SSE Plc. is a multinational energy company headquartered in Perth, Scotland. The company was founded in 1998 in the United Kingdom. SSE serves in the areas of the United Kingdom and Scotland. It has more than 11,676 employees in the world (Forbes, 2021). The firm engages in the generation, transmission, distribution, and supply of electricity. It operates through the following business divisions: Networks, Retail, and Wholesale.
The Networks division includes electricity distribution, electricity transmission, and gas distribution. The Retail division comprises the business energy, Airtricity, and enterprise. The Wholesale division involves energy portfolio management, electricity generation, gas storage, and gas production. Porter’s five forces model is a valuable tool to identify threats and opportunities faced by SSE in the energy utility industry.
Competitive Rivalry in The Market
The utility industry has grown invariably and is one of the important proponents of growth. SSE is an integrated utility company. It is a crucial part of today’s industrial revolution. The industry is at the forefront of every industrial process and played a significant role in it. SSE Plc. Formerly Scottish Southern Energy is one of the so-called ‘Big Six’ energy providers in the United Kingdom.
The most significant competitors of SSE are EDF Energy and Centrica. EDF Energy has earned £8.04 Billion in revenue (EDF, 2021). On the other hand, Centrica has posted £22.7 Billion in revenue (Statista, 2021). SSE Plc. made an annual revenue of 6.8 billion British pounds in its 2020 fiscal year. (Statista, 2021). The competitive rivalry is high due to the presence of multinational companies with specialized entities.
Threat of Substitutes
Renewable energy solutions are gaining grounds from conventional companies. The world is moving away from traditional energy production. Traditional energy production was fossil fuel-based, and resources are depleting. Fossil fuel-based energy consumption is polluting the environment at an alarming rate. Climate activist and global warming are forcing companies to move away from fossil fuel-based production. These solar energy and wind energy is a significant threat to traditional electric companies.
SSE is leading the innovation is developing the largest offshore wind pipeline in the UK and Ireland at over 6GW and an onshore wind pipeline across both markets in excess of 1GW. (SSE, 2021). The company has set a target to decarbonizing the power sector and achieving net-zero emissions by 2050. The company can reduce the threat of substitution by adapting the technology. All these factors result in low-level threats.
The Threat of New Entrants
The capital required is the biggest impediment for the entrant, as the required capital is high. In the utility industry, regulations are strict. The government has stringent oversight protocols because of the involvement of the general public. The main barriers to entry in any industry are capital requirements, product differentiation, regulatory requirements, and economies of scale. Newcomers can get financing from private investors. The smaller companies can attract the customer by offering bundle deals in the United Kingdom.
The UK’s Big Six energy firm’s market share of domestic customers has decreased in the last decade, as smaller rivals lure customers away with cheaper deals (Power Technology, 2018). The new competitor like Bulb and Octopus Energy has grown rapidly and control about 30% of the market, up from 1% a decade ago (Twidale, 2019). The threat of new entrants remains high.
Bargaining Power of Buyers
Buyers exercise higher bargaining power if there are available options. Solar energy is the known solution, but it requires higher capital per person. The solar power capacity is increasing all over the world. In 2020, UK saw a 27% year-on-year increase in new capacity compared with 2019, with 545MW of the new solar PV capacity deployed; the majority was installed in commercial and industrial units (Power Technology, 2021). The government are providing subsidies on renewable energy systems.
The buyers of the energy utility company are commercial entities and domestic users. The buyers can’t exert any influence because they don’t have anything to a bargaining chip in this case. Commercial or industrial users get electric power at a subsidies rate. Domestic user’s only hope is a minor relief in the form of direct subsidy or tax relief. States can exert their power to bring the tariff down from companies. Considering the available facts, buyers have no or low bargaining power.
Bargaining Power of Suppliers
The major suppliers in the electrical equipment industry are providers of raw materials and distributors. Distributors bring the consumer. In the energy production industry, the quality of raw material has a lot of weight. If the material is of good quality, it can significantly increase efficiency; otherwise, it can hamper it. Solar panels, wind turbines, fossil fuel generators are the major equipment needed for production. The stronger the power of suppliers in an industry, the more difficult it is for firms within that sector to make a profit.
The suppliers can determine the terms and conditions on which business is conducted (Oregon State, 2021). These companies have multinational operational bases and have suppliers in different parts of the world. That gave them an edge over suppliers as they have multiple suppliers to choose from. So they can negotiate better deals for equipment. By analyzing all the facts mentioned above, suppliers hold moderate bargaining power.
References
EDF. (2021) EDF Energy Holdings Limited Annual Report and Financial Statements. Available at: https://www.edfenergy.com/sites/default/files/2020_-_holdings_accounts_signed_deloitte.pdf
Forbes. (2021). SSE. Available at: https://www.forbes.com/companies/sse/?sh=7480a22e4f6d
Oregon State (2021) Analyzing the Organization’s Microenvironment. Available at: https://open.oregonstate.education/strategicmanagement/chapter/3-analyzing-the-organizations-microenvironment/
Power Technology. (2018). UK power market transition: Big Six under pressure. Available at: https://www.power-technology.com/comment/uk-power-market-transition-big-six-pressure/
Power Technology. (2021). Will the pandemic trigger a boom for rooftop solar? Available at: https://www.power-technology.com/features/will-the-pandemic-trigger-a-boon-for-rooftop-solar/
SSE. (2021). SSE RENEWABLES. Available at: https://www.sse.com/what-we-do/sse-renewables/
Statista. (2021) Centrica Group’s annual revenue from 2007 to 2020. Available at: https://www.statista.com/statistics/225142/revenue-of-centrica/
Statista. (2021) SSE plc’s revenue from 2010 to 2020. Available at: https://www.statista.com/statistics/748189/sse-total-revenue/
Twidale. S. (2019). Explainer: Britain’s Big Six energy suppliers to shrink to five. Available at: https://www.reuters.com/article/us-e-on-results-britain-explainer-idUSKBN1Y31H4