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Electric Retailing: When Will I See Profits?

Deregulation Abroad: Still Reaching Its Potential
Fortnightly Magazine - June 1 2000

customers had switched providers, representing 20 percent of the eligible customer population.

"Face-to-face contact on the doorstep or selling over the telephone is used by most suppliers wishing to enter the designated market. It has been particularly effective in persuading domestic customers to change supplier," according to the OFFER. Price is the overriding reason named by consumers for switching gas and electricity providers. Another frequently mentioned reason is the ability to get both gas and electricity from a single energy provider.

Among this class of customers, each with demands of less than 100 kilowatts, switching rates for small business customers have been higher than those for residential customers. Some PESs have lost nearly 30 percent of their business customers in this market segment.

Clearly, only a small share of the market potential has been realized thus far, despite almost universal awareness of competition, which most customers welcomed. There are several reasons for this slow rate of switching:

  • Inertia. Customers see no reason for change.
  • Savings Perceived Too Small. A significant gap exists between the savings non-switchers think are available and the savings necessary for them to switch suppliers. 5
  • Savings Believed to be Short Term. Some customers think the promised savings are an illusion that cannot be maintained over the long haul.
  • Energy Costs Relatively Small. Energy costs do not represent a substantial portion of household costs.
  • Risk Aversion. Still others don't want to confront the risks that might be attendant to switching, or the hassles of shopping around.

Over the long term, however, one can expect more switching to occur in this segment. For example, more than 5 million of Britain's 20 million households have changed gas suppliers since 1998. 6 Exploiting its gas industry switching experience, British Gas already has secured a market share in excess of 50 percent in electricity supply, and the company remains the most aggressive supplier in the small customer market. 7 The driver for small customers to switch in Britain is savings on their gas bill, not their electricity bill. 8

Australia - One-Third Switched. Choice was introduced in Australia in 1994, with a market design similar to that used in Britain. Choice was first introduced in Victoria in 1994, for customers with demands greater than 5 MW, and next in New South Wales in 1996. Today direct access is available in most states to customers with consumption of more than 160 megawatt-hours per year.

About 12,000 of the 35,000 eligible customers, or 34 percent, have switched providers. The share is roughly 40 percent for customers with demands greater than 750 MWh per year. Many large customers have signed long-term contracts for a 15 percent to 30 percent reduction in electricity prices.

Norway - 5 Percent So Far. In Norway, electricity choice was introduced simultaneously across all customer segments. There is a high level of competitive pressure in all markets, and in 1998 prices to the average end-user fell 24 percent from the year before. In addition to the effects of retail competition, some of the savings are due to the increased share of hydropower