Price regulation and switching: what’s the experience?

New Power asked Philip Lewis, chief executive of European energy customer consultancy VaasaETT, for comment on the CMA recommendations, based on experience of regulated tariffs elsewhere. His response:

 

The UK energy market was once the most active electricity market in the world and remains active despite its fall from the top of the VaasaETT global switch rankings. What has confused so many is how a market with so much switching can have such a bad image. Essentially the public were promised benefits from competition that were unrealistic.

“The public were promised benefits from competition that were unrealistic.”

Competition does not reduce prices across the board. Who would want to compete in a market where margins are close to zero? Companies enter markets to make money, not lose it. They compete for those customers who exercise their choice. Other customers remain where they are, unless they are forced to choose.
Some regulators argue that having a default regulated price will protect those that do not switch (if the price is low) or encourage switching (if the price allows sufficient margin for competition). But if the price is set low, few customers will switch (as in most markets with low regulated prices, such as France) and if the price is set high, inactive customers will end up paying more.

“Will those customers paying too much switch if the default tariff allows decent savings? Think again.”

Will those customers paying too much switch if the default tariff allows decent savings? Think again. In Norway, where customers are supplied by the system operator at a relatively high price until they choose a supplier, large numbers of customers remain on that tariff – so many, that they have been auctioned off to a supplier. In Finland, despite potential savings of up to 50% over the years, churn is still lower than in Great Britain.
Australia’s markets had very high levels of switching and regulated safety net prices, but that is because the margins on standard tariffs have been relatively high (yes, the bigger the margins, the higher the churn). But switching has not led to the impact the CMA supposes. More than three-quarters of consumers are still with former incumbent suppliers and the image of the industry is arguably no better than in Great Britain.
It is paradoxical to suggest suppliers in Great Britain could have a quasi-regulated tariff high enough to allow some profit and competition (if it is less than 5%, forget new entrants) and low enough to protect the customer. If the price is above what it is now (and what the market sets) the customer is worse off, and if the price is lower then competition will be stifled. Arguments like these are the reason why price regulation has been removed in three Australia states.
Price regulation is pointless. Regulated price energy markets generally have lower levels of competition (on average only 3% of customers switch each year), there is no evidence that they have higher levels of satisfaction, they have fewer new market entrants and they raise prices anyway because you can only hold them artificially low for so long. Only when default prices allow higher margins does switching thrive. According to VaasaETT’s analysis, the largest net electricity retail margins in the world, in a competitive market, are in New Zealand, the market that also has the highest churn.

There are no liberalised energy markets where the majority of consumers are served by new entrants.

Whatever the prices and churn, incumbent suppliers will dominate. There are no liberalised energy markets where the majority of consumers are served by new entrants. The success of customer protection and encouragement of new market entrants does not depend on these issues but other market management issues, and especially on facilitating new business models.

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