Enabling electricity consumer choice via market competition

Published: Fri 14 Jun 2013
A blog entry by Sasha Bermann

Contributed by:

Sasha Bermann
Chief Dissemination Officer
VaasaETT

Sasha Bermann's Blog

One way to look at the success of market openings and the level of competition in retail markets is to see how many offers electricity customers can have access to and how many suppliers are active in their area. Enabling consumer choice is essentially about providing consumers with more options to choose from, which in theory will favor competition between suppliers and lead to fair energy prices in the long term. The graph below shows the number of electricity-only and dual-fuel offers which are offered to inhabitants of some European capital cities (left side) and how many suppliers are active in the capital city area (right side). In Europe, Dutch, Swedish and Finnish households have the most offers to choose from, they have more than 470 options available to them. In comparison French and Italians households have far fewer options to choose from. The French have 47 options and the Italians have only 36 options. This clearly shows the vast differences across the EU. 

 

Figure 3‑1: Number of retail contracts and number of suppliers in selected European countries (capital cities)

Source: Certified price comparison websites, companies' websites, analysis VaasaETT.

Includes electricity-only and dual fuel offers. Dual-fuel offers are defined as offers whereby electricity and gas are offered by the same supplier who then sends one bill and often offers a discount to customers for buying both energies from him. We therefore did not count as dual-fuel offers cases where a supplier sells both energies but not as part of the same contract.

 

Perhaps not surprisingly the number of options available and the amount of suppliers in an area seem somewhat correlated. In general, there are more options available to consumers and more new entrant suppliers competing if the market has been long open. Concrete cases that proves this point are Germany, Finland and The United Kingdom, whose electricity markets were opened up back in 1998. They all have a relatively high amount of competitors in their markets. The same goes for Sweden that opened up in 1999. Opposite, there are relatively few suppliers in both France and Italy, whose residential markets were closed for competition until 2007. However, this is not so simple, indeed many complex and mutually reinforcing factors at play: Price freedom, customer churn, level of retail margins, customer interest in switching, ease to establish a supply business, presence of dominant player, etc.

As an illustration, markets with the most options and players have no price control whereas markets with low regulated prices have the least. It is likely that a market with low retail margins will not experience many active suppliers competing. It can be assumed that retail margins are low in countries with low regulated prices such as France or Spain. This complicates competition for new entrants, which would otherwise have come in and taken on the incumbent supplier.

 

In order to secure more choice for consumers and more competition in the market more measures than simply opening up the market is needed and Europe still has a long way to go if the whole region is to have real competition in the electricity market and thus more consumer choice. Market liberalization is a good step to take in order to enable consumer choice, but is not enough to enable it.  

 

All of the information provided in this article stems from the CRIEPI III report, which was created by VaasaETT, global energy think tank and the Central Research Institute of Electric Power Industry of Japan.