Customer switching process: How to find the right model


    PhilipLewisCutting time of the energy supplier switching process, reducing the complexity of the market & choosing the “right” model for your market are the subjects of this post, says Dr Philip Lewis, CEO and founder of global energy think-tank VaasaETT.

    There are two main models for switching; the centralised model and the bilateral model.

    The centralised model is characterised by a switching process, where the winning retailer interacts with a central entity that will process the switch and interacts 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 characterised 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.

    In a market with a high number of market participants, for example multiple DSOs, the centralized model facilitates the switching process by reducing the number of contact points – every market agent needs to be in contact with the central entity.

    Thus the process is smoother resulting in shorter switching times (up to 33% faster switching time compared to markets with the bilateral model and multiple DSOs). In the case that a market has multiple DSOs, but operates under the bilateral model, the time of the process is prolonged due to the many contact points in the process.

    The centralised model naturally offers a great advantage for these complex markets. However, in some markets, there is only a single DSO and so this advantage is neutralized. In other words, the centralized model only speeds up the process of switching in complex markets, but holds no special value for market agents in markets with a single or few DSOs.

    For smaller retailers/suppliers operating in a complex market with many competitors (and many DSOs), completing a switching process can be a genuine challenge. This is due to elements like smaller retailers often having a small back office and simple, low cost systems, so the ability to handle many different interacting processes, however well standardized, can be both expensive and time consuming.

    In the case of Germany, with around a thousand separate utilities and 4,000 market participants in all, the situation can also mean that the retailer simply does not even bother approaching all regions of the market, thus reducing the size and potential of the market.

    While making a switching process less time consuming is undoubtedly a good for the market, it does not increase the rate of the switching as one could otherwise hope.

    For instance, whereas Victoria, Australia has for several years had the World’s highest rate of annual switching with one of the world’s longest times-to-switch, New Zealand has an almost identical level of switching with the World’s shortest time-to-switch of just 3-5 working days (plus a one week cool-off period if the customer was signed up via a direct sales channel approach). Great Britain too, long known for its active energy market, has one of the World’s slowest times-to-switch.

    To sum up: The centralized model does offer an advantage in terms of reducing complexity for smaller retailers and reducing the time of the switching process in markets with many DSOs. However, this advantage will not materialize in all markets, as markets vary substantially across the globe.

    This blog post is based on extensive research into competition and switching in global energy markets over 17 years.

    To see the full report on switching models, click here