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NEW Report: Customer Choice in The Nordic Countries

A Report by CRIEPI (Central Research Institute of the Electric Power Industry, Japan) in collaboration with VaasaETT.

Full Title: Electricity Market Reforms in the Nordic Countries – Historical Evolution and Differences in Customer Choice Behavior. Report Number YO8036.

Main writers: Toshio Ariu, Dr Philip E. Lewis and Hisanori Goto.

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ABSTRACT

In the debate about deregulating the electric power industry, it is crucial to develop a quantitative, long-term understanding of issues such as supplier switching by customers and variation in electricity rates after deregulation, while keeping in mind whether or not there is a benefit for the customer. In this regard, it is expected that useful lessons can be drawn from trends in Europe, where there is a track record of deregulation, particularly in the Nordic countries, namely, Finland, Sweden, Norway, and Denmark (Iceland is excluded from this study), where there is a high rate of supplier switching.

The purpose of this research is to describe the situation after liberalization, such as the variation and actual status of supplier switching by residential and commercial/industrial customers, and the handling of customers by electric power companies, in the Nordic countries, and derive implications for Japan. Main findings are as follows:
1. Looking at the rate of supplier switching by residential and commercial/industrial customers, switching is most frequent in Norway, followed by Sweden, Finland, and Denmark. One possible reason for this is differences in the starting year of full retail deregulation, which was 1991 in Norway, 1996 in Sweden, 1997 in Finland and 2003 in Denmark. In addition, when deregulation was introduced in Norway, there were originally some constraints on supplier switching by customers, such as a charge of 246 Norway kroner (approx. ¥3,000) for each switch when switching 4 times or less per year, and a requirement for the customer to self-pay for an automatic meter reading system, but after 1998 it became possible to switch at no charge in 1 week units. In contrast, free switching was realized in 1998 in Finland and in 1999 in Sweden. For residential customers, supplier switching is also related to the annual average consumption per household of approx. 26,600kWh in Norway, approx. 17,000kWh in Sweden, approx. 7,500kWh in Finland and approx. 5,000kWh in Denmark. The results suggest that the regulatory environment and market conditions, which vary by country in this way, have a large effect on supplier switching by customers.
2. With retail liberalization, there was a rise in price competition and service competition to secure and retain customers by the 100 suppliers in Norway, 130 suppliers in Sweden, and 70 suppliers in both Finland and Denmark. During this process, the supplier switching rates of all countries varied greatly from month to month. For example, the supplier switching rate increased as significant disparities in supplier rates appeared due to factors such as rising fuel prices and drought. On the other hand, it was also found that supplier switching rates have tended to decline in recent years because suppliers have worked to improve customer satisfaction and build customer loyalty. They have done this by enhancing customer service with better response using call centers and service centers, and improvement of billing related services.
3. After deregulation, the major electric power companies with operations in the Nordic countries underwent repeated cycles of M&A, and were reorganized with specialization in the energy business. As a result, it was found that, among the five leading electric power companies such as E.ON, FORTUM and VATTENFALL, there was improvement in profitability and growth, as well as improvement in overall corporate performance, such as steady performance of stock prices.