Written by CEO Philip Lewis
With the increased influence of switching websites and market process hubs, electricity markets are becoming ever more centralized. But what are the implications for switching of increased centralization and how centralized should a liberalized market be in order to maximize its efficiency and competitiveness?
There are two main models for switching; the centralized model and the bilateral model. The centralized model is characterized by a switching process, where the winning retailer interacts with a central entity that will process the switch and interact with all other relevant market agents – except the customer. Examples of markets using this model are The Netherlands, New Zealand, Czech Republic, Slovenia, Texas and certain Australian regional markets. The bilateral model is characterized by a switching process in which the retailer that wins a customer interacts with the customer’s DSO in order to process the switch. The DSO then interacts with the customer’s former retailer and other relevant market participants – but not the customer. Examples of markets using this model are Austria, Belgium, Finland, France, Germany, Great Britain, Greece, Hungary, Ireland, Italy, Norway and Sweden.
Some markets operate the centralized model and others the bilateral. However, most liberalized energy markets tend to use the bilateral model, even though the centralized model is gaining in popularity. Austria and Denmark are both switching to the centralized model as concrete examples of this new trend.
Unbundling, liberalization and other such market trends may lead to markets with more companies competing. This may include multiple DSOs and retailers. With a more complex market as regards the number of competitors the centralized model will facilitate the switch by reducing the number of contact points. Thus the centralized model has a sizeable advantage in highly competitive markets, note that the most competitive markets like New Zealand and Australia also have the centralized model. In other markets with fewer competitors however, this advantage is neutralized and so in this aspect the centralized model is no more advantageous than the bilateral model. However, the fact that highly competitive markets nowadays tend to use (or switch to) the centralized model does not mean that a market can’t be very competitive with a bilateral model. A good example to illustrate this point is Belgium. Belgium is a market marked by high switching rates, particularly Flanders. Still, it operates the bilateral model.
In other words; what model works best, depends on the market. There is no one-size-fit-all solution to choosing a switching model, but do not expect switching to increase just because you make the market more centralized.
This article is based on extensive research into competition and switching in global energy markets over 17 years. Only VaasaETT has data tracking switching in all fully liberalized electricity markets since they opened. VaasaETT has published many reports containing elaborate analysis and data, which are available for free or for purchase on the Switching website: http://www.utilitycustomerswitching.eu
A report on switching models is available here: http://www.vaasaett.com/wp-content/uploads/2014/03/Switching-Centralisation-and-Websites-040314.pdf