E.ON is the international energy utility company headquartered in Essen, German and it was founded in 2000. The company has 70,000 employees, and its focus is to provide energy solutions to the customers (E.ON, 2020). The company has a significant presence in Europe with subsidiaries in different countries, including one in the United Kingdom. The United Kingdom subsidiary is named as E.ON UK and it is based in Coventry. E.ON started the business by generating power conventionally and eventually switched to renewable energy. E.ON policy going forward is the generation of renewable energy. They want to sustain the global need for energy utilization in times of climate awakening. They acquired a renewable energy company to increase their capacity. In 2019, the company was the only company in the United Kingdom to switch all of its users to renewable energy. Porter’s five forces model is used to oversee threats and opportunities the company is exposed to.
Competitive Rivalry in the Market
The energy distribution is a profitable business and can be very rewarding. The services offered by utility companies are commodities, and their demand is usually growing non-linearly. As the sector promises decent revenue, it attracts competition. State and private entities compete for their market share. E.ON is among the top ten global energy utility companies based on a number of employees (T. Wang, 2020). The company faces competition among European utility providers. Due to major multinational companies in Europe, the competition is intense. E.ON’s major competitors are GDF Suez, Enel, and RWE. E.ON posted annual revenue of $ 35.7 billion with a profit of $ 3.8 billion (Fortune, 2020). GDF Suez, Enel, and RWE earned annual revenue of $ 118.5 billion, $83.9 billion, and $ 51.6 billion, respectively (Fortune, 2020). Due to the presence of multinational companies, there exists intense competition.
Threat of Substitutes
The energy generation has been on the brink of change due to a change in requirements and consumption patterns. The utility of energy has grown exponentially. The switch from fossil fuel-based companies to renewable is changing the landscape. Conventional energy production was fossil fuel-based, and resources are depleting, and coal will be only remaining fossil fuel after 2042 (Shafiee, S., & Topal, E. 2009). The renewables resources are available in the form of solar and wind power. Fossil fuel-based energy consumption is polluting the environment at an alarming rate. The companies are innovating and trying to produce renewable energy at a sustainable cost. The real threat of traditional energy producers are facing is from companies producing renewable energy. Energy is required as a commodity, but its production method is changing. So the threat is moderate in the short term and high in the long term if companies don not adapt.
The Threat of New Entrants
The main requirements to enter are high capital, adherence to state regulation, and expert human resources. The biggest and foremost impediment is capital; the capital required is quite high. Along with the required capital, there is a strict compliance requirement. The regulations are needed to be met because it is a commodity, and the government has strict oversight. Private for-profit companies need to consider the return on investments too. The price at which utility can be distributed is usually regulated by the government, and there is a strict price range implementation. The companies cannot set their desired profit margins. There is intense competition in the industry. Considering the state of competition, profit margins along with compliance and capital requirement threat of entrant remains low.
Bargaining Power of Buyers
The buyers of the energy utility company are commercial entities and domestic users. Buyers exercise higher bargaining power if there are available options. The buyers of utilities are at a disadvantage because they can’t leverage anything to bargain. Energy is a commodity that is required by everyone. The other alternative is solar power, which requires a high initial capital requirement for individual households. The only relief to the buyer is in the form of a subsidy provided by the state. Commercial consumers sometimes get tax breaks and subsidies from the state. In the case of the state-owned company provides energy utility, then the consumer can pressurize and seek some relief in the tariff. In the case of a private entity, the consumer cannot pressurize. Considering the available facts, buyers have no or low bargaining power.
Bargaining Power of Supplier
The suppliers hold high bargaining power if they can provide unique products, and there are few suppliers. The output of the energy generation sector is the input to the energy utility distribution. The suppliers can reduce the profit margins of the utility companies by driving the cost up. There are two major suppliers’ private sector companies and state-owned companies. If the utility distribution company has vertical integration, then they use that to their advantage.
The large companies have vertically integrated supply chain that protects them from supplier’s risk. If the company does not have vertical integration, then suppliers hold high bargaining power and vice versa.
References
E.ON. (2020). About E.ON. Available at: https://www.eon.com/en/about-us/profile.html
Fortune. (2020). E.On. Available at: https://fortune.com/global500/2019/e-on/
Fortune. (2020). Enel. Available at: https://fortune.com/global500/2016/enel/
Fortune. (2020). GDF Suez. Available at: https://fortune.com/global500/2014/gdf-suez/
Fortune. (2020). RWE. Available at: https://fortune.com/global500/2016/rwe/
Shafiee, S., & Topal, E. (2009). When will fossil fuel reserves be diminished?. Energy policy, 37(1), 181-189.
Wang, T. (2020). Leading energy utility companies worldwide in FY 2018, based on the number of employees. Available at: https://www.statista.com/statistics/274671/the-biggest-energy-companies-worldwide-based-on-number-of-employees/