Big names in the market for energy

As supermarkets and other retailers prepare to sell gas and electricity , British Gas is poised to diversify. By Paul Gosling

Consumers stand to benefit from a two-way price war between the big utilities and the supermarkets. Many of the big retailers are getting ready to sell cut-price gas and electricity when the rules allow and the utilities are starting to fight back by offering new services to customers who stay loyal. British Gas set the scene last month by launching Goldfish, a combined credit and loyalty card.

British Gas spokesman Gareth Wynn admits that in the gas supply market the only way for them is down, so they must also diversify. "We are looking at diversifying and new products, not least to move into electricity supply," he says. "We don't expect ever to be cheapest in the gas market, but we will try to offer the best value for money."

The regional electricity companies (Recs) also intend to move into other product areas, starting with telecoms, and offer their own range of financial products. Recs are also likely to issue loyalty cards jointly with specialist retailers and petroleum companies, offering discounts and special offers.

The utilities have been forced to act because they face an inevitable growth in competition in their core markets. The electricity regulator, Offer, earlier this year rejected proposals from the regional electricity companies to delay opening up the domestic supply market, which will be subject to open competition from April 1998. The gas supply market is being opened up in three tranches - the south west already has a free market; the south east, apart from London, will follow next year; and the rest of the country will be liberalised in 1998.

All the major supermarket groups are expected to sell gas and electricity as part of their conversion into suppliers of almost all our everyday needs, from banking to telephony, on the back of loyalty cards. The pay- off for the consumer is that the cost of currently high-margin purchases, such as energy, will come down dramatically.

Once the markets are fully open, consumers will see a wide range of new energy suppliers. In the south west, many of the major petrol companies, including BP and Total, are selling gas. But it is the expected entry into the market of the supermarket giants that is likely to push prices down heavily.

Sainsbury and the Co-operative Wholesale Society say that they are considering selling electricity and gas, but add that no final decision has yet been taken. Asda, Tesco, Safeway and Marks & Spencer are all understood to have had discussions with regulators about entering the market, but all are keeping quiet about their plans.

The major retailers will be willing to sell energy at lower prices than their competitors because it will form just another part of an overall retailing package. Using loyalty cards, customers will be given discounts for buying a vast range of products and services from their preferred retailer and there will be strong disincentives to change retailer.

By integrating the billing of utilities into loyalty cards, the supermarket retailers can avoid some of the overheads of the utility companies. Bills can be automatically charged to the card, and cards that, like Tesco's, carry a credit balance will be instantly debited, saving the cost of chasing debts.

Consumers will be offered lower charges, perhaps as much as 5 per cent cheaper, and will have to deal with fewer bills. There will be no need for any physical alteration to properties, as electricity and gas will still be supplied via the national grids. Energy taken out by the consumer will be replaced nationally by the supplier.

"The supermarkets have a good customer base, and an ability to transact efficiently," says John Reynolds, energy analyst at HSBC-James Capel. "But they don't have the skills to buy energy, so they might be expected to work closely with energy companies."

Mr Reynolds believes that insurers and banks are also looking to sell electricity and gas. Buying energy, he says, is "really a hedging exercise, like an insurance policy. The issue is who can tie up the contracts."

Though the wider market will create much more intense price competition, it may not be good news for everyone. Lower-income households may find that the retailers are not clamouring at their doors. Offer and Ofgas, which require licensees to fulfil social obligations, will have to look carefully to make sure that the poorest are not discriminated against