Transcript Tariffs for Cornwall Summit

Retail Market Review
Distribution Charging
Methodologies Forum
Dena Barasi
5 April 2012
Outline
• Reasons for launching the Retail Market Review
• Key findings
• Proposed remedies
– Tariff simplification
– Interaction with distribution charging
• Questions / discussion
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The Retail Market Review
Why we launched the Retail Market Review
• Response to earlier remedies appeared patchy
– Minimalist approach to compliance?
– Little action on Standards of Conduct?
• Ongoing questions over Big 6 behaviour
– Continuing similarity on pricing and hedging behaviour?
– Sharp rise in margins – indication of concerns?
Significant concern: is market working for consumers?
4
Tariff complexity – the theory
• Behavioural economics highlights two relevant consumer
biases:
– Limited capacity: the range of limitations on
consumers to assess the goods and services available to
them.
– Status quo bias: tendency of consumers not to change
from what they are currently doing unless they face
strong reasons for doing so.
Loss aversion and time inconsistency may also have an impact
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Tariff complexity – the evidence (1)
Limited capacity
Complexity
Complex domestic pricing more common in energy supply than any other sector
350
Number of tariffs
300
250
200
150
100
50
0
Jan 07
Jan 08
Jan 09
Online Green
Online Fixed
Online Other
Online Standard
1Office
Jan 10
Jan 11
Offline Green
Offline Fixed
Offline Other
Offline Standard
of Fair Trading (2010) “Advertising of Prices Annexe N: Consumer survey data tables”
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Tariff complexity – the evidence (2)
Status quo bias
Switching
Roughly 60% of domestic consumers claim that they have never
switched supplier
43% of switches in 2010 were made after talking to a salesperson
Only 16% via price comparisons sites
Evergreen contracts
75% of gas and electricity domestic consumers currently on
standard evergreen products
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Consumer preferences
Our research shows consumers want:
• greater simplicity
• tariffs to be comparable
• for there to still be choice and scope for innovation
This implies:
• structural remedies
• clearer information
• balance between simplicity and choice
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Suppliers’ margins and pricing behaviour
•
•
•
Gas margins have increased sharply but from a negative base
Electricity margins positive but declining since 2006
Higher margins on single fuel customers relating to legacy business
•
New evidence of asymmetric price response
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Summary of RMR findings
Based on our evidence we still believe there are incidences of
persistent consumer harm in the retail market that are being driven
by features of the market.
We believe the most important market features are that of sticky
customers and the advantages of the vertically integrated incumbents.
Our evidence also tells us that limited or complex information and
poor comparability between suppliers lowers engagement and leads
to poor switching decisions for some.
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RMR: Proposed Remedies
Core tariffs proposal
For standard tariffs
• All suppliers limited to one standard tariff per
payment method for single rate and E7 meters
• Compulsory standardised element set annually by
Ofgem and identified separately on consumers’ bills
• All other revenue recovered through a single unit
charge, set on a p/kWh format
For non-standard tariffs
• No restriction on number of fixed term products
• No auto-rollovers or adverse unilateral contract variation terms
• Price information presented in a ‘standard equivalent’ (p/kWh
format)
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Setting the standardised element
• Key component of approach for standard tariffs
• National standing charge will cover fixed network costs (i.e. DUoS
fixed charge)
• Other categories of cost may be included in standing charge (e.g.
environmental costs, metering…)
• Majority of network charges recovered through unit rate,
reflecting charging methodologies
• Unit rates differ between regions, reflecting network charging
methodologies
13
Standard tariff structure - options
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Standing charge (both options) and regional
adjuster (option 1 only)
Gas transmission
Gas distribution
Electricity transmission
Electricity distribution
Energy Company
Obligation*
Warm Home Discount*
Metering*i
Other supplier fixed costs*
Illustrative
annual cost for
average
consumer (£)
6
122
19
81
29 (gas), 29
(elec)
7 (gas), 7 (elec)
23 (gas), 15
(elec)
25 (gas), 25
(elec)
Recovered
through
standing
charge
Recovered
through unit
rate
x
x
x



(£13)
(£68)

x

x

x

x
* If included in the
standing charge.
i Metering cost
estimates are based on
traditional meters, not
smart meters.
The regional adjuster will be set annually (1 June) and we propose to change
network charges only once each year. However, Ofgem would monitor actual
costs incurred by suppliers and may propose a change if we observe significant
mid-year changes to network costs.
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Standing charge and regional adjuster
• National standing charge in both options
– Fixed networks charges recovered via standing charge
– Proposed treatment in licence: Schedule of numbers for early years +
automatic adjuster thereafter
Electricity
DUoS fixed charge (£/MPAN)
Gas
N/A
• Regional adjuster in Option 1
– Consumption-based network charges recovered via regional adjuster
– Historical consumption ≡ current consumption
– Proposed treatment in licence: formulae
Electricity
DUoS unit rate
TNUoS unit rate (peak charge*peak percentage)
Unit rate *
consumption
Gas
Distribution unit rate (tariff/load factor)
National Transmission System (NTS) exit capacity unit rate
(tariff /load factor)
Unit rate *
consumption
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Next steps
• Review consultation responses
– December consultation on domestic proposals
– February consultation on standardised element
• Re-assess proposals in light of responses
• Further research and analysis
• Next publication during summer 2012
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