NEWS

Commentary: Assessing the benefits of an Open Electricity Market for households and small businesses

With the recent announcement on the liberalisation of the energy market, one expert from the National University of Singapore’s Energy Studies Institute discusses the potential benefits to consumers.



SINGAPORE: Households and small businesses in Jurong will be able to buy their electricity from a retailer of their choice or continue with SP Group at the regulated tariff from April next year, with the soft launch of an Open Electricity Market.

This option to shop around for electricity suppliers will be extended to the rest of Singapore in the second half of 2018.

With this move, Singapore joins a host of other nations such as the US, UK and most recently Italy and Japan, in providing energy retail choice to residents and business owners.

According to Minister for Industry and Trade (Industry) S Iswaran, the move intends to give consumers more flexibility in choosing a retailer and a package that suits their needs, which will bring benefits and lead to greater energy efficiency.

But will it really?

The short answer is that it ultimately depends on the consumer’s usage patterns and pricing choices.

POTENTIAL SIZEABLE COST SAVINGS

There may be substantial immediate cost savings for consumers who decide to switch from SP Group to another service provider.

Established electricity retailers like Tuas Power and newly registered electricity retailers like iSwitch have advertised rates with cost savings of more than 20 per cent compared to SP tariffs.

But how much households and small businesses actually save also depends on the structure of pricing plans, which may incorporate some element of dynamic pricing that uses real-time data on electricity demand to assign prices.

Depending on how high peak pricing is, and how consumers adjust their own electric energy usage patterns with changes in price, consumers may or may not enjoy cost savings.

One caveat may be that electricity use is more difficult to adjust even if prices change.



Working parents with young children, particularly those without domestic workers, will be hard-pressed to shift much of their home-based activities to off-peak periods on weekdays.

They will almost certainly need to do their laundry, have dinner and tuck their children into bed after an evening of activity with little wriggle room to change their energy consumption habits drastically.

Time-of-use pricing, which sees rates vary depending on when electricity is used may be more suitable for elderly retirees and adults with flexible working hours, as they may stay at home for longer hours in the day, and can thus adjust their electricity use more easily.

As a corollary, just think about whether the Electronic Road Pricing has altered your travel pattern as a driver.

Your answer is likely to be a mix of no, because the road you use is the only one to get to work and yes, because you stay away from the downtown area on weekday evenings if you don’t already work there.

Nevertheless, having a greater variety of pricing plans offers the potential of allowing consumers to choose one that best meets their personal needs.

After all, electricity prices in the UK dropped following the liberalisation of the energy market, due to efficiency gains and the industry’s increased competitiveness. The first wholesale electricity trading market went live in 2001, pushing prices 2.6 per cent lower in 2002, and then 13.6 per cent lower in 2004. 

Even though prices have risen since then, due to the combination of climate change, rising consumption of electricity and investments in infrastructure, the country continues to reap energy efficiency gains.



NEW BUNDLES

Over the first year when the market is fully liberalised, there may be some period of trial and error, as households and small businesses shop around to try out various retailers to find a bundle that reaps the best value for them.

Electricity retail markets in the US and Europe have evolved to an extent where electrical services companies offer competitive, bundled services.

These offers include tariff vouchers, the use of green electricity, integrated billing solutions which offer usage analytics, and even charity donations on behalf of the consumer, catering to various consumer preferences and introducing an element of product differentiation.

Such are just some examples of innovations derived from increased competition, all of which improve consumer welfare based on individual preferences.

The available bundles may be highly customised to consumer preferences and individual electricity consumption patterns. In Sweden, electricity companies offer a total of 4,200 types of contracts to households.

We may see an initial spike in activity, as companies embark on a customer acquisition frenzy with highly publicised attractive packages.

In some segments, there may be inertia if consumers take time to trust the reliability of the electricity services provided by new entrants, do not actively search for alternatives or switching requires administrative hassle.
 
Many may also wait for early adopters to assess complex pricing options to give their take and report on the benefits from their experiences.

The likely outcome is that most Singaporean households will remain with SP Group and the default pricing plan for a while.



More small business owners may move, as the predictability of their load patterns and greater cost savings make switching more attractive.

AFTER THE SWITCH

Once a consumer switches, however, it is no guarantee that low costs can be sustained, as there may be underlying price mechanisms that could increase electricity costs.

Large cancellation fees for switching prior to contract expiration, a minimum lock-in period, and minimum monthly usage penalty fees may be imposed, as is the case with retailers operating in some states within the US.

Just as if you end your mobile phone contract with a telco early, termination fees often cited as necessary to cover administrative costs will likely be charged, leading to demand stickiness.

Certainly, the availability of pricing information will help inform household and business choices and aid the authorities in regulating contractual arrangements both to safeguard consumer and business interests, and to ensure sufficient choices are available for effective retail competition.

With the retirement of old electricity generation plants in the coming years, the supply of electricity is projected to decrease, based on the 2016 EMA outlook report.

Taken in conjunction with an expected demand increase, this could be a source of concern for electricity prices, although EMA’s commitment to maintaining a 30 per cent minimum supply cushion will do well to allay fears.

Perhaps a relevant reason for liberalising the retail electricity market is to empower consumers who can conveniently make use of smart devices to reap potential cost savings.

The ability to automate household appliances so that they turn on or off based on pre-set price and demand thresholds is just one such example.

Benefits to consumers or otherwise, one key criteria by which to assess the success of an Open Electricity Market may be whether it incentivises consumers to be more prudent in their energy usage patterns.

A good outcome would be if households and businesses cut down on usage.



But if electricity plans impose minimum usage penalty fees or rates that are significantly discounted below SP tariffs, consumers may have less incentive to cut back on electrical consumption.

Minimum usage penalty fees have been defended by retail providers, to allow them to recover their operating costs associated with meeting the diverse needs of consumers. Such fees are common in the state of Texas, US, for instance.

It is still early days, and difficult to say if electricity demand is really that price sensitive and how much of the purported benefits of energy efficiency will be realised in the coming years.

But if you knew that your electricity rates will be reduced when you switch operators, wouldn’t you be less inclined to be mindful of your electricity usage?

Allan Loi is a research associate at the National University of Singapore’s Energy Studies Institute.