The World’s Hottest Retail Energy Markets Paul Grey Peace Software
By a clear margin the world’s hotspots of retail energy competition are Great Britain and Victoria in Australia.
T
he number of retail energy markets open to competition grows year-on-year and research carried out by Peace Software and VaasaEmg has provided for the first time an “apples for apples” comparison of customer switching across competitive retail energy markets around the world. Great Britain and the state of Victoria in Australia are revealed to be by far the most active retail energy markets, at times reaching the rate of 20 percent customer switching per year. Customer switch rates in more than 30 competitive retail energy markets have been monitored on an ongoing basis by the Peace Software and VaasaEmg Utility Customer Switching Research Project team. Peace Software is a developer of utility customer information software for regulated utilities and competitive energy retailers and VaasaEMG is a university-based research center that specializes in electricity, gas and related utilities marketing to end-customers. Customer switch rates are an important metric of retail energy market competitiveness and have the advantage of being objective, measurable and comparable between markets. Eric Cody, retail energy markets consultant and former vice president at National Grid, said: “Regulators will find this comparative customer switch rate information essential for benchmarking the success of their own retail competition initiatives, and energy retailers can apply the insights to their customer acquisition and retention strategies.” The research project’s customer switch rate metric is calculated by dividing the number of customers that switched suppliers in a given period by the total number of customers in the market, and the result is then converted to an annual rate. For example, if 1 percent of customers switch suppliers in a given month, that month has a 12 percent annualized customer switch rate. This approach has substantial advantages over commonly reported switch rates that measure the cumulative market share of regulated utility providers versus competitive providers. Comparative switch rate research has enabled the classification of markets into four categories: Hot, Active, Slow and Dormant. Hot markets demonstrate annualized switch rates of 15 percent or higher; Active is at least 5 percent; Slow is below 5 percent; and Dormant markets exhibit less than 1 percent switching per year. Figure 1 compares customer switching trends in a selection of markets across these categories.
Annualized Percentage of Customer Switching Per Quarter 30 Victoria - Hot Texas - Active Finland - Slow
20
New York - Dormant
10
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1998
figure 1
1999
2000
2001
2002
2003
2004
Customer Switching Examples of Hot, Active, Slow and Dormant Source: Peace Software and VaasaEmg. Category Markets
energy retail prices in recent years motivated British utility customers to switch supplier and led the incumbent utility-affiliated suppliers to ramp up customer win-back campaigns. Price hikes have especially impacted British Gas, which lost approximately 800,000 gas accounts between August 2004 and August 2005. The principal market share beneficiaries at this time are thought to have been Scottish Power and Scottish and Southern Energy. It is believed that Scottish Power achieved a net gain of around one million energy customers between January 2004 and August 2005. Meanwhile, down under in Australia, the state of Victoria has fast become a hotspot of energy retail competition. Victoria introduced full retail competition for electricity and gas in 2002 and it has exhibited increased customer switching year-on-year, peaking at over 20 percent in 2005. Strong competition from out-of-state incumbents and new start-up energy retailers have contributed to this dramatic level of switch activity, along with the introduction of lifestyle products cleverly targeted at niche customer segments.
Active Markets Active markets include Flanders, the Netherlands, New South Wales, New Zealand, South Australia, Sweden, Norway and Texas.
Paul Grey is chief market strategist at Peace Software, the world’s leading developer of utility customer information soft-
Hot Markets
ware for regulated utilities and competitive energy retailers. He and his team research the dynamics of regulated and
Great Britain has consistently been at the forefront of utility customer switching activity since full market opening in 1999. Rising
competitive energy markets so as to be able to develop advanced software products that anticipate and support utilities’
3
business needs. Grey has had articles and white papers published on a wide variety of energy and technology topics and is a regular speaker at industry conferences.
www.UtilitiesProject.com
Chapter Title In Belgium, only the Flanders region is open to full electricity and gas The Texas electricity market opened to full retail competition in retail competition. The other Belgian regions of Wallonia and Brussels are January 2002 and is widely considered the most competitive North introducing full retail competition from July 2007. The rate of customer American retail energy market. It stands alone in U.S. markets for switching in Flanders slowed to around 5 percent in 2005 after hitting having separated its utility retail operations from distribution, a peaks of over 10 percent in 2004. market structure that has more in common with competitive retail The Netherlands introduced full retail competition for both electricity markets in Australia and Europe than with other U.S. states, most and gas in July 2004 and today it is one of the most active European of which employ a hybrid coexistence of regulated and competitive retail energy markets. In the initial months after full market opening, utility operations. In 2005, Texas exhibited customer switching most customer switching activity related to electricity rather than gas. around the 7 percent level. The Texas market is notable for the New South Wales in Australia has exhibited a steady increase sheer number of participants, with over 40 energy retailers actively in customer switching competing for customers. levels since full market opening in 2002. Slow Markets Customer switch rates in In the Slow category for 2005 hovered just above 2005 are the markets of 5 percent, much lower Finland, Denmark and than its neighboring Spain, with switching levels states, but clearly active. of less than 5 percent. New Zealand has the Switching in Finland has longest history of full historically been inhibited by energy retail competition a lack of customer of any country, dating back awareness, direct marketing to 1994. As is often activity and new market characteristic of a mature entrants. Denmark suffers energy retail market, New from small savings Zealand experienced potential, and in Spain the extremely high peaks of incumbent utilities remain customer switching early the dominant force with on – around 30 percent little incentive for customers per year in mid 2001 – to switch. before easing and stabilizing in later years. In Dormant Markets 2005, New Zealand Dormant markets are those exhibited customer in which all customers are switching around the 8 able to choose their retail percent level. figure 2 Map of the World’s Competitive Energy Retail Markets Indicating Hot, Active, Slow and energy supplier, but which South Australia opened do not exhibit significant Source: Peace Software and VaasaEmg. Dormant Status its doors to full retail levels of customer electricity competition in 2003 and customer switch rates quickly soared. switching. More than half of all markets monitored by the research project Principal reasons behind this rapid acceleration include the divestment of remain Dormant, with switching levels below 1 percent per year. This the retail customer base by the state government that removed the includes a number of European markets, such as Germany and Austria, incumbent brand advantage, the granting of switching credits to a portion which lack a consistent method for switching and a centralized market of the customer base and rising retail prices that motivated customers to registry infrastructure. shop around. Customer switching in South Australia eased in 2005. Almost all North American markets are classified as Dormant, Customer switch rates in Sweden have increased year-on-year since including New York, Pennsylvania, Massachusetts and Ohio. Their full market opening in 1999, reaching 10 percent in 2004 and holding market structures inhibit healthy competition through the continued steady for 2005. A winter 2005 survey published by market research role of the regulated utility as “last resort” supplier and issuer of the agency TEMO highlighted that a cumulative 32 percent of Swedish customer bill within their respective distribution territories. energy consumers have switched supplier at least once. The research provides a consistent and objective basis for Norway was one of the most active energy retail markets in the world benchmarking the competitiveness of retail energy markets around the in 2003 with customer switching around the 20 percent level, following world. The research shows the leading markets have sustained active a temporary but massive hike in wholesale prices and extensive utility levels of competition for many years and this should be viewed as proof marketing activity. Customer switching levels have since stabilized at the that energy retail competition can thrive in new markets provided they 7 to 10 percent level. are appropriately structured. ■
The Energy and Utilities Project
4