11 Functioning of retail electricity
markets for consumers
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16188/10
SEC(10) 1409
| Commission Staff Working Paper: The functioning of the retail electricity markets for consumers in the EU
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| Legal base | —
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| Document originated | 11 November 2010
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| Deposited in Parliament | 17 November 2010
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| Department | Energy & Climate Change
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| Basis of consideration | EM of 30 November 2010
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| Previous Committee Report | None
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| Discussed in Council | 3 December 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
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.
CHOICE
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).
Switching
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.
PROBLEMS AND COMPLAINTS
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.
FAIR AND AFFORDABLE PRICES
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.
CONCLUSIONS
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.
Conclusion
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
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