Customer-Centric Retail Markets - Eurelectric

Customer-Centric Retail Markets:

A Future-Proof

Market Design

EURELECTRIC Policy Paper, September 2011

The Union of the Electricity Industry–EURELECTRIC is the sector association representing the common interests of the electricity industry at pan-European level, plus its affiliates and associates on several other continents. In line with its mission, EURELECTRIC seeks to contribute to the competitiveness of the electricity industry, to provide effective representation for the industry in public affairs, and to promote the role of electricity both in the advancement of society and in helping provide solutions to the challenges of sustainable development. EURELECTRIC’s formal opinions, policy positions and reports are formulated in Working Groups, composed of experts from the electricity industry, supervised by five Committees. This “structure of expertise” ensures that EURELECTRIC’s published documents are based on high-quality input with up-to-date information. For further information on EURELECTRIC activities, visit our website, which provides general information on the association and on policy issues relevant to the electricity industry; latest news of our activities; EURELECTRIC positions and statements; a publications catalogue listing EURELECTRIC reports; and information on our events and conferences.

EURELECTRIC pursues in all its activities the application of the following sustainable development values: Economic Development  Growth, added-value, efficiency Environmental Leadership  Commitment, innovation, pro-activeness Social Responsibility  Transparency, ethics, accountability

Dépôt légal: D/2011/12.105/46

Customer-Centric Retail Markets: A Future-Proof Market Design

TF Retail Target Model Roel KALJEE (NL) Chair Maria Elena FERIGO (IT), Juan-José FERNANDEZ MARTIN (ES), Riina HEINIMÄKI (FI), Alexandra HERRMANN (AT), Vladimir HOLECEK (CZ), Henrik HORNUM (DK), Peter KORNMANN (SE), Akke KUUSELA (FI), Javier LATORRE (ES), Pauline LAWSON (GB), Stefano MATANI (IT), Lars OHLSSON (SE), Frode OTNES (NO), Andreas POULLIKKAS (CY), Davis SKULTE (LV), Jörg-Martin STÖCKLE (DE), Alesander VALDES AGUILAR (ES), Luc VAN NUFFEL (BE), Elliott WAGSCHAL (NL), Elsa WIDDING (SE) Anne-Malorie GERON (EURELECTRIC Secretariat), Bernardo RANGONI (EURELECTRIC Secretariat) Contact: Anne-Malorie GERON – [email protected] Bernardo RANGONI – [email protected]

Table of Contents Executive Summary and Recommendations

4

1. Introduction

6

1.1 Objective of the report

6

1.2 A customer-centric retail market model

7

1.3 Retail markets towards 2020

8

2. A Future-Proof Retail Market Design

10

2.1 Preconditions for well-functioning retail markets

10

2.2 Core retail market processes

12

Supplier as main point of contact

13

Supply and network contracts

14

Single bills tailored to customers’ needs

15

Efficient and robust supplier switching

16

Moving of end-users

17

Balance and settlement

18

Metering

18

Third party access to data

19

Information exchange between market operators and with customers

19

Customer data privacy and security

20

3. Ensuring a Market-Consistent Customer Focus

22

Credit management (debt and disconnection)

22

Supplier of last resort

23

Default supplier/default tariff

23

Vulnerable customers and energy poverty

24

4. Towards Converging Retail Markets

25

4.1 The need for interoperability

25

4.2 Harmonised retail market design: desirable and realistic?

26

ANNEXES

27

ANNEX I: A Customer-Centric Demand Response Market Model

28

ANNEX II: Retail Market Design Models in the EU

33

Customer-Centric Retail Markets: A Future-Proof Market Design | 3

Executive Summary and Recommendations Well-functioning electricity retail markets are indispensible to Europe’s energy future. As well as giving customers the chance to become much more active and involved, they will help to deliver low-carbon, reliable electricity at competitive prices. This report sets out a customercentric retail market model as part of a wider, future-proof market design. Our model consists of 10 key features:

1. Well-functioning wholesale markets: wholesale markets have a significant impact on retail markets. Efficient price signals for retail market customers require a well-functioning wholesale market with transparent price mechanisms. Similarly, large wholesale price differences within or between regions – and large differences in wholesale market design – will have detrimental effects on retail markets and may distort competition between electricity suppliers. 2. Clear roles and responsibilities: well-functioning retail markets need clear roles and responsibilities of all market actors while drawing a clear distinction between competitive and regulated players. In demand response markets suppliers will ‘package’ innovative products based on customers’ preferences and consumption profiles, while distributors (DSOs) will act as ‘neutral market facilitators’ by providing suppliers with the necessary information. New contractual agreements will have to be drawn up to satisfy the interests of both market players and system operators, for instance regarding the management of the supply portfolio and grid stability. 3. Removing regulated prices for end-users: customers should be able to benefit from marketdriven prices. However, price regulation at household level – still present in 19 out of 27 EU member states – is hindering the development of well-functioning retail markets. Moreover, regulated prices obstruct the development of demand response markets, as they prevent customers from realising the value of (shifting) their consumption. We therefore suggest the adoption of market-reflective commodity prices and cost-reflective grid tariffs. 4. Efficient information exchange: system operators, market players and customers need to share information efficiently to ensure high-quality retail market processes such as switching. Interoperability will benefit customers and should therefore be widely implemented, by agreeing on a minimum set of data to be exchanged and through compatible formats and functional open standards. Moreover, information exchange between suppliers and DSOs is evolving towards ‘data hub’ models, where information is sent to, received from and possibly stored in a central data hub, making it easier to verify data and exchange information. Although data hubs are not a prerequisite for efficient retail market processes, the rationale for data hubs will be strengthened by the increased amount of information exchanged in ‘smart energy systems’; the advantages of different ownership/control regimes should therefore be further investigated in terms of quality, cost-efficiency and governance.

4 | Customer-Centric Retail Markets: A Future-Proof Market Design

5. Customer interface: customers are at the heart of any retail market model. A simple customer interface can improve customer awareness and active participation in electricity retail markets. We therefore suggest a model in which suppliers act as the main point of contact for customers. 6. Single bills tailored to customers’ needs: customers should be able to receive a single bill covering both commodity prices and grid fee components. Moreover, smart meters will allow customers to receive accurate bills frequently enough to manage their consumption. Once smart meters are fully rolled out, customers should be able to receive monthly bills based on actual consumption. Alternatively, suppliers should be allowed to offer customers the possibility to opt for an equally spread payment scheme with an annual reconciliation bill, in which case they would receive frequent information on actual consumption through other means such as mobile phones, in-house displays, or the Internet. 7. A market-consistent customer focus: the focus on customers, for instance in terms of customer protection, should be consistent with competitive, well-functioning retail markets. This means inter alia that measures related to suppliers of last resort or default suppliers/ tariffs are well-targeted, do not limit customers’ ability and interest in choosing between market-based competing offers, and are in line with market dynamics such as price levels or tendering processes. 8. Reliable sources of information: customers can only reap the benefits of competitive and well-functioning retail markets if they are well-informed about their rights, the offers available on the market and the distinction between competitive and regulated actors. They therefore need reliable sources of information, for instance through the ‘single point of contact’ prescribed by Directive 2009/72/EC. 9. P rivacy and data confidentiality: customers’ confidence is crucial to ensure the wellfunctioning of both present retail electricity markets and future demand response markets with smart meters. This requires adequate safeguarding of customers’ privacy and data confidentiality. 10. Converging retail market design: the harmonisation of market design and major processes should be regarded as a useful policy option rather than as an objective in itself. The potential costs and benefits of EU-wide retail market harmonisation should therefore be investigated further. A stepwise approach should be adopted, in which the necessity of further steps is evaluated based on the experience gained after each step.


1

Introduction

1.1 Objective of the report The liberalisation of the energy sector was undertaken to create an internal energy market with competitive prices, better services and improved security of supply. Properly functioning retail markets are essential to complete the internal energy market, allow citizens to fully reap the advantages of competitive markets and move towards the decarbonisation of the electricity sector. Electricity is a key solution to the challenge of climate change. With its potential for carbonneutrality, electricity is an ideal vector to contribute to the decarbonisation of the European economy. Electricity and highly efficient end-use electric technologies such as electric vehicles (EVs) and heat pumps will play an increasing role in modern societies, thus combating climate change, achieving greater energy efficiency and creating economic growth and jobs.

The development of new market models should have customers at its very heart.

The integration of intermittent renewable energy sources (RES) into the power system will require an evolution towards ‘smart energy systems’. This implies adequate regulatory incentives to ensure that the necessary investments are delivered, as well as the development of new market models which should have customers at their very heart. Building on clear roles and responsibilities for suppliers (as major points of contact for customers) and distribution system operators (DSOs) (as neutral market facilitators), new contractual agreements will be established to ensure proper market functioning, smooth processes, and security and reliability of supply. In designing well-functioning, competitive retail markets to the benefit of customers, the principles should be the same as for any other market; in particular, to the customer, buying electricity and electricity services should ‘look’ like any other purchase1. Customers are genuinely empowered wherever they can make an informed choice based on a variety of offers, with the confidence that

1 The only exceptions relate to the specific features of electricity, such as the fact that it is intangible, the need to protect those for whom a short-term loss of electricity supply would be potentially life-threatening (e.g. reliance on kidney dialysis machine), and the need to ensure universal supply for residential (household) customers. Electricity is, however, not the only essential good, and provisions to ensure citizens can afford essential goods are part of wider economic and social welfare policy.


any potential problems will be properly resolved and/or compensated. Customers will have a choice of products, services and suppliers wherever retail supply companies can freely enter the market, innovate to meet customers’ differing expectations and compete on a level playing field. This paper considers the market design necessary to enable electricity retail markets to function optimally from a macro-economic perspective – taking into account the specificities of power markets – and to ensure that suppliers and energy service companies (ESCOs) can develop their products in line with technological and market developments. This will in turn allow the full potential of smart meters and smart grids to be realised as well as the delivery of appropriate offers with regard to local power and heat generation, smart heating and cooling solutions, electric vehicles, domestic appliances, and efficiency and load optimisation services.

This report aims to elaborate a customercentric retail market model, derived from customer needs.

1.2 A customer-centric retail market model This report aims to elaborate a customer-centric retail market model, derived from customer needs. These are: Choice of different supply products and companies • Customers can freely choose from a range of different products and supply companies, while supply companies can innovate in terms of price structure and contract types, products and services. • Customers can base their choices not only on price and supplier brand, but also on features such as billing type and frequency, detailedness of information, level of service, or type of generation fuel mix (green, grey, etc.). • A variety of offers is available to meet customer preferences. Market-based prices • Customers benefit from competitive market-driven prices and from their ability to choose and pay for only the product/service level they want, without having to subsidise services they do not use. Confidence in market functioning and operators • Customers benefit from ‘carefree choice’ and smooth execution of the supply agreement. • The supplier switching process is straightforward and does not represent a barrier to switching. • The terms of contracts are clear and transparent, allowing customers to base their choices on them, rather than on price alone. Reliable and easily accessible information • Customers can easily access all the information necessary to compare relevant offers and make a choice, i.e. information on product, type of contract and price. • Customers can access general information on the market. The information required is member state specific because national markets are at different development stages regarding for instance customer rights and obligations, minimum supply standards, customer protection, and supplier switching procedures.


• Customers receive clear, transparent and accurate bills frequently enough (based on their preferences) to manage their consumption, as well as information on payment terms and recovery procedures if the bill is not paid in time. • Contract terms contain all the relevant information including, where applicable, the end date of the contract and what terms apply thereafter (e.g. automatic renewal or return to standard product). Adequate customer protection rules • General customer protection legislation should also apply to electricity supply, and sectorspecific social legislation should in principle not be necessary. Should specific policy measures exist or be introduced, they should be proportionate and not hinder market functioning or distort retail market competition. • Protection from unfair commercial practices is important, as it is for other retail markets. • Legislation should ensure protection from interrupted supply if a supply company goes bankrupt. • Customers should be able to easily access their supply companies’ complaint/customer service and third party complaint resolution bodies.

1.3 Retail markets towards 2020 A clear distinction between competitive and regulated market segments should be maintained.

The increasing share of decentralised generation from intermittent RES, the possibility for customers to become ‘prosumers’ that both consume and generate electricity, and the diffusion of EVs and electric heating and cooling will all require the evolution towards ‘smart energy systems’.

To ensure the successful development of demand-side participation customers have to be at the very core of demand response markets with smart meters. This will only be possible under the following conditions2: • Suppliers should remain customers’ main point of contact for all (major) processes. This will simplify and clarify market processes for customers and therefore ease their engagement and active participation in markets – even with the increased complexity of the future ‘smart energy system’. • A clear distinction between competitive and regulated market segments should be maintained:

— On the one hand, suppliers should have non-discriminatory access to relevant information and their own customers’ data to offer innovative products based on customer preferences. Moreover, suppliers will further develop their role as energy services providers. They will increasingly offer energy efficiency services, will use load flexibility for load management and balancing purposes and will offer this flexibility to system operators for grid congestion management.

— On the other hand, DSOs should have an adequate overview of the grid and of existing innovative contracts, in order to neutrally facilitate well-functioning retail markets by providing the necessary information to market players in a timely, efficient and non-

2 See Annex I for a more detailed vision of the future customer-centric demand response market.


discriminatory manner, while at the same time maintaining grid stability and allowing the integration of intermittent RES into the power system.

Demand response markets need to be supported by an appropriate regulatory framework.

• Demand response markets need to be supported by an appropriate regulatory framework. Suppliers will design creative and dynamic feedback programmes to provide customers with information that allows them to actively manage their consumption. Yet this will not be sufficient to change electricity consumption: active demand response will only become possible once regulated prices for end consumers – currently present in 19 out of 27 EU member states – have been removed (or have been made market-reflective) and customers become more aware of the value of shifting their electricity consumption. Similarly, business as usual will not deliver: DSOs must be given a chance to invest in smart grids and manage their networks more intelligently (where necessary). In most member states, the regulatory framework rewards DSOs for following business-as-usual approaches – investing in ‘copper, aluminium and iron’ – and provides little to no economic incentives to invest in innovative solutions such as smart meters, supervision and monitoring devices, and network automation. Policymakers should address this issue to ensure that incentives for smart grids exist and that demandside participation solutions can take off. • C ustomers will need to have confidence in demand response markets, which includes adequate data protection. It should always be clear to customers who has access to their data and what is done with it. At the same time, a market framework needs to be developed which allows innovation and makes full use of technological potential to offer products that are attractive to customers. • Finally, new market models also mean that new contractual agreements will have to be established between suppliers and DSOs to ensure that the mutual interests of both market players and system operators are satisfied (concerning, for instance, grid security, congestion management, and management of the supply portfolio).


2

A Future-Proof Retail Market Design

2.1 Preconditions for well-functioning retail markets Based on the customer needs in section 1.2, we can derive the following preconditions for well-functioning retail markets: Fully liberalised wholesale and retail markets

A well-functioning wholesale market with transparent price mechanisms is essential to drive efficient price signals for retail market customers.

• A well-functioning wholesale market with transparent price mechanisms is essential to drive efficient price signals for retail market customers. Large price differences within or between regions – as well as large differences in wholesale markets design – will have detrimental effects on retail markets and may distort competition between electricity suppliers. • To facilitate the creation of the European electricity market and the promotion of liquid markets that are easily accessible by suppliers for procurement and balancing, cross-border congestions should be progressively reduced. • Competition conditions should be met as defined in EU competition law. In particular, regulated tariffs3 should exist only where necessary to facilitate opening of a market,4 and barriers for new suppliers to enter the retail market should be low, for instance through interoperable data and similar supply licences across the EU. Unfortunately, according to the European Regulators Group for Electricity and Gas (ERGEG), regulated household prices for end-users still exist in 19 out of 27 European member states, as shown in Figure 1 below5. 3 Examples include use of regulated tariffs in pre-competitive markets to ensure head room for new entrants, specific and well targeted where they are used as a substitute for social welfare; and supplier of last resort tariff to ensure a fair opportunity for other suppliers to win the business of such customers following the transfer from a bankrupt supplier. See opinion of advocate general Colomer, case C-265/08, 20 October 2009: “if public service can be defined, as noted by the French Conseil d’Etat as ‘the extension of the market by other means, where the market has failed, and not the other way around’, then in a situation of diminished competition, the state would have to intervene in order to mitigate the effects of this difficult situation. Yet state involvement in the market must be limited so as not to postpone true liberalisation indefinitely, and should focus on the protection of the rights of the consumer.” 4 For instance imposing price caps in uncompetitive markets for a defined and limited period in order to protect customers against market abuse. The price caps should be sufficiently high so as not to discourage new entry and expansion of existing competitors. 5 By definition, “an end-user regulated price is a price subject to regulation (or control) by a public authority, as opposed to an end-user price set exclusively by supply and demand. The regulation can take different forms, such as setting or approval of prices, price caps or various elements of these” (ERGEG, 2010).


Figure 1: Overview of end-user price regulation at household level in the EU Market opening Country

Final market opening date

Austria

2001

Belgium

Jan-07

Price regulation on 1 January 2010 Households

Small businesses

Mediumsized to large business

Energyintensive industry

2013-01

2013-01

2010-04

2010-04

2010-10

2010-10

Bulgaria Croatia Cyprus Czech Republic

2006

Denmark

2003

Estonia

2009

Finland

1997

France

Jul-07

Germany

1998

Greece

Jul-07

Hungary

Jul-07

Iceland Ireland

2005

Italy

Jul-07

Latvia

Jul-07

Lithuania

Jul-07

Luxembourg

Jul-07

2015-01

2013-01

Malta Netherlands

2004

Norway

1995

Poland

Jul-07

Portugal

2006

Romania

Jul-07

Slovak Republic

Jul-07

Slovenia

Jul-07

Spain

2003

Sweden

1996

United Kingdom

1990

2011-01

2012-12

2010-01

2010-01

2009-07

2008-07

2011-12

2009-07

Price regulation End-user price regulation in open market segment removed between July 2008 and January 2010

YES NO Closed market

Segment closed in July 2008

N.A. XXXX-XX

Scheduled date of price regulation removal

Source: ERGEG (2010) Customer-Centric Retail Markets: A Future-Proof Market Design | 11

• The basic information requirements and business processes should be efficient and compatible so as to allow flawless implementation and data exchange between market participants. • The customer focus should be consistent with well-functioning markets. When addressing energy poverty and the protection of vulnerable customers – which are member state specific – by imposing energy supply prices (social tariffs), this support should target a well-defined group and result in minimum distortions to the retail market. Established and robust retail market processes

Retail market processes should be simple and reliable, and encompass well-defined data requirements and formats.

• Retail market processes (e.g. switching) should be simple and reliable, and encompass well-defined data requirements and formats so that market players can share critical information efficiently and swiftly. • Procedures should be in place to ensure a continuous energy supply, e.g. supplier of last resort provisions should be applied in cases of failed supplier switching or bankrupt supplier.

Reliable sources of information • Customers should have access to clear facts on how to choose a supplier and on the switching process; on how to make a complaint and when and how to seek dispute resolution and redress; and on customer protection legislation and its application to energy supply. • Clear information should be provided on the roles and contact details of suppliers and DSOs. For instance, consumers should be confident that switching suppliers will not affect quality of supply. • According to Article 3 (12) of Directive 2009/72/EC, member states shall provide “single points of contact”. These can represent a possible – but not exclusive – reliable source of information for consumers. Adequate complaints, dispute settlement and redress procedures • Customer complaints should, in the first instance, be handled consistently within a reasonable timeframe by the suppliers themselves. • Where a complaint is not resolved satisfactorily by the supplier, an independent service (e.g. ombudsman) should be available to settle the dispute and to make recommendations on redress, including a proposal for compensation payments. This should provide a fair and cost-efficient mediation process in cases where the cost of referral to a court might be disproportionate to the harm and appropriate level of compensation. Both the consumer and the supplier should in any case have the right to go to court6.

2.2 Core retail market processes Based on the identified preconditions for well-functioning retail markets and following the 2007 EURELECTRIC ‘Reference Retail Market Model’7 this chapter briefly analyses the market design models implemented in the EU as to the main retail market processes, and provides some recommendations. A more extensive overview with data on 15 member states is provided in Annex II. 6 EURELECTRIC, “Response paper to EC Consultation on the use of Alternative Dispute Resolution (ADR) as a means to resolve disputes related to commercial transactions and practices in the EU”, March 2001, Brussels. 7 EURELECTRIC, “Reference ‘Retail Target Model’: Bringing the Benefits of Competitive Electricity Markets to the Customer”, April 2007, Brussels.


Supplier as main point of contact An essential part of market design concerns the organisation of the customer interface. The customer interface defines how the market actors and different processes appear from the customer’s point of view. It has a significant influence on processes and on the roles and responsibilities of different market actors. EURELECTRIC believes that suppliers should constitute the major point of contact for customers. Customers can better relate to the electricity market if it ‘looks’ like other purchases. For instance, a customer buying goods via the Internet can choose the delivery service they are willing to pay for but have no interaction with the transportation company; delivery is both arranged and billed by the retailer. Customers choose the service based on the delivery date (next day, one week) but not on how it is achieved, i.e. by plane, overland, by courier or by postal service. A customer purchasing goods in a store can request delivery (e.g. for furniture) and again make arrangements and payments in the store where the goods are bought rather than with a separate delivery agent. Similarly, the customer interface model advocated here, ‘a customer-centric model with the supplier as the major point of contact’, implies that most customer issues are handled by the supplier. Examples of such issues – based on today’s retail markets – include billing, moving in/out, supplier switching and questions about consumption, fuel mix and so forth.

Suppliers should constitute the major point of contact for customers. [...] This ensures clarity and simplicity for customers and therefore facilitates their active involvement in the market.

The customer-centric model means that the customer has just one counterpart for all (major) matters: the supplier. This ensures clarity and simplicity for customers and therefore facilitates their active involvement in the market. The need for such a market model is likely to be strengthened within demand response markets with smart meters, because of the increased complexity and amount of information exchange in tomorrow’s “smart energy systems”. However, this model does not imply that all customer issues should be handled by suppliers. Strictly network-related issues will remain the responsibility of DSOs, defined by Directive 2009/72/EC as the “natural or legal persons responsible for operating, ensuring the maintenance of and, if necessary, developing the distribution system in a given area” (Article 2.6). Such issues include interruptions, technical aspects of metering and metering devices, quality of supply, new connections, and compensation for failing to meet specified standards of supply. Moreover, a clear distinction between the competitive and the regulated segments of the market is required to make sure that customers fully reap the benefits of competitive electricity retail markets in terms of prices, quality and variety. Within the regulated segment of the market, DSOs “shall be responsible for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity and for operating, maintaining and developing under economic conditions a secure, reliable and efficient electricity distribution system” (Art. 25.1). By providing access to the necessary information on a non-discriminatory basis, they will neutrally facilitate the market. Within the competitive segment of the market, customers will then be able to choose between different offers and suppliers.


Supply and network contracts All customers have an electricity supply contract with their supplier and – in general terms – a network contract with the DSO8, as illustrated in the figure below. Figure 2: Customer contracts: a generic representation

Competitive segment

Supply contract with supplier: prices, fuel mix, terms and conditions for termination of contract, moving in/out, etc.

Customer

Network contract with DSO: interruptions, quality of supply, compensation for failing to meet quality standards, new connections, etc.

Regulated segment

Source: EURELECTRIC elaboration

It is worth noting that the results of a recent study on supply contracts, conducted for the European Commission, show that the number of supply tariffs offered to household customers is generally very high: 96 on average9. These tariffs differ, for instance, in terms of: • fixed or variable prices; • duration (1 year, 2 years or unspecified); • unique or peak/off-peak prices, as with the “Time-of-Use” (ToU) offers already present in several member states and characterised by higher ‘on-peak’ prices during daytime hours and lower ‘off-peak’ prices during night and weekends; and • whether the electricity is produced from green or grey sources. The roll-out of smart meters will certainly increase the available number of offers for customers. Demand response means that customers will be encouraged to be more flexible in how much electricity they use and when, for instance through “dynamic pricing” offers. Given the ability to easily manage their electricity use, information about its value and packaging of attractive products, customers can be willing to change that use. For this to happen, end-user price regulation will however need to be removed. Since flexibility is a valuable resource for both market and system operators, we can envisage that suppliers will sign contractual arrangements with DSOs in order to provide them with the load flexibility they might need for grid management purposes. As highlighted by the Customer-led Network Revolution project recently granted by Ofgem, “if distributors were to control demand response without engaging suppliers, it would threaten suppliers’ ability to balance their portfolios. As a result, the need for the network operator to contract for reserve would increase, 8 See Annex II for more detailed information on the models identified across EU member states. 9 ECME Consortium, “The functioning of retail electricity markets for consumers in the European Union”, November 2010. 10 CE Electric UK, “Customer-led Network Revolution”. Project granted by Ofgem, 20 December 2010, Appendix 4: Methodology, p.14.


and this would in turn lead to increased costs for consumers”10. Moreover, situations might arise in which the interests of suppliers to use load flexibility for supply portfolio management will be in direct conflict with the need of DSOs to maintain local grid stability. Such situations will have to be resolved through a new set of contractual agreements, to ensure that the different interests of all market players are safeguarded. Finally, as regards contract termination, it is worth noting that the switching requirements set out in the electricity and gas directives (switching within 3 weeks) refer to the switching process rather than the contractual conditions. In a fixed-term contract the contract itself should clearly set out what happens at the end of the contract and what happens in the case of early termination, which may constitute a breach of contract. Early termination fees can apply in line with general contract law, as for other markets such as telecoms and internet services. The fees usually reflect the loss to the company and make clear to both parties what happens if the contract is broken, removing the need for court referral in straightforward cases. In some member states, suppliers can prevent a customer switch and thus protect the customer from these fees if they have simply failed to take account of their existing contract in making their decision to switch. Single bills tailored to customers’ needs Energy bills are an essential instrument for consumers to choose the supplier that best meets their needs. According to the 2009 European Commission’s Good Practice Guidance (GGP) for Billing, “the bill is the primary means by which consumers obtain information on their consumption and on the price they pay. It is, indeed, an important tool which helps consumers to manage their consumption and, if possible, consume less11.” As shown in the figure below, most EU member states have adopted a market model in which suppliers generally send customers a single bill combining both the commodity and the grid fees, while also comprising related costs such as taxes12. The fundamental advantage of this customer invoicing model is that customers have just one counterpart (i.e. the supplier) for all major matters. Figure 3: Number of bills that customers generally receive in EU member states

Numbers of bills

30 20 10 0 One bill

Two bills

Source : ERGEG Status review on the Implementation of EC Good Practice Guidance on Billing (2010)

11 European Commission (DG SANCO) Working Group on Billing, “Good Practice Guidance for Billing”, 2009, Brussels. 12 Figure 3 shows the number of bills that customers receive ‘in general’, though country-specific situations can be more complex and include exceptions. For instance, in Austria suppliers can choose to use either combined or separate bills.


In a customer-centric model with the supplier as the major point of contact customers receive a single combined bill for both commodity prices and grid fee components.

In a customer-centric model with the supplier as the major point of contact customers receive a single combined bill for both commodity prices and grid fee components. The clarity of this model is likely to facilitate customers’ participation in the market. EURELECTRIC therefore welcomes the ongoing assessment in the Nordic region (Denmark, Finland, Iceland, Norway and Sweden) of combined billing regimes, which includes an evaluation of the implications of a mandatory vs. a voluntary adoption of combined billing.

In an alternative model, currently implemented in some (Nordic) countries (Denmark, Sweden, Finland13), customers receive two separate bills: one from the supplier for the commodity price and another one from the network operator covering the grid fee. Smart meters will enable customers to receive accurate bills more frequently, and to receive information frequently enough (according to their preference) to manage their consumption. Billing frequency will therefore be an important means for suppliers to differentiate their commercial offers and to compete against each other. For this reason, once smart meters are rolled out customers should be able to either receive monthly bills based on actual consumption or, when offered by suppliers, choose an equally spread payment scheme with an annual reconciliation bill. In the latter case, which is used widely and is preferred by many customers, information on actual consumption would be provided on a frequent basis through other means (e.g. monthly bill, Internet, mobile solution or in-house display), selected according to costefficiency criteria and local market features. Efficient and robust supplier switching In a well-functioning retail electricity market, customers actively choose their supplier. This means that customers have confidence in the market and are not afraid of switching: they know they will not be cut off when changing supplier and will receive the right bill. In addition, clear and transparent contract terms allow customers to make an informed choice. Behind the scenes, efficient and effective data exchange between market actors should be in place to ensure high-quality processes. The meter operator should provide the necessary information to market players in a timely, efficient and non-discriminatory manner, while at the same time safeguarding customers’ privacy and data confidentiality. Figure 4: Information exchange behind supplier switching Metering Access to consumption information Change of supplier Market facilitation

CUSTOMER CHOICE

13 In Finland, customers receive two bills when they switch to an alternative supplier, while they continue to receive a single bill if they do not switch.


We can identify two different market models for supplier switching, which can be found equally across the EU. In the first model, the DSO simply registers the new supplier contacted by the customer, and then notifies the old supplier of the switch (NL, NO, SE, IT, ES, FR, DK, GR). In the second model, the DSO has to check with the old supplier that the switching is correct, e.g. does not imply a breach of contract. The DSO then sends either a positive or a negative supplier switching message to the new supplier (FI, DE, CZ, HU, AT, UK). As a result, supplier switching in the first model is a rather straightforward process, where the customer is responsible for contract breach fees and bad debt is a suppliers’ risk. In the second model, by contrast, the switching process is subject to evaluation and can be blocked, under certain conditions, by the old supplier. In some markets objections to switching are normal practice where the contract allows it, if the customer requests it, or for outstanding debt. However, in some markets objections are not permitted under any circumstances. In these cases, fees are charged for switching within a minimum contract period and it is considered the customer’s responsibility to know when the fee applies. If there is a switching error or a fraudulent switch then the customer should be able to contact their original supplier and ask for the switch to be cancelled. Therefore objections to switching should be possible within the process. Notwithstanding the fact that neither model is more efficient than the other, the current differences in national rules and practices regarding switching, as well as in the data to be exchanged, may constitute an entry barrier for suppliers. Harmonisation could offer substantial benefits to suppliers who want to enter other electricity markets across the EU and, through market competition, ultimately benefit customers with lower prices, more choice and better quality. However, harmonisation would also lead to stranded investments for all market parties and would necessitate substantial efforts to adapt ICT systems. These costs might indeed be higher than the direct benefits. EURELECTRIC is therefore closely following the implementation of a harmonised supplier switching model in the Nordic region. Moving of end-users Moving can be split into two separate business processes: moving out of a consumption place and moving into a consumption place. Two different market models exist in the EU. In the first model the supply contract is considered ‘personal’: it moves with the customer, though it takes into account the local market features that, for instance, are likely to influence grid tariffs. When customers move, they can choose to maintain their contracts with their old suppliers (NL, IT, NO, FI, CZ, DE14). In the second market model, the supply contract is fixed to the connection and automatically ends when the customer moves. In this case, after having contacted the old supplier – which will in turn inform the DSO(s) – customers will have to arrange a new supply contract for their new address. This new contract could be with the old supplier or a different supplier (SE, ES, DK15, FR, HU, GR).

14 In Germany it is possible though not mandatory to maintain the supply contract when moving. 15 I n Denmark it is possible to maintain the supply contract when moving, but customers need to actively request it; otherwise, moving will automatically imply switching to a new supply contract.


It is worth noting that in the Nordic region harmonisation of the most important messages and the timetable to send them is considered essential in order to ensure swift and reliable moving processes, as is the case for the process of supplier switching. However, whether the supply contracts will be terminated when the customer moves out of a consumption place is a contractual issue whose harmonisation is not critical. Balance and settlement Balance and settlement are essential processes to settle any imbalances between the supply and the consumption of electricity. Balance and settlement represent two fundamental processes, for which a market model common to all member countries can be identified. In this common model, each access responsible party is responsible for balancing its own portfolio, while the TSO is responsible for residual imbalance and relies on grid operators for meter reading. Regarding settlement, on the other hand, grid operators – usually TSOs rather than DSOs – are responsible for the allocation process, which is yearly in most cases. The reconciliation is often done by an ad hoc settlement company appointed by grid operators and suppliers. Metering Metering is a crucial behind-the-scenes process for establishing consumption data for billing purposes. The meter reader has to provide consumption information to the relevant market players in a timely, efficient and non-discriminatory manner, whilst safeguarding consumers’ privacy and data confidentiality. In most EU member states, the DSO both owns the metering assets and is responsible for meter reading, for estimation (based on synthetic load profiles) and for validation of metering data. The established consumption data is communicated to the supplier, who is then able to correctly bill the customer (BE, NL, AT, IT, NO, FI, CZ, DE, DK, FR16, HU, SE, GR). Although this model is the most common across the EU, the frequency of meter reading varies among countries. Often it is yearly for low voltage (LV) customers, but in other cases it depends on thresholds related to consumption per year, ampere or other criteria. In addition, alternative models exist. For instance, UK suppliers are responsible for the provision of a meter as well as for meter reading and estimation. As competition has been introduced in the metering activity, suppliers contract with third parties (either DSOs or independent meter asset providers) to fulfil their obligation. Similarly in Germany, while it is usually the DSO who is responsible for meter reading, it can also be the supplier (e.g. by offering services which comprise meter reading) or a third party: customers are free to decide. Smart meters will allow more frequent and accurate consumption data. In Italy, where smart meters are already rolled out, monthly meter readings are available for LV customers. Finnish legislation prescribes that 80% of all consumption places will have to be metered hourly and read daily by 2014. EURELECTRIC believes that meter readings at 15-minute intervals should be technically possible in view of a consistent approach and complete synchronisation with wholesale markets (notably for balancing and settlement purposes), but its actual use should be left to market dynamics. 16 In France, distribution meters – as well as networks – are owned by the authorities in charge of organising distribution (i.e. local authorities).


Third party access to data Access to data is essential to ensure the smooth functioning of the retail market. For instance, commercial data is needed for a smooth switch of suppliers, for billing and provision of energy services, and for suppliers to make reliable product offers to customers. At the same time, access to technical data is essential for operational control of the grid and to realise the benefits of smart metering and smart grids. This implies that suppliers should have access to relevant information and their own customers’ data on a non-discriminatory basis in order to be able to “package” innovative products and services based on customer preferences. At the same time, DSOs should have an adequate view of the grid and of the innovative contracts between suppliers and customers, in order to (i) neutrally facilitate well-functioning retail markets by providing the necessary information to market players in a timely, efficient and non-discriminatory manner; (ii) while at the same time maintaining grid stability and allowing the integration of intermittent renewable energy sources into the power system. It is thus essential that suppliers have access to commercial data (e.g. consumption), while DSOs have access to the technical data (e.g. metering point identification number) necessary to manage the grid effectively and, where relevant, in a smarter way.

Suppliers should have access to relevant information and their own customers’ data on a non-discriminatory basis in order to be able to “package” innovative products and services based on customer preferences.

Information exchange between market operators and with customers Data exchange is one of the most critical processes for a well-functioning electricity retail market. To guarantee a flawless information exchange between DSOs, suppliers and customers, both consumption information and ‘relevant consumption point’ data should be shared among relevant market players in a timely and efficient manner. Within the EU we can identify three different models through which information is exchanged between the metering operator (usually the DSO) and the supplier. 1. In the first and currently most common market model, information exchange is direct and bilateral: all market parties directly send one another standardised messages (e.g. IT, NO, FI, ES, SE, DE, DN, FR, HU, GR). 2. As an alternative, messages can be sent to a data hub, intended as a kind of ‘post box’ where messages are subject to a quality check and are then forwarded to the final addressee (e.g. CZ, NL). 3. Data hubs can also be organised as a central database where the exchanged data is not only checked, but also stored. This provides added value in the form of record keeping and data storing (e.g. UK). The fundamental advantage of models 2 and 3 is that messages are sent to, checked by, received from and possibly also stored in just one address. These models are likely to become increasingly relevant to the future smart energy systems, which will have smart meters as an interface between technical operation and the market system and which will be characterised by greater complexity. In fact, a trend towards information exchange through data hubs can already be observed within the EU: some countries have already implemented it (NL, CZ) or decided to fully adopt it (BE, DK); others have decided to adopt it just for some processes such as switching (AT, ES, IT); and some countries are implementing this model as a voluntary alternative (SE).

A trend towards information exchange through data hubs can already be observed within the EU.


It is important to note that the advantages of models 2 and 3 are independent from the ownership/ control of the data hub, which can be either public, private (controlled by a third party – energy industry or otherwise) or mixed.

It will be necessary to further investigate the advantages and disadvantages of different data hubs by focusing on quality, cost-efficiency and governance.

What is needed is an efficient, transparent and non-discriminatory data dispatching platform with clear access rules to guarantee customers’ data confidentiality. It will be necessary to further investigate the advantages and disadvantages of different data hubs ownership/control regimes in the near future, by focusing on the following key criteria: quality, cost-efficiency and governance. Given the confidentiality obligation of DSOs (Art. 27 2009/72/EC) and their task to “provide system users with the information they need for efficient access to, including use of, the system” (Art. 25-3), DSOs might be particularly effective in fulfilling this role. At the same time, cases such as the Swedish, Dutch and Danish (under development) data hubs show that ownership/control by national industry associations can be equally efficient.

Regardless of the ownership/control model, DSOs must in any case have access to technical and power quality data to ensure that they can efficiently perform their tasks as set out in Article 25, 2009/72/EC. Similarly, the necessary information should be made available to market players in a timely, efficient and non-discriminatory manner so that customers are able to seek products or services that suit their needs, while suppliers can invoice their customers and develop new products and services. Customer data privacy and security

Customer confidence is a prime precondition for the well-functioning of both present retail markets and future demand response. Data security and privacy are therefore crucial.

Customer confidence is a prime precondition for the well-functioning of both present retail markets and future demand response. Data security and privacy are therefore crucial. Customers should always know who has access to their data and for what purpose. At the same time, a privacy framework that protects customers, yet enables new services and technology, is essential. Energy usage data, in particular the anticipated wealth of data from new technology (smart metering, ICT, in-home units), can be used to tailor products and offer a better price and service to customers, including the introduction of dynamic demand response services. Tailored energy services, energy efficiency and cost-effective grid management offer significant potential advantages for customers. This can be facilitated if suppliers have access to all the data required to develop products and tailor energy services. Data protection risks need to be balanced against the benefits.

Data from smart metering may prove valuable in managing grid constraints and may therefore contribute to security of supply and reduced costs by reducing grid investments. Using the data from smart metering can potentially encourage more efficient use of energy. Some argue that the societal benefit of open access to usage data for the purpose of encouraging energy efficiency outweighs any privacy and security considerations. This is being tested in the U.S.: for example Madison (Wisconsin) and Gainesville (Florida) already disclose their residents’ energy use on the Internet. Disclosure of the annual energy use of public buildings, commercial premises and when renting or selling residential property is already required in some EU member states as part of measures under the Energy End-Use Efficiency and Energy Services Directive.


Clearly the attitude to privacy differs across countries, as existing laws demonstrate. For example more people choose to pixelate their property on Google Maps in Germany than in Sweden. Credit reference is common in the UK but unheard of in Hungary. The public interest should be balanced with an individual’s ability to give and withdraw consent to the use of their personal data. In an example from the energy sector, Spanish legislation to support the liberalisation of the national energy market obliges each distribution company to share (and update) the data related to their points of supply through a free online system. To address the relevant privacy issues, national legislation defines which data can be shared: location of the point of supply (full address), type of access tariff, voltage, maximum power, type of metering, availability of power control interruptor, type of consumption profile, contracted powers for each period, date of last change of access tariff, date of last change of supplier, consumption of the two previous natural years, day, month and year of the last reading, information related to defaults on payment, physical or legal person, type of usage, regular home or not, and information on arrears and on whether the customer has had payment problems in the past. In conclusion, attitudes to privacy may vary across member states, but all customers will only be comfortable with access to and use of their data if they are confident that their data is secure and that their privacy is safeguarded. Designing data storage and exchange technology and processes that guarantee security of data will play a key role in ensuring that customers are confident and willing to take up new energy services, in particular demand response services. Looking to demand response markets, national regulators could draw lessons from sectors such as banking and telecoms to ensure that the benefits of smart grids are fully delivered, while adequately safeguarding customers’ privacy and data security.


3

Ensuring a MarketConsistent Customer Focus

The essential nature of electricity means that it is covered by a requirement for universal service provisions17. In particular, it is necessary to ensure that customers do not lose supply if a supplier fails and that vulnerable customers are able to participate in the market. Measures should nevertheless be compatible with the functioning of competitive retail markets, and such contracts should not represent an attractive long-term (or permanent) alternative for the customer to competitive markets.

Measures should be compatible with the functioning of competitive retail markets.

For example, if tariffs provided by a supplier of last resort/default supplier are below market prices, customers have no incentive to re-enter the competitive market. Measures to meet climate and social policy goals should also be assessed not only in terms of their efficiency and effectiveness in meeting these goals but also in terms of their impact on competitive retail markets. When a member state introduces measures which amount to subsidies, these should be clear to the customer.

Credit management (debt and disconnection) In competitive markets, those offering services are entitled to be paid for those services as agreed contractually (at its simplest this is the amount of money paid in exchange for a product/good/ service). In all markets, suppliers have processes and policies for credit management such as prepay options, mechanisms to access bad payer lists before contracting with customers, or the possibility to cease supply to bad debtors. This principle should apply to electricity markets as well, with the exception of household customers who are unable to pay and those defined as vulnerable. Suppliers provide electricity to public service customers who do not pay their bills (without disconnecting them) only under very strict conditions set by law. In those cases specific debt collection measures are also provided.

17 European Directive 2003/54/EC establishes that all household customers should enjoy universal service, which is the right to be supplied with electricity at reasonable, transparent, easily and clearly comparable prices.


The costs of credit management and bad debt will be reduced by smart metering, which allows remotely switching meters from prepay to credit mode and remotely connecting and disconnecting. This will benefit all customers (notably the majority of ‘good’ payers) as the cost of debt is necessarily spread across the entire customer base. In addition, it will increase choice for customers (prepayment18 as a service), reduce disruption and inconvenience (i.e. no need to visit a property and physically disconnect and reconnect or change a meter from credit to prepay or vice versa), and facilitate a better service for rented properties, particularly for short-term letting. It will also prompt customers to choose a supplier rather than continue with a default supplier when moving house. Supplier of last resort Under the public service obligations Directive19, member states may appoint a supplier of last resort (SoLR) to ensure the provision of universal service for household customers (and small enterprises, where deemed appropriate by the member state20). This provision is intended to ensure continuity of supply should a supplier fail. The method of implementation, while left to each member state, must be transparent and non-discriminatory, and restrict competition as little as possible. Appointment of a SoLR should preferably result from a competitive process as stated in the Directive’s interpretative note. In some member states SoLR is used not only in the case of the failure of a supplier but also when customers fail to pay the bill or choose a supplier.

Default supplier/default tariff A default supplier/default tariff is important for electricity, given electricity’s physical characteristics and potentially essential nature. The default situation is that electricity flows through the meter on demand, and that a person moving into a house should reasonably expect to be able to use electricity immediately. A default supplier/default tariff enables supplying and billing customers even when a supply contract has not yet been explicitly agreed. This provision is often used when opening up markets, in which case all consumers are on default prices until they choose to switch. Default prices should incentivise customers to seek a more suitable contract for their needs. Otherwise, energy prices could be artificially low, in which case consumers do not see the true cost of electricity reflected in the prices and are thus neither motivated to engage in the competitive market nor to take up energy efficiency measures. Where a default supplier is used as the SoLR the process is not competitive. If a default price is below the market price a customer has no incentive to re-enter the electricity market and

18 Prepayment provides a straightforward means of budget (and energy use) control which many customers prefer. In the UK 80% of customers on electricity prepay meters would prefer to continue with that method of payment. Source: Waddams Price 2002, PrePayment Meters: The Consumer Perspective. 19 Directive 2009/72/EC, Article 3. 20 Enterprises with fewer than 50 employees and an annual turnover or balance sheet of less than EUR 10 million.


a regulated sub-market is created. The impact on the competitive market is exacerbated if this default position is used not only in the case of a failure of a supply business but in every situation where a customer does not actively choose a product, e.g. at the end of a fixed-period contract, or as the outcome of a debt management process. Vulnerable customers and energy poverty The third legislative package requires member states to ensure adequate safeguards to protect vulnerable customers. In this context each member state should define the concept of vulnerable customers, which may in turn refer to energy poverty. To ensure that measures taken do not interfere with the competitive market, this definition should comprise a small specific set of household customers; it is for social policy to ensure that essential services are met (e.g. services such as hospitals where electricity can be critical) and household customers should not be subsidising businesses. In order to make sure that customers are aware of energy prices, any social subsidies processed via the electricity bill should be clearly distinguished from the electricity price they would pay without this social aid.


4

Towards Converging Retail Markets

4.1 The need for interoperability EURELECTRIC believes that interoperability, defined as “the ability of two or more systems or components to exchange information and to use the information that has been exchanged effectively”, will bring benefits to consumers by: • facilitating communication between market players; • reducing market entry barriers; • increasing the cost-efficiency of processes; • facilitating innovation and offering of new services; • avoiding dependency on a single equipment or service provider. Interoperability will contribute to keeping the system as simple and cost-effective as possible and allow electricity retail markets to function like every other market. Several ‘layers’ of interoperability can be identified: a minimum set of data to be exchanged, compatible formats, and functional open standards. 1. To define the minimum set of data to be exchanged, two types of information should be taken into account: the minimum set of information that has to be exchanged (i) during supply and (ii) when starting energy supply. During supply (i) there should be a regular exchange of consumption data between the metering operator (usually the DSO) and the supplier, to enable invoicing, balance and settlement processes. When starting energy supply (ii), on the other hand, the metering operator should provide suppliers with the ‘relevant consumption point data’ to allow them to correctly identify the customer, start supplying energy and notify the other market actors. Regardless of the tool used (e.g. direct bilateral exchange or data hub), the minimum information required in this phase is the consumption point ID. EURELECTRIC therefore believes that (i) consumption data and (ii) ‘relevant consumption point data’ (i.e. consumption point ID) should be compatible.


Interoperability will bring benefits to consumers.

2. The use of compatible formats refers to the possibility that all operators, when exchanging data and regardless of the tool implemented in the different markets (e.g. direct bilateral exchange or data hub), use predefined formats (for example EDI) that are applied in most European countries. 3. The introduction of functional open standards represents the highest layer of interoperability. It refers to the use of a standard format or protocol made available to the general public for widespread adoption, and permits the development of a variety of competing interoperable services that use different technologies and platforms.

4.2 Harmonised retail market design: desirable and realistic? Harmonisation should be seen as a potentially useful instrument rather than an objective in itself.

Harmonisation should be seen as a potentially useful instrument rather than an objective in itself. The Nordic experience proves that cost-benefit analysis (CBA) is extremely difficult, especially in trying to quantify the potential benefits of harmonisation. Nonetheless, it is worth briefly mentioning potential costs and benefits of harmonisation in the EU as we see them.

On the one hand, harmonisation could offer substantial benefits to suppliers in terms of economies of scale and lower barriers to entry. This would promote more competition across larger markets and by this means ultimately benefit consumers in terms of lower prices, more choice and better quality. Even a reduction of a few euro cents per kWh would, if multiplied for a large amount of total household consumption, deliver substantial economic benefits. In addition, harmonisation of retail market design could be an opportunity to improve retail market design, by learning from other countries’ experiences and implementing the models that are considered most successful. On the other hand, however, retail markets currently have a national dimension, with (strongly diverging) national legislation and rules, for instance for communication among market parties. Moreover, harmonisation would lead to stranded investments for all market parties and would imply significant costs to adapt ICT systems, which could in the end be higher than the direct benefits. The adaptation costs of harmonisation at EU level would be even more significant for countries which are already involved in harmonisation processes at regional scale, so aligned timescales will be crucial.


Current initiatives towards the harmonisation of retail markets design in the EU include the Nordic region and the All-Ireland market between Ireland and Northern Ireland, both of which EURELECTRIC is closely following. The advantages of harmonisation will be higher if: • regulated prices have been removed; • lessons from the harmonisation exercises in the above-mentioned regional projects are taken on board; • relevant parties have enough time to jointly develop and enact moves towards harmonisation. To make an EU-wide harmonisation of retail market design and of the main retail processes feasible, a stepwise approach is necessary. After each step, the necessity of undertaking further steps should be evaluated based on the experience gained. A. Basic Step: Functioning national retail markets

To make an EU-wide harmonisation of retail market design and of the main retail processes feasible, a stepwise approach is necessary.

a) Removal of regulated tariffs (2012 -2014)

B. Harmonisation of processes

a) Among the first steps would be (at the earliest 2014-2017):

• (minimum level of ) harmonisation of roles and responsibilities;

• (minimum) requirements regarding the availability of data to be exchanged.

b) The next steps could be (at the earliest 2017-2020):

• (minimum level of ) standardisation of retail-market related processes;

• (minimum level of ) standardisation of retail-market related rules and legislation.

c) The ultimate steps could be (at the earliest 2020-2025):

• harmonisation of retail-market related processes;

• harmonisation of data to be exchanged.


ANNEX I

A Customer-Centric Demand Response Market Model Introduction Europe’s future electricity system will be different from the present system as its physical infrastructure and market design will have to keep pace with the decarbonisation of the sector and with customers’ changing needs. To address climate change and its effects, the power sector is striving to achieve a carbon-neutral power supply by 2050, in which the share of electricity from renewable energy sources (RES) will amount to more than 50%21. In addition, customers will increasingly manage and adjust their consumption (energy savings, energy shifting, peak shaving) throughout the day, responding to real-time information and dynamic price signals. In order to smoothly integrate distributed energy resources (DERs) into distribution grids and enable a more active and flexible demand, a fundamental change in the power system is needed. As part of a wider movement away from a ‘supply follows load paradigm’ to a ‘load follows supply paradigm’, smart grids will significantly increase the resilience of distribution networks to intermittent intake and will serve as a market platform for flexible loads and (enhanced) demand-side participation. The development of demand-side participation solutions – encompassing both demand-side management and demand response22 – will improve overall system efficiency and provide benefits to every stakeholder, to the ultimate benefit of consumers (see EURELECTRIC’s Views on Demand-Side Participation report). First of all, customers will potentially see lower electricity bills than in a scenario without demand response; they will increase their awareness and participation in the market; and they will benefit from flexible load contracts. Secondly, suppliers will be able to offer new products and services based on individual consumption profiles and preferences, and will have better balancing and hedging opportunities. Thirdly, provided DSOs are given the possibility to rely on DSM tools to operate and plan the grid in a smarter way, smart grids will mitigate the increase in new network assets to relieve grid constraints. Finally, generators and traders will be able to optimise investments in peaking generation plants and back-up capacity. They will also gain potential benefits in terms of portfolio diversification.

Customers • Increased awareness and savings • Increased participation and economic benefits of personalised and flexible load contracts

Suppliers • Ability to offer new products and services for customers • Enhanced balancing and hedging opportunities

Network Operators

Generators

• Opportunity to optimise the use of and investment in new network assets to relieve constraints

• Investment optimisation in peaking generation plants and back-up capacity

• Increased network performance

• Possible benefits in terms of portfolio diversification

21 EURELECTRIC Power Choices Study - Pathways to Carbon-Neutral Electricity in Europe by 2050, November 2009. 22 This paper focuses on demand response. For a deeper analysis of both demand-side management and demand response please refer to ‘EURELECTRIC Views on Demand-Side Participation: Involving Customers, Improving Markets, Enhancing Network Operation’ (2011) Brussels.


The Vision The paradigm shift that is occurring in balancing electricity supply and demand means that in a demand response market customers will be encouraged to be (more) flexible regarding how much electricity they consume and when. In future, customers will steer their consumption much more actively than today, contributing to the flexibility that the new system requires. Given the opportunity to easily manage their electricity use and receive information about its value, customers might be willing to change their consumption patterns. As a result, they will become active in managing their consumption in order to achieve system efficiency gains and by this means also individual monetary/economic benefits. Demand response can be defined as “the changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time. Further, demand response can also be defined as the incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardised. Demand response includes all intentional modifications to consumption patterns of electricity of end-use customers that are intended to alter the timing, level of instantaneous demand, or the total electricity consumption”23. Demand response therefore aims to reduce electricity consumption in times of high energy costs or network constraints by allowing customers to respond to price or quantity signals. With the development of demand-response markets, customers will be encouraged to be more responsive to price signals and hence more flexible in their electricity consumption. Such higher flexibility will help to offset the intermittency of RES. To ensure a smooth transition from the current ‘supply follows demand’ paradigm to a larger degree of ‘demand follows supply’, an architecture which allows easy, simple and automated services should be offered. This would ensure customers’ engagement and consequently the take-off of demand response markets. In sum, demand-response products (new paradigm) have the potential to complement conventional peak power plants (traditional paradigm) to provide the system with the needed flexibility.

The Concept In a functioning retail market, customers should be able to choose from a range of products which suit their preferences. The innovative products packaged by suppliers will deliver – provided that end-user price regulation is removed – powerful messages to consumers about the value of shifting their electricity consumption. Examples of such offers comprise: • T ime-of-Use (ToU): higher ‘on-peak’ prices during daytime hours and lower ‘off-peak’ prices during night and weekends (already offered in some member states); • D ynamic pricing (including real-time): prices fluctuate to reflect changes in the wholesale prices; • C ritical peak prices: same rate structure as for ToU but with especially higher prices when electricity prices are high or system reliability is compromised.

23 M .H. Albadi and E.F. El-Saadany (2007) “Demand Response in Electricity Markets: An Overview”, IEEE.


Figure 2: A customer-centric demand response market Total

Customer

Customer in-home remote control via iphone – sets own price signal alerts

Handover control to third party with criteria e.g. car ready to go at 6am, food safety, home temperature maintained, microgeneration used locally or fed to grid anytime

Limited Price The control on customers’ load can either be: • m anual: customers see prices, for example on a display, and decide to shift their consumption, e.g. remotely through a mobile phone; • automated: customers’ consumption is shifted automatically through automated appliances, which can be pre-programmed and can be activated by either technical or price signals (as agreed for instance in the supply contract). Suppliers will need to translate the complexity and sophistication of a well-functioning demandresponse market into the simplicity that customers demand, by ‘packaging’ attractive products. Successful suppliers will offer products that are easy for the customer to understand and effectively manage any complexity in costs (e.g. variable grid tariffs). Moreover, the potential for demand response and related earnings (e.g. possible savings in energy bills) at household level is currently limited in most countries. Such customers can therefore only be engaged – at least in the short term – through services which are not exclusively related to energy savings. It will be the suppliers’ role to create attractive products that, for instance, offer customers more security, an appealing (green) brand and convenience. This will in turn require a cultural shift for suppliers, who will progressively become service providers rather than mere energy suppliers. Many large and energy-intensive industrial consumers already use demand-response services, and further services will develop over time. Household electricity consumption and customer preferences differ significantly across Europe, hence the potential for demand response at the household level will also differ. In countries such as Sweden and Finland for instance, the average yearly household consumption is three times higher than in Southern Europe (around 15,000 kWh compared to less than 5,000 kWh24. Furthermore, average consumption is neither the only nor the most important factor determining the potential for demand response. The most important influence will most likely be the share of usage which can be shifted. We expect the market to develop gradually, according to the figure below. 24 For instance there are fewer options for use of discretionary load in the UK than in other parts of Europe due to factors such as lack of air conditioning load (moderate climate) and high take-up of gas rather than electricity for heating (which is expected to change in the future as gas supplies become more expensive).


Figure 3: The European demand response/DSM market will develop step-by-step HOUSEHOLD CONSUMERS < 5,000 kWh a year

Business case of demand response by category of users

HOUSEHOLD CONSUMERS > 5,000 kWh/y

PUBLIC ADMINISTRATIONS

COMMERCIAL CONSUMERS

SMALL AND MEDIUM-SIZE INDUSTRIAL CONSUMERS

LARGE INDUSTRIAL CONSUMERS

Today

2010 and beyond

The technological changes expected within the energy industry present attractive opportunities for suppliers to further develop their products and services. However, technological developments and the application of emerging technologies cannot be known in advance. Customers’ flexibility, consumption profiles (shiftable load for households vs. SME) and local conditions (e.g. wholesale markets, network constraints) that will affect future offers by suppliers differ widely; while the future potential for demand response is still largely unknown (e.g. electric vehicles). This is why demand-response offers should be ultimately left to market dynamics.

Behind the scenes To efficiently deliver new products on a competitive basis, suppliers will need timely, transparent and non-discriminatory information from metering operators (DSOs in the majority of EU member states). In a ‘smart energy system’ characterised by smart grids and load flexibility, DSOs will facilitate the playing field on which suppliers offer innovative products, and will therefore play the role of neutral market facilitators. It is thus essential that suppliers have access to commercial data, while DSOs have access to the technical data necessary to manage their grid effectively and, where relevant, in a smarter way. In particular, the frequency/granularity and quality of information required from and by DSOs will depend on the purpose and the products offered by commercial players, with even real-time information conceivable. Commercial products in turn will depend on the availability of information as well as customer preferences. Taking into account that customers’ flexibility is a valuable resource for every stakeholder, suppliers will contract with customers their flexibility for energy balancing purposes. Distributors will then contract with suppliers and with distributed generators for an additional level of flexibility for local network balancing. If distributors were to control demand response without involving suppliers, it would threaten suppliers’ ability to balance their portfolios. As a result, the need for the network operator to contract for reserve would increase, and this would in


turn lead to increased costs for consumers25. Where applicable, network tariffs should support the development of demand-response products. It is anticipated that in the future and with the advent of smart grids, the grid-tariff structure will become more load-dominated26. A new set of agreements will also have to be established between suppliers and DSOs to ensure that customers benefit from proper market functioning, smooth processes, and a secure and reliable electricity supply. Such innovative agreements can be set out in grid codes and ancillary services, allowing suppliers to market new products and optimise their supply and balancing portfolio, while DSOs can guarantee local grid stability and security of supply through system services. Indeed, the large-scale connection of distributed energy resources to a smarter distribution grid opens up new opportunities for system obligations and grid services (reactive power, voltage support, congestion management) and will hence foster the development of a market for ancillary services. The table below provides some generic, non-exhaustive examples of possible arrangements between DSOs and suppliers. These agreements, which need to be analysed in further detail in the future and will have to be reflected in grid codes and ancillary services, should ensure that the core competencies of both market players and system operators are put to best use. Table 1: Examples of possible future agreements between suppliers and DSOs Object of agreement

Purpose

Responsible actor

Service/product provider

Provide customers with information on energy consumption & related cost

Enhance customer awareness and their active role in electricity markets

Supplier

Supplier

Balance of demand/supply in the transmission grid

Optimise demand and supply to balance the grid

TSO

Balance responsible party

Balance of demand/ supply portfolio at balance responsible level

Optimise demand and supply to ensure global system flexibility

Balance responsible party

Supplier/large customer

Security congestion management (short-term)

Operate the grid within the security standards

DSO


Firm capacity management (long-term)

DSO planning purpose; optimise demand and supply with a viewing to using assets most efficiently

DSO


Voltage control

High quality of service

DSO


Finally, smart grids will also lead to increased interactions between market players and system operators along the upstream electricity value chain and will usher in a stronger link between wholesale and retail markets. Consistency in price signals should be achieved, and TSO-DSO interfaces should be more structured. Looking ahead, the increasing penetration of intermittent and distributed generation may imply that DSOs will gradually move towards more local system operation and coordination functions. In the near future they might thus be put in a position to perform local balancing or islanding: further research will be needed on these aspects.

25 CE Electric UK, “Customer-led Network Revolution”. Project granted by Ofgem, 20 December 2010, Appendix 4: Methodology, p.14. 26 More specifically, ‘an assessment of the actual grid tariff systems reflecting grid load by demand charge on a metered basis and by offering special discounts for interruptible loads could help to find the essential framework to be designed’ (EC Expert Group 3). Adequate tariffs structures could be elaborated taking into account energy (kWh), load (kW) and time of use, so as to ensure fairness towards all grid users and adherence to the principle of causality (i.e. cost-reflective tariffs).


• Consumer information exchange: Consumer information is always exchanged between the metering operator (usually the DSO) and the supplier, often through the use of standardised messages for the most common processes (e.g. switching). Currently 3 different models of information exchange exist:

1) Direct bilateral exchange: everyone directly sends messages to everyone else. This is currently the most common market model.

Examples: IT, NO, FI, ES, SE, DE, DK, FR, HU, SK, GR.

2) Information exchange through a ‘data hub’, a kind of post box where messages receive a quality check before being sent to the addressee. The fundamental advantage of this model is that just one address is needed to send and receive messages.

Examples: NL, CZ have already implemented it; BE and DK (April 2012) have decided to adopt it; SE as a voluntary alternative; ES, AT and IT have decided to adopt it just for switching.

3) The data hub also acts as a central database where the data is stored and managed. The extra advantage of this model: it can represent an instrument for recordkeeping and data storing.

Examples: UK uses one hub for information exchange and another portal to store static data, e.g. point ID, current supplier. • Balance and settlement: There is one market model common to most countries, in which:

• Balancing: each access responsible party is responsible for balancing its own portfolio, while the TSO is responsible for residual imbalance and relies on grid operators for meter reading.

• Settlement: grid operators are responsible for the allocation process, with an annual ex post reconciliation by a party appointed by grid operators and suppliers  TSO often via an ad hoc (balancing and) settlement company.

Examples: BE, NL, ES, IT, UK, AT, DK, SE, DE, NO, CZ, FR

In an alternative settlement model, DSOs are responsible for yearly reconciliation and there is no central party for reconciliation.

Examples: FI, HU

• Customer contact; customer information: Two models exist:

1) In the model adopted by the majority of Member States the supplier is the major point of contact for the customer. The DSO can be contacted in cases of emergency loss of supply or technical issues related to the network, e.g. power quality or connecting large loads.

Examples: BE, UK, NL, AT, IT, NO, ES, DE, CZ, FR, SK

2) A minority of Member States has adopted a “dual contact model”, where customers are in contact with both the supplier and the DSO

Examples: FI and DK (however the supplier is in fact the main point of contact, because customers can handle supplier switching and moving with the supplier alone if they so want); SE.


ANNEX II

Retail Market Design Models (15 Member States)

• Contracting with the consumer: Besides the supply contract (which is always between supplier and customer), we can identify three main contractual models:

1) The connection contract is concluded between the DSO and the customer, while the network service contract is concluded between the DSO and the supplier.

2) Both the connection contract and the network service contract are concluded between the customer and the DSO.

Examples: BE, NO, DK, CZ, DE27, SK, GR

Examples: FI, HU, SE28, AT

3) Both the connection and the transport contracts are concluded between the DSO and the supplier, who acts on the customer’s behalf.

Examples: IT, FR29, UK, ES30

• Establishing consumption data for billing purposes: Three market models exist:

1) In the model adopted by the majority of Member States the DSO is the owner of the metering assets and is responsible for meter reading, for estimation (based on SLPs) and for validation of metering data.

Examples: BE, NL, AT, IT, NO, FI, CZ, DE31, DK, FR32, HU, SK, SE, GR

However, the frequency of meter reading varies across Member States, e.g.:

• yearly for LV and monthly for MV and HV customers (BE, NL, AT) – daily for MV and HV customers equipped with AMR meters (BE)

• monthly for LV, MV and HV customers and yearly only for residual customers still not provided with smart meters (IT)

• frequency depends on usage: yearly for small customers ( 8000 kWh/year) and every second month for large customers (8000 kWh/year) (NO); yearly for customers with consumption of  100000 kWh/year (DE, DK)

• frequency depends on Ampere: monthly for customers with 63 Ampere or less and hourly for customers with more than 63 Ampere

• 80% of all consumption places should be metered hourly and read daily, by beginning of 2014 (FI)

• a 4-month metering period for LV customers with small capacity and a monthly metering for HV, MV and LV customers with capacity greater than 35kVA (GR)

27 Although this is the most common model in Germany, customers can also choose model 2. 28 Some aspects in the network service contract are also regulated in the Electricity Act and Regulator provisions. 29 Customers can decide to have a contract with a DSO or to let suppliers act on their behalf. Most household customers favour simplicity and therefore prefer to have just a single contract with a supplier. 30 Although this is the most common model in Spain, customers can also choose model 1. 31 I n Germany the DSO usually reads the meter, but the customer can also decide to delegate this to the supplier (e.g. it can offer services with meter reading included) or a third party. 32 In France the distribution meters – as well as networks – are owned by the authorities in charge of organising distribution (i.e. local authorities).


2) The meter company (usually the DSO) owns the assets, but suppliers are responsible for meter reading and estimation; reading frequency varies from 4 to 1 time per year and suppliers accept customer readings – any dispute is referred to Ofgem.

Examples: UK

3) Either the DSO or the customer owns the metering assets, and the DSO is responsible for meter reading (every two months for LV customers and monthly for MV and HV customers).

Examples: ES • Billing consumers: Two market models exist:

1) In the model adopted by the majority of Member States the supplier issues a unique bill comprising both commodity prices and grid fee components (plus related costs such as taxes). In this model the supplier is usually liable for unpaid bills (including for the related grid fee component).

Examples: BE, NL, UK, ES, IT, AT33, FI34, DE, CZ, FR35, HU36, SK, NO37, GR

2) A minority of Member States have decided to adopt two separate bills, issued by the supplier and the DSO respectively.

Examples: SE, DK

Billing frequency varies widely across Member States, e.g.:

• monthly billing of a fixed sum with a yearly reconciliation bill based on measured consumption for LV customers – monthly billing of measured consumption for MV and HV customers (BE, NL, AT, CZ).

• billing frequency decided by suppliers and therefore varies (UK, ES, IT, FI)

• Switching of customer: Two market models can be identified:

1) Consumer -  new supplier -  DSO (registration only) -  (notification only) -  old supplier. In this model the switching process is straightforward; the customer is responsible for contract breach fees and bad debt is a suppliers’ risk.

Examples: NL, NO, IT, ES, SE, FR, DK, GR

2) Consumer -  new supplier -  DSO -  (check) -  old supplier -  (restraint for switch or not) -  DSO -  (switch OK or not) -  new supplier. In this model the switching process is subject to a check by the DSO and may be blocked by the ‘old supplier’ (under certain conditions)

Examples: FI, DE, CZ, HU, AT, UK

33 Austria: mostly one unique supplier bill but suppliers can choose to bill only the supply side if they so wish. 34 Finland: customers who have not switched receive one unique supplier bill, while customers that have switched receive two separate bills. In these cases suppliers can also offer one unique bill if the DSO agrees. 35 This is by far the most common model in France for LV and MV customers. Nevertheless, since the number of bills depends on the number of contracts the customer has, in principle it is possible for customers to have two separate bills. In addition, it is interesting to note that in France due to a recent ruling the supplier is not liable for the grid fee component of an unpaid bill. 36 I n Hungary household customers typically receive a single bill, though commodity and grid fees have to be stated separately. 37 The majority of households in Norway receive a single combined bill, though the rate is decreasing. In addition, when customers switch from the local or incumbent supplier (from which they received a combined bill) they receive two separate bills.


• Moving of end-user: Two market models exist:

1) The supply contract is ‘personal’ and moves with the customer. The customer contacts the supplier (date, meter data old connection and ID new connection, meter data new connection) and the supplier informs DSO/DSOs (old and new when moving out/into different DSO area).

Examples: NL, IT, NO, FI, CZ, DE (maintaining contrast possible but not necessary)

2) The supply contract is linked to the connection and automatically ends when the customer moves; the customer contacts the supplier (and DSO?) and has to arrange a contract for the new address with a new supplier.

Examples: SE, ES, FR, HU, GR; DK (possible to maintain contract but automatic switch to new one if customers do not actively request it) • Dispute settlement: Customers generally contact first and foremost the supplier to settle disputes (ES, NL, IT, UK, FR, GR, DK: also DSO when appropriate). In case they are not satisfied, there are several options. They can:

1) turn to an in-house company ombudsman (FR);

2) turn to an independent dispute settlement organisation (NL);

3) turn to a regulator with dispute settlement functions (IT, GR);

4) turn to (free of charge) consumer advice services (FI).

• Commodity prices: Besides the supplier of last resort (SoLR)/ default supplier/tariffs (discussed below), prices can be:

1) determined by demand and supply.

Examples: AT, BE, UK, FI, LU, SI, NO, CZ, DE, SE

2) regulated. By definition, “an end-user regulated price is a price subject to regulation (or control) by a public authority, as opposed to an end-user price set exclusively by supply and demand. The regulation can take different forms, such as setting or approval of prices, price caps or various elements of these”38. For instance, in Spain prices are determined by suppliers without need for approval by the regulator but there is an ex post price monitoring by regulators; while in the Netherlands prices are determined by suppliers but the regulator has to determine if they are reasonable. If this is not the case, suppliers have to adjust prices.

Examples: FR39, HU, SK, ES, BE, NL, IT, DK40, BG, CY, EE, GR, IE, LV, LT, MT, PL, PT, RO

38 E RGEG, “Status review of End-User Price Regulation as of 1 January 2010”, 8 September 2010, Brussels. 39 Prices are regulated by the Ministry of energy if supplied by incumbent (this is the case for most customers), while are determined by suppliers if energy supplied by suppliers other than the incumbent. 40 “Passive customers” who are not actively switching supplier are supplied at regulated prices.


• Supplier of last resort, default supplier and default tariff: SOLR / Default Supplier / Default Price - Tariff Scheme used:

REGULATED

Applies in cases of:

Social supplier (DSO), regulated tariff

Bankruptcy of supplier

Social supplier, regulated tariff / regulated price

NON-DISCRIMINATORY / NEUTRAL

PRO-MARKET

Social supplier, nondiscriminatory price

Customers split proportionally between all other suppliers, nondiscriminatory (standard) prices

SOLR allocated by tender process, market prices

NL

UK, IT

Standard published price with ex-incumbent supplier

ES (Supplier which is part of same vertically integrated company as the DSO); CZ (‘Common’ supplier in the local area); FR; SK

Customer does not choose a supplier (house move, at end of contract) Customers unable to pay bills Customer never switched (supplier or product)

ES (Supplier which is part of same vertically integrated company as the DSO) DK (Supplier obtains licence to offer supply obligation contracts) BE

IT41

AT

DK (Supplier obtains licence to offer supply obligation contracts)

UK

• Social supply tariff: Some Member States have no social supply tariff. Where such a tariff exists, these have different features:

1) There is no social supply tariff.

Examples: NL, AT, FI, UK, CZ, DE, DK, CZ

2) There is a social supply tariff.

Examples: BE, IT, ES, FR, HU, GR

a) for about 5% of the population (e.g. disabled people with low income); cost (= delta between commercial price and imposed tariff ) is socialised and recovered by suppliers (BE);

b) all suppliers are required to offer social tariffs to people with low income or severe physical disease (about 5 mn); social tariff is a cash discount on the bill which depends on the number of family members but not on their consumption (IT);

41 O nly large business customers (i.e. all HV and MV customers and LV customers with revenues higher than 10 mn ∑ and more than 50 employees). 42 Only large business customers (i.e. all HV and MV customers and LV customers with revenues higher than 10 mn ∑ and more than 50 employees). 43 Exceptions are Belgium (regional licence for retailers) and Finland (no licence needed for suppliers).


IT42

c) social supply regulated tariffs are offered by incumbents as part of their public service obligation, for which they are compensated. In addition, all suppliers contribute to the “housing solidarity funds” managed by the government and which assist lowincome customers (FR);

d) a social supply tariff is applied to customers under 3 kW or retired people, large families and those where all members unemployed (in total about 2.5-3 mn customers); the social tariff is regulated and the cost is paid by generators (ES);

e) the beneficiaries are socially disadvantaged groups who satisfy specific criteria, like families with low income, families with three children, long-term unemployed and people with disabilities whose income is lower than the current tax-free bracket of the category they belong to (GR).

• Market structure:

• In most countries suppliers and DSOs need a licence at national level43.

• All retail customers are now eligible to buy on the competitive market (as prescribed by EU legislation), but they were made eligible at a different pace:

- UK (1990)

- NO (1995)

- SE (1996)

- FI (1997)

- DE (1998)

- UK (1999)

- AT (2001)

- ES, DK (2003)

- NL (2004)

- IE (2005)

- CZ, PT (2006)

- BE, IT, FR, SK, GR, HU, LV, LT, LU, PL, RO, SI (2007)

- HU (2008)

- EE (2009)

• The number of DSOs and suppliers (registered and active) varies, but in some Member States we can see concentration, e.g. 3 suppliers with 80% of the market (NL), 4 suppliers with 80% of the market (ES) and 1 DSO with 95% of the market (FR).


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