Is PowerGen in for a big shock?

Unusually among utility companies, PowerGen understands the need for innovative branding. Ten years of sponsoring ITV’s weather reports have paid a handsome dividend in turning what was a start-up company into a household name.

Whether this expertise has been intelligently applied to its market strategy will now be tested as never before.

Last July, PowerGen acquired the REC, East Midlands Electricity, for 1.9bn. It was a pivotal point for the power generator. After years of trying to develop horizontally, it had come to the conclusion that this was a dead-end strategy and embarked on the vertical route instead. Buying a retailer seemed a very good idea at the time, since the UK gas and electricity markets were on the brink of deregulation, with all the exciting marketing possibilities that presented.

Critically, however, PowerGen was frustrated in its early attempts to enter the market, with the result that it is now severely disadvantaged. Not only has it had to pay a high entry premium, it also acquired an REC which has been haemorrhaging customers.

The rout has been caused, as much as anything, by new entrants such as Centrica’s British Gas Trading, Scottish Power and Eastern Group, which have been able to offer customers tempting ‘dual fuel’ packages.

PowerGen’s response is a major rebranding campaign, which will involve either the wholesale axing of the East Midlands name or, at the very least, its radical subordination to that of the parent company.

Some observers think this strategy is thoroughly misguided. They argue that the worst is already over for East Midlands; those who will defect on price have already done so. The vast majority of customers are too apathetic – or too unimpressed by what is on offer – to make the move. A rebranding exercise by PowerGen will only worsen its position by bringing to customers’ belated attention the advantages of playing the market.

But the critics may well be wrong on this point. New research from Datamonitor suggests that consumers have switched, not merely out of naked, price-led opportunism, but because they have been affected by the strongly branded proposition of some new entrants – British Gas Trading in particular.

If so, PowerGen’s strategy, although long-term, is likely to be on the right track. The logic of its position, given the scale of investment involved, is that the power generator should acquire at least one other REC and perform the self same rebranding operation. The company has denied that this is its intention. We shall see.

Cover Story, page 26