Nordic smorgasbord - retail electricity in Scandinavia
Electricity Abroad In three Nordic countries - Sweden, Norway and Finland - retail competition in electricity supply has proven to be a solid success.
While those directly involved in the electricity industry may be concerned with, and even directly involved in, issues like privatisation and market reform, for the average person, electricity is a subject that is encountered at the retail level. You turn on a lamp, switch on the TV or plug in an appliance and don’t think much about electricity until the bill arrives in the post.
Most electricity consumers really want only two basic things: dependable supply and a fair price. How that electricity is generated, traded, transmitted and distributed is not their concern. So, while market reform has been a widely discussed topic within the industry for almost 20 years, retail competition is where the subject really begins to matter to the customer.
The merits of retail competition in electricity have been debated in markets all over the world, but evidence to back up that debate has tended to be drawn almost exclusively from the US and/or the UK Meanwhile, ticking happily along for almost a decade, Sweden, Norway and Finland have blazed a trail in retail competition.
Market reforms began in Scandinavia as far back as 1991 in Norway, and in Finland and Sweden in 1995 and 1996. What makes their experience particularly interesting is that regulatory control over pricing and contracts was virtually absent right from the beginning. The market was allowed to develop more or less freely and naturally according to its needs, without a policy-driven end result in mind. Generally speaking, the process proved successful. Retail competition was introduced early in all three countries, but success at the retail level was slower to develop.
The major obstacle was a purely practical one. To accommodate all the options and services that were potentially available, customers were required to install new metering equipment capable of measuring consumption on an hourly basis and, as the up-front costs were high, most consumers chose not to participate. Only after customer profiling was introduced, between 1997 and 1999, did retail competition begin to take off.
Scandinavian households are high energy consumers, with electricity consumption levels between two to four times higher than the Organisation for Economic Co - operation and Development (OECD)average. The OECD is an international body that includes 30 member states with democratic governments and free market economies, 22 of which are in Europe. This high rate of consumption provided a keen incentive for customers to take an interest in the development of competition, and in the offerings of competing retail suppliers. When customer profiling eliminated the need for new and expensive metering equipment, customers became more enthusiastic.
Given the chance to exercise more control over their purchase of electricity, Scandinavian consumers did just that. A considerable number of residential customers chose supply terms very different from the standard variable tariff, including 'fixed price, fixed term' contracts, and even pricing agreements directly tied to the market spot price. In this sense, consumers began to view electricity supply contracts in much the same way as they do mortgages - making a choice between the security of a fixed price for specified term or a price that would float with the market, in much the same way as a tracker mortgage might follow the European Central Bank rate at a small premium.
Today, retail competition is well established in all three countries. In contrast to what could be called 'from the top down' market reforms in countries like Chile and Argentina, which we have recently featured in EM, the Scandinavian experience is more vibrant at the retail level than it is at the level of generation and transmission.
In Sweden, for example, Vattenfall is 100% state-owned and is the largest company in the national electricity market. Vattenfall provides nearly half the generation output in the country and serves 13% of the residential market under its own brand, and an even higher share with partner companies.
On the other hand, in all three countries there is regulated thirdparty access to the transmission and distribution networks. Nord Pool - also known as the Nordic Power Exchange - operates spot and forward markets in which all three countries participate.
As the retail market has developed, there has been some consolidation. When the markets first opened there were over 600 different suppliers, mostly small regional and municipal utilities. The number of suppliers today is roughly half that, with about a third of those offering service outside their original geographic areas.
As time goes by, customer uptake of alternative terms is growing, and this, in turn, has driven a process of innovation in retailers' offerings. Thus, the Scandinavian retail electricity market is doing what markets do best: identifying customer preferences and delivering products and services to match. EM
