Retail competition universal service guarantee: the
industry perspective
Simone Mori
Florence School of Regulation, June 15 2007
Liberalisation of the Italian electricity market
1999
2002
2003
2007
2004
TWh
65
110
Captive
Free
121
144
175,8
87
Non shopping
61
26,5
183
33,6
98,2
110
128
46,1
• Decree
79/99:
customers
>30 GWh
• Decree
79/99:
customers
>9 GWh
• Consortia
which
members
consume >
2 GWh
• Consortia
which
members
consume> 1
GWh
• Law
57/2001:
customers
>0.1 GWh
• Law
239/2004:
all non
domestic
customers
• July 1st
2007: full
market
opening
2
The Italian model
Eligible
Customers
Power
exchange
Non- eligible
Customers/
non
shopping
Traders
DISTRIBU
TORS
Generators
Import
Single
Buyer
Distributors
3
Switching rate: European comparison
Large industrial
60-80%
40-60%
Small and medium enterprises
20-40%
0-20%
> 60%
Source: European Commission, Benchmarking Report 2005
S
E
C
i
i
R
t
P
i C
ti
th I t
lG
d El
30-60%
t i it M 4 k t
15-30%
0-15%
The Italian experience so far
Percentage of business customers having
switched to a new supplier (not a the supply
branch of the distributor), by volume
Italian free market shares (2005)
Enel
13%
58%
Edison
11%
32% *
Others
53%
Eni
9%
12%
Sorgenia
5%
Source: CRE, CNE, AEEG, Enel estimates (data refer to end 2006 for France and Italy, end 2005 for Spain)
* Large and medium sized industry only
5
EGL
9%
Public Service Obligations in the retail market–
some open issues
Universal
service
Supply of
last resort
Other
issues
• Who should provide it
• Who should be entitled to access the service (domestic
customers only, or also small businesses?)
• Non shopping customers who are not entitled to benefit
from universal service
• Customers switching to the retail market who are not able
to find a supplier (e.g. the supplier goes bankrupt)
• Pricing
• Social tariff
• Load profile issues
6
Default rate: pricing issues
WHAT IS MEANT BY REASONABLE PRICES?
1. Default rate is needed when competition in the retail market is still
limited – it should not prevent competition from developing!
2. Therefore, it should always reflect wholesale energy costs
3. According to some authors, unattractive rates should be applied to
non residential customers, in order to stimulate switching to the
retail market
7
Regulatory framework and retail competition
REGULATORY FRAMEWORK
• Transition period (4 years) with high
reference prices for households
• Regulated tariff rates all
customers
• No price controls for other customers
• They are set by the
Government on a yearly basis
and capped at RPI for domest
customers
• Undercutting by the most aggressive
new entrants
RESULTS
• Competitive stimulus for incumbents
• Limited switching to new
suppliers (below 15%)
• Development of innovative offers (dual
fuel, discounts for other services)
• negative effects on the
wholesale market
• High switching rates
8
Default rate: pricing issues (2)
“Reasonable” residential customers rates are generally higher than those paid by
businesses, because
– Commercial (advertisement, CRM, ..) costs are relatively higher for domestic
– In the retail market you typically have discrimination between customers as in
other commodity markets
Average rates for residential and business customers in Nordic countries
DOMESTIC
MEDIUM ENTERPRISE
9
The social tariff issue in Italy: domestic customers
regulated rates
D2 subsidized tariff
D1 cost-of-service
• Theoretical rate without
cross-subsidies
Yearly expenditure ()
D3 non subsidized tariff
• Domestic up to 3kW
• Holiday houses
• Varies according to
consumption
thresholds
• Domestic over 3kW
1.400
1.200
1.000
800
600
~ 18 million
subsidized sites
~ 11,5 million
subsidisizing sites
400
200
0
3.000
Source: Enel estimates
kWh/y
10
Load profiling
MWh
____
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
MWh
Total consumption
2
3
4
5
6
7
P
8
fil
9
d
10
ti
11
12
13
14
P
fil
15
16
d
17
18
19
20
21
22
Non hour met
24
____
1
_______
23
Residential_______ Business
24
ti
The introduction of digital meters will allow to introduce load profiles
based on time-of-day segments, reducing current distortions
11
BACK UP
12
Public Service Obligations in the retail market–
some open issues
Member States shall ensure that all household customers, and,
where Member States deem it appropriate, small enterprises…
enjoy universal service, that is the right to be supplied with
electricity of a specified quality within their territory at
reasonable, easily and clearly comparable and transparent prices
(art. 3.3, Directive 2003/54/EC)
Member States shall take appropriate measures to protect
final customers, and shall in particular ensure that there
are adequate safeguards to protect vulnerable customers,
including measures to help them avoid disconnection (art.
3.5, Directive 2003/53/EC)
In general, the Directive provides that all final customers
have the right to be supplied
Universal
service/
Default rate
Supply of
last resort
Social tariff
13
Domestic market opening, by year
Ante 2000
2000-2003
2004-2006
2007 and beyond
14
Competition in the Italian retail market is effective
Retail market, 2006 (295 TWh)*
Enel
13%
155
Others
53%
Eni
9%
Sorgenia
5%
78
62
Captive
Non shopping
* Net of self-consumption and losses
Market shares are based on Enel estimates
Edison
11%
Market rates
15
EGL
9%
Electricity market liberalisation
2005
% of electricity consumption
Declared
market
opening
Spagna
100
Francia
68
% having left the regulated market
% having changed supplier
Domestic
Domestic
Non domestic
Ba
8,0
20,0
0
ck
13,8
Note su esistenza tariffa
22 ÷ 25
19
up
Non domestic
0
15
• Regulated tariff for all customers
Italia
80
Portogallo
100
Gran
Bretagna
100
0
61,2
28,9
100,0
3,0
0
Circa 330.000
clienti su
7,7 milioni
idonei
60
16
16
48
100,0
Corrisponde a circa
126.000 clienti
(38% del
mercato libero),
in prevalenza
large industrial
~80
• No default rate in place
Germania
100
100,0
100,0
5
41
Large industrial,
solo 7% su
medium-small
industrial
Fonte: Commission of the European Communities: “Commission Staff Working document, accompanying document to the
Communication from the Commission to the Council on the European Parliament – Prospects for the internal gas 16
and
Universal service – role of the Single Buyer
Chi beneficia del
servizio
Chi svolge il
servizio
A quali prezzi
• Clienti domestici e piccole imprese connesse in BT
• Approvvigionamento sul mercato all’ingrosso: AU
• Attività di commercializzazione: distributori o società di vendita
collegate ai distributori
• Approvvigionamento: costo di acquisto di AU
• Commercializzazione: corrispettivo definito da AEEG in base ai
costi che sosterrebbe un venditore nuovo entrante (stand alone)
in modo da promuovere la concorrenza
17
Il servizio di salvaguardia - proposte Enel
Chi beneficia del
servizio
Chi svolge il
servizio
A quali prezzi
• I clienti che non rientrano nell’ambito della maggior tutela e non
scelgono il fornitore sul mercato libero o che si trovano privi di
fornitore per cause indipendenti dalla propria volontà
• Come per il servizio di maggior tutela ma senza AU (distributori
o società di vendita collegate svolgono anche
l’approvvigionamento)
• Eventuali aste dovrebbero essere limitate alla fornitura di ultima
istanza, ovvero dei clienti che, una volta passati sul mercato
libero, si trovano sprovvisti di fornitore (ad esempio per
fallimento del venditore)
• A prezzi in linea con quelli praticati sul mercato libero
18
Failure of retail competition: France and Spain
DOMESTIC MARKET OPENING: 2003 (SPAIN), 2007 (FRANCE)
REGULATORY FRAMEWORK
• Regulated tariffs for all customers, set by the Government on a yearly basis
• Tariffs are kept artificially low, limited correlation with wholesale prices
RESULTS
• Limited switiching rates
• Tariff deficit causing significant financial imbalances for the system(Spain)
• Negative effects on the wholesale market (e.g. booming dispatching costs in Spain,
fall in futures conctracts volumes in France, detrimental effect for investment in
new capacity)
Le niveau anormalement bas des tarifs régulés… constitue un obstacle à l’arrivée
de nouveaux entrants au profit d’EDF .... Il représente en outre un frein à
l’investissement dans de nouvelles capacités de production électriques European
Commission, January 10 2007
19
Successful competition in the retail market: UK e
Nordic countries
DOMESTIC MARKET OPENING: 1997-1999
REGULATORY FRAMEWORK
• No price controls (Nordic countries)
• Transition period (4 years) with high reference prices for domestic customers in the
UK
RESULTS
• Undercutting by the most aggressive new entrants
• Competitive stimulus for incumbent operators
• Development of innovative offers (dual fuel, discounts for other services)
• High switching rates
Net gains in terms of price reductions and innovative offers in line with
customers’ expectations
20
Failure of retail competition: France
DOMESTIC MARKET OPENING: 2007
REGULATORY FRAMEWORK
• The retail market for all non domestic customers has been open to competition since 2004
• However, regulated tariff rates are still in place for all customers, and they do not reflect
wholesale energy costs
- They are set by the Government on a yearly basis
- Capped at RPI for domestic customers
• The new Tarif de retour (TARTAM) established by law at the end of 2006 allows all
customers to switch back to regulated tariffs for two years
RESULTS
• Limited switching to new suppliers, other than the incumbent (below 15%)
• The introduction of TARTAM had immediate negative effects on the wholesale market: 30%
decline in Powernext Future market’s volume during 1Q 2007
Le niveau anormalement bas des tarifs régulés… constitue un obstacle à l’arrivée
de nouveaux entrants au profit d’EDF .... Il représente en outre un frein à
l’investissement dans de nouvelles capacités de production électriques European
Commission, January 10 2007
21