has turned this chaos into a ladder.

The 10-year-old energy supplier has agreed to buy rival SSE Energy Services' UK household energy unit for £500 million (around $623.8 million), which will reportedly make Ovo the country's second-largest energy supplier behind British Gas in terms of customers served. The deal, which comprises £400 million in cash and £100 million in loan notes, has more than doubled Ovo's footprint. Prior to the deal, Ovo had 1.5 million customers. Now the combined entity of some 10,000 employees will serve nearly 5 million households in the UK.

Even before the transaction, the company—launched by CEO Stephen Fitzpatrick to offer affordable and clean energy— witnessed impressive growth. Ovo has increased its UK customer base by 50% in the past year, partly thanks to a recent cull of competitors. At the same time, it opened operations in France and Spain, with plans to expand to Australia, Germany and Italy in 2020. And in February, Ovo was said to have achieved unicorn status, when Japanese multinational Mitsubishi picked up a 20% stake for a reported £216 million.

The company's other investors include the UK Government, which gave the company a grant in 2018, Mayfair Equity Partners with an investment in 2015, and former US Vice President Al Gore's Generation Investment Management, which reportedly backed Ovo in 2014.

Appetite for disruption

Part of the reason the company has been able to stand out has been its ability to seize upon disruptive trends in a beleaguered market. In a statement announcing the most recent agreement, Fitzpatrick said the company benefited from opportunities brought about by new technology and the falling cost of renewable energy. He added: "For the past three years Ovo has been investing heavily in scalable operating platforms, smart data capabilities and connected home services, ensuring we're well-positioned to grow and take advantage of new opportunities in a changing market."

The flipside of that coin is SSE, formerly Scottish and Southern Energy, which finds its origin in two public sector electricity suppliers that existed prior to the deregulation of the UK energy market in the 1990s. As a long-term industry incumbent, the company's retail energy unit has struggled to retain customers amid price competition from nimbler market entrants like Ovo. The division's EBIT fell 68% in the year to March 2019 to £84 million. SSE was reportedly seeking a price tag of £1 billion for the unit when it was put up for sale in April.

SSE tried to sell its retail business to rival Innogy last year, but the £7 billion deal collapsed after the pair failed to reach an agreement on revised commercial terms. In a statement, SSE blamed multiple factors including the performance of the respective businesses and a lack of clarity on the final level of a default tariff cap imposed by the government.

Featured image via peshkov/iStock/Getty Images Plus

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