Vertically integrated energy retailers

Economies of Scope – Production Possibility Frontier (PPF)

The Conventional production unit with large number of retail customers is the main competitive advantage for SSE. Total production capacity is fixed for all conventional power plants (fig. 1); however revenue could be optimised by giving up base production capacity to gain peak production capacity (fig. 2b).

conventional-power

Fig. 1Conventional power – total annual production hours

PPF is shifted due to the investment in renewables and conventional capacity over the last five years (fig. 2a). Increased production capacity should be utilised for higher revenue generating peak production period.

ppf

Fig. 2Production Possibility Frontier (Vahey, 2015- working paper)

Bundled offerings – imperfection for differentiation:

Along with electricity and gas, SSE offers telephone and broadband services nationwide (fig.3). Limited (postcodes) offerings of Electric and boiler insurances must be expanded nationwide in order to maximise customer reach.

bundled-offerings-to-customers

Fig. 3Bundled offerings to customers

Proposed pricing strategy:

By offering price freeze (fig. 4) guarantee to retail customers, SSE could be shielded from micro and macro pressures for the foreseeable future. More discounts should be offered on “Online” deals with DD and fixed term contracts, saving SSE on operating cost.

pricing-strategy-for-retail-customers

Fig. 4Retail Pricing strategy – to attract different segments 

Low cost production and economies of scale: 

SSE employs diversified skills and resources throughout the energy value chain, such skills and resources should be shared among other businesses to reduce operating costs.

References:

Vahey S., 2015a – Working paper, Basic Macro Models (Production Possibility Frontier), Warwick Business School, unpublished.

SSE plc, 2014, Annual report 2014. [Online] Available at:

http://sse.com/media/241200/2014AnnualReport.pdf [Accessed on 05 May 2015]

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