Documents considered by the Committee on 19 January 2011 - European Scrutiny Committee Contents

11 Functioning of retail electricity markets for consumers



SEC(10) 1409

Commission Staff Working Paper: The functioning of the retail electricity markets for consumers in the EU

Legal base
Document originated11 November 2010
Deposited in Parliament17 November 2010
DepartmentEnergy & Climate Change
Basis of considerationEM of 30 November 2010
Previous Committee ReportNone
Discussed in Council3 December 2010
Committee's assessmentPolitically important
Committee's decisionCleared


11.1 After an earlier study carried out in the context on the Consumer Markets Scoreboard had identified the retail electricity market as one of the areas most likely to function poorly for consumers, a further study on the functioning of that market was carried out in 2010 by the European Consumer Markets Evaluation Consortium. This considered whether consumers can effectively benefit from a well-functioning market in terms of choice, price and quality, and whether they are able to make informed, rational and empowered choices (in other words, how easy or difficult it is for them to participate in the market and make the optimal choice). In particular, it considered such aspects as awareness and information, choice, prices, transparency and comparability of offers, switching, billing, problems, complaints and dispute resolution mechanisms.

11.2 The main findings of that study have now been set out in this Commission Staff Working Document, which focuses on the problems consumers face in making the right choice, and looks at the instruments which can help them to participate in the market: as such, it complements the measures on consumer protection contained in the third energy package (and now adopted as Directive 2009/72/EC).

The current document

11.3 The Commission notes that, in most Member States, retail electricity markets were not fully opened until July 2007, so that the process of developing a single European energy market is a recent one, and it adds that, even in markets with strong competition, consumers will not reap efficiency benefits if they cannot exercise informed choice. It therefore stresses the importance of appropriate measures being taken at an early stage, empowering consumers, providing information, raising awareness, facilitating comparison and providing redress, particularly for the most vulnerable. It also points out that the third energy package contained a number of consumer protection measures such as transparency of contractual terms and conditions, information and dispute settlement mechanisms, switching facilities, and safeguards, and it suggests that these measures now need to be put into practice. The Commission then examines the various aspects covered by the recent study.


11.4 The Commission suggests that consumer satisfaction depends greatly on whether prices are perceived as fair and reasonable, and that price competition depends, not only on structural market factors, but also on price transparency and comparability, and on consumer behaviour, with active consumers tending to enhance competition. In particular it looks at:

—  Finding better offers

The Commission notes that over 60% of shoppers instructed to search for cheaper tariffs succeeded in doing so within a day (on average), with the cheapest offer providing an average annual saving of €100 (equivalent to €13 billion, if replicated across the EU), though it points out that there were substantial differences between Member States.

—  Choice and complexity

The Commission says that the total number of electricity suppliers varies widely as between Member States, but that, in those in countries with a large number, suppliers are often small and operate locally. It notes that, in the EU as a whole, 866 standard tariffs were available to medium consumption consumers, with about 60% applying a fixed rate and being of an unspecified duration, but it also comments that the range of tariffs in some Member States is quite limited, and that certain types of tariff are not found at all in some countries. It says that, where a wide variety exists, consumers need to be fully aware of the associated conditions, should be given a period of notice before price changes are made, and not automatically be rolled over to contracts with different conditions.

The Commission suggests that liberalisation can be expected to lead to a greater number of tariffs on offer, and that there is some evidence of this. It also points out that higher market concentration tends to be linked to a smaller number of tariffs on offer, and that there are also typically fewer different tariffs where prices are regulated.

—  Price ranges within countries

The Commission says that the range of prices for consumers in different consumption bands provides a further indication of the level of choice and diversity, and of potential savings from switching to the lowest tariff. It provides an analysis of the dispersion of prices within the Member States, with an especially wide range available across all consumption bands in Finland, Belgium and Italy (and for low consumption in the UK).

—  Consumer attitudes towards choice

The Commission says that consumers like to have a choice of tariffs and suppliers, even though they often fail to exploit the opportunities this provides. However, if the choice becomes too complex, it may be difficult for consumers to select the best alternative, meaning that there are large potential benefits which are not currently being used. It suggests that one explanation for this is that consumers could be falsely reassured by a high perceived level of competition, and so expect prices to be low, regardless of the supplier, assuming that there is no need to search for alternative offers. However, it also acknowledges that other explanations could include lack of motivation or interest, or an impression that switching is difficult.

—  Comparing suppliers and tariffs

The Commission points out that nearly half of consumers do not know whether they are on the cheapest tariff, and that they have more experience of comparing different offers from their current supplier than from other suppliers, perhaps because of the perceived cost and inconvenience of switching suppliers. It also notes that fewer than 20% of consumers in all Member States had received assistance or advice in choosing their tariff.

—  Price comparison tools

The Commission says that these can greatly help to overcome obstacles, but that fewer than 50% of consumers had used a price comparison website, even though the evidence is that this makes it easier to compare offers from different suppliers. It suggests that this might be because consumers are not aware that price comparison tools exist for retail electricity; that they may not trust the sites; that competing sites sometimes give different information on the cheapest offers, leading to confusion rather than transparency; and that the offers covered on some websites may be incomplete or out of date.

—  Consumer understanding of consumption and the market

The Commission suggests that consumers may not make the right choice because they have limited knowledge of the market as regards products and prices, energy source, contract terms and consumer rights, and that many feel very poorly informed on the retail electricity market, allowing suppliers to exploit this to their benefit. In particular, it says that consumers were more aware of the amount they spend than of how much they consume, and that this problem was exacerbated by the use of estimated consumption (which is the dominant method in the majority of Member States, even though simple means, such as smart meters, exist for billing according to actual consumption).

—  Information on bills

The Commission observes that, although suppliers make information available, they tend to rely more on passive (website) provision than on active means, which it suggests may in itself be an indicator of poor market functioning, and it says that it is rare for consumers to receive better offers. It also highlights the importance of the electricity bill as an opportunity for consumers to consider their consumption, and points out that in most Member States bills are regulated so as to make them more transparent and understandable, though the level and clarity of the information provided varies considerably between Member States (and information not directly related to billing is often hard to find).


11.5 The Commission says that the percentage of consumers switching tariff or supplier within the last two years varies considerably across Member States, but that the low rate overall is consistent with the conclusion that consumers are not particularly active in this regard. It says that supplier switching rates increase with the maturity of the market, but that there is evidence that switching is still not as easy as it could be in some Member States, particularly where a change of supplier is concerned.

11.6 The Commission says that the main reasons for switching tend to be poor customer service, the environmental friendliness of the supplier, or moving house. On the other hand, apart from lack of awareness or limited access to information, a significant number of consumers do not switch because they had no local alternative, because of the length of the notice period required, because they believe the financial incentive to do so is not sufficient, or because they find the process too cumbersome. Consumers considering switching are often offered a better deal by their current supplier.


11.7 The Commission notes the importance of consumer problems being solved swiftly and satisfactorily, and that this can be achieved by complaints to suppliers or third parties and by seeking redress. It says that one in ten consumers across the EU has had a problem with a supplier in the last two years, notably power interruptions and problems related to prices, including inaccurate billing and infrequent meter readings. The Commission observes that in the majority of Member States regulation relating to the handling of complaints is in place, but that the level of complaints varies greatly between them, and that overall less than half of those making a complaint were satisfied with the way in which it was handled, particularly when this takes a long time. However, the Commission also records that more than one in three consumers who have a problem do not make a complaint, either because they do not know how (or where) to complain, because they think they are unlikely to get a satisfactory solution, because the sums involved are too small, or because complaining would be too difficult. Despite this, consumers very rarely complain to other organisations, such as ombudsmen or regulators, perhaps due to a limited awareness of their existence.


11.8 The Commission observes that the view consumers take on the fairness and reasonableness of price depends on whether they believe these are competitive and that, on average, prices are seen as fairer in Member States where they are not regulated. In terms of price levels in different Member States, it points out that consumer prices depend upon the commodity price, transport, distribution and supply costs, and taxies and levies, and that the dispersion of average prices across the EU is high (underlining the absence on an internal market), even when account is taken of differences in purchasing power. It says that the unit prices charged to households with lower overall consumption are higher, which has two unfortunate effects — because such households tend to be those on a low income, and because it provides an incentive to consume more electricity, which is contrary to the EU 2020 strategy. Finally, the Commission says that there are large differences between Member States as regards the proportion of consumers who have problems affording their electricity bills.


11.9 In summarising the survey, the Commission says that, although opportunities for better deals are widely available, liberalisation has not turned consumers into active participants, and that it is therefore vital to put in place appropriate mechanisms to address this, particularly in making information available. It suggests that guidelines for price comparison tools and in relation to the switching or suppliers or tariffs would be helpful, and that consumers would be aided by improved and simplified handling of complaints. It says that it will set up a multi-stakeholder working group to identify best practices in alternative dispute resolution in energy, and that there is considerable scope for making electricity more affordable for the most disadvantaged consumers and for enhanced price incentives to reduce consumption. It also says that European energy bodies should have a strong mandate to deal with consumer issues, and to facilitate the sharing of best practice.

The Government's view

11.10 In his Explanatory Memorandum of 30 November 2010, the Minister of State at the Department for Energy & Climate Change (Mr Charles Hendry) says that the Government considers tackling the issues of fuel poverty and energy affordability as top priorities, and that much work has already been done at EU level to improve consumer rights and information and to address the issue of vulnerable consumers, mainly through measures in the third energy package, which provides a strong European framework for protecting consumers. This includes provisions on switching suppliers, defining vulnerable consumers and introducing smart meters, measures which the Government welcomes (and which, in many cases, are already in place in the UK).

11.11 He adds that the UK agrees with the Commission that the internal energy market legislation should be fully implemented and enforced to ensure that the benefits are enjoyed by consumers throughout the EU, and that improving energy efficiency is a central part of the solution to the issue of energy affordability. It does not see any need for further EU legislation on energy consumer issues at this point, but would welcome more sharing of best practice, for example through the Citizens' Energy Forum.


11.12 Although this document is neither a legislative proposal nor a formal Commission Communication, the functioning of retail electricity markets is nevertheless relevant to the successful pursuit of the EU's Energy 2020 strategy,[48] which we have recently recommended for debate. Consequently, although we are clearing the document, we think it right to draw it to the attention of the House.

48   (32170) 16096/10: see HC 428-xi (2010-11), chapter 2 (15 December 2010). Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 7 February 2011