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How ‘smart homes’ and price caps drained Centrica’s power

Providing power to homes once accounted for a third of Centrica profits, but the landscape is changing with tariff caps and more competition.
 Providing power to homes once accounted for a third of Centrica profits, but the landscape is changing with tariff caps and more competition. Photograph: Alamy Stock Photo

Would any other chief executive have done things differently? The question has been the topic of conversations in the energy industry since Iain Conn, Centrica’s chief executive, said last week that he would step down

Rick Haythornthwaite, Centrica’s chairman, is expected to look outside the company, and even the energy industry, for Conn’s successor. It will not be easy. “Who would want that job? Seriously?” one City source quipped. “In a best-case scenario, if you were able to do a great job and turn things around, you’d be on the front of newspapers vilified for earning a big bonus while energy bills go up.”

The worst-case scenario would be presiding over the breakup of a famous British business. Centrica is an exemplar of the privatisation drive that has shaped the corporate landscape since the mid-1990s. It was born out of the same privatisation endeavour that produced National Grid and gas giant BG Group, now owned by Royal Dutch Shell. But Centrica has fared far worse.

National Grid may face the threat of renationalisation under Labour, but it is a £30bn company with strong growth prospects in the US. BG Group was snapped up by Shell three years ago for £36bn as a pivotal part of the oil major’s future strategy. By contrast, Centrica’s market value has fallen to less than a fifth of its value a decade ago, and is worth less than £4.5bn today. Senior City sources and industry executives agree there is little choice but to strip the former energy behemoth for parts.

The board has already agreed plans to flog its one-fifth stake in EDF Energy’sUK nuclear reactors, and sell off its oil and gas business Spirit Energy. If Centrica’s share price continues to fall, the incoming chief may face a tougher choice: to trade the most profitable parts of the business for a short-term financial reprieve.

“Centrica owns some real gems but together it is too big and too messy. You only need to look at the share price to see that the City believes that the company is worth less than the sum of its parts,” one City banker said.

The gems include a US supplier, Direct Energy, and an energy solutions business that spans 34 countries – attractive to buyers but also core to the company’s future growth.

Selling energy to homes through British Gas made up about a third of Centrica’s operating profit before the government’s cap on tariffs came in. Today, that business accounts for only 15% of its profit.

The same is broadly true of Centrica’s nearest rival, SSE, which is hoping to sell off its home energy business to focus on more straightforward returns from running wind farms and energy networks. The difference is that Centrica has no fallback plan; the dwindling customer numbers are still core.

Supplying power to British homes via British Gas now generates only 15% of Centrica’s operating profit.
 Supplying power to British homes via British Gas now generates only 15% of Centrica’s operating profit. Photograph: Darren Staples/Reuters

“Energy customers are interested in more than just energy,” Conn has said. “Some of our customers only want energy at the cheapest price and they don’t care who it comes from. But others actually want more than energy. They’re willing to buy insurance services from us; boiler cover, home cover, Hive [smart meters]. They are taking an interest in the things that help their lives run better.”

Seizing this opportunity in home services could help Centrica run better too, and gives an idea of how the brand may evolve in the years ahead.

“Converting energy customers into customers for new propositions is the direction of travel. We have gone from energy company to energy and services company. One day, we might be a services company with energy as one of those services,” Conn said.

Britain’s biggest energy supplier may survive, but not as it is today.

About Oluwadamilare Funsho

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