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What Will Happen To Centrica PLC’s Slice Of The UK Energy Market?

gasringThe 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.

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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.

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.

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Mark Howitt owns shares in Centrica and SSE. The Motley Fool has no position in any of the shares mentioned.