Report on regulation to modernize utilities

Consumers must learn to switch suppliers if they want to make savings on their utility bills, said global energy think-tank VaasaETT at a recent event in Brussels. 

Consumers in Belgium are the most active in switching between energy suppliers with the rest of Europe relatively active, according to VaasaETT’s research into competition, prices and switching in the global energy markets. However, existing retailers are seeing little impact and still serve more than 60 per cent of energy customers in any given market.

VaasaETT researchers said: “Despite markets being liberalised across Europe, and some of the remaining world, the incumbent energy company still dominates. To understand why, it is necessary to understand the nature of competition in the retail energy market.”

What drives the market

When there is a drop in wholesale market prices within a liberalised market, it makes room for new entrants, they explain. The new entrants are attracted by the prospect of purchasing cheaper energy in the wholesale market and then selling it with the lower margin in the retail market. The price will be set at a level where it is attractive enough to lure the customers away from their existing supplier, but high enough for the entrant to make a profit justifying the hassle of entry.

“Though there are successful new entrants [to the energy market], the most successful still tends to be the incumbents. The reason for this is the standard mindset of the average retail customer, which can best be described as indifferent. Most customers don’t switch. This lessens the pressure on the incumbent and thus lowers the prospects of market liberalisation in terms of competition.”

Changing customer behaviour

Another effect from the customer’s mindset is that the competition effect on prices is limited. Conventional wisdom dictates that with liberalisations come price drops, but this is not the case in energy markets. Not because the market is any different from other markets, but because the customer is different.

An indifferent customer who doesn’t switch to a big extent will not enhance competition and thus force the average price down.

The VaasaETT team said: “The way to change this is to change the mindset of the customer – if they cared enough to switch they could achieve price drops and save money. However, as it stands now the price drop doesn’t occur, instead what is then the observed effect is a bigger range of prices in the market.

They add: “We can explain this also the other way around. Only if the level of the margins in the retail market is sufficient, will it attract new entrants to enter the market thus to increase competition and most of all develop new services for the customers.”

Customer switching project

The Utility Customer Switching research project was established in 2004 by VaasaETT and tracks 42 liberalised energy markets on a global level to analyse switching, competition, prices and rank them accordingly. An extensive report is released on a yearly basis.