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New Research says Electricity customers not seeing expected price benefits of competition

12.04.2007
New research by economists at the University of Warwick, Aston Business School and the Universidad del Rosario Columbia, reveals that electricity customers are not seeing expected price benefits of increased competition and internet price searches in the sector.

The new research is in a paper entitled “Pricing behaviour under competition in the UK electricity supply industry” to be delivered at the Royal Economic Society Annual Conference at the University of Warwick on Thursday 12th April. The researchers looked at prices offered by each of the 6-18 firms active in the domestic electricity market from February 1999 to December 2006. The data was obtained from the Consumer’s Association, OFGEM and Energywatch.

The researchers noted that there were a number of factors in that period that would lead one to expect that customers would benefit from low prices and that there would be low differentials in prices between companies:

- Increased use of the internet by customers to provide price comparisons

- Increased competition between suppliers. In particular new suppliers entering the market place and attempting to take market share by offering prices well below the incumbent suppliers

- Easy mechanisms allowing switching between suppliers.

Surprisingly the researchers found that incumbent suppliers’ electricity prices were much more resistant to change and remained at higher levels than expected. These high incumbent prices also appeared to make it worthwhile for new suppliers entering the market to quote, and do business at, prices that were significantly noncompetitive.

The researchers also found that over the period of study retail electricity prices overall did not fall to the extent of price falls in wholesale prices over the period since a market has developed (OFGEM, 2003).

The researchers further found that if anything the variation in prices being offered between one supplier and another increased over the period of study. High energy users paying by direct debit saw the range of price offerings by non-incumbent suppliers increasing to 30% of the bill, for example. Low energy users paying by direct debit saw an even larger range, up to 35%.

In examining what factors could have produced these surprising results Professor Waterson from the University of Warwick said: “This confirms past studies which have shown that some consumers remain reluctant to switch, even in the face of substantial financial benefits. Incumbent electricity suppliers can therefore charge a premium over new suppliers without losing all of their custom. Moreover, it is important to be careful in choosing an alternative supplier, because it is perfectly possible to switch and yet be worse off, if you choose at random.”

The research team also noted that while fast and increased internet access brings with it the possibility that a large proportion of consumers might avail themselves of the opportunity to compare prices on line and switch to another company there is little evidence that this is a sufficiently widespread practice to have a large effect. Past studies show that although the proportion of searchers using the internet specifically for this purpose has increased, it is still a minority method of gaining information on electricity price offers compared, for example, with information gathered from a representative who calls at the consumer’s home (according to an OFGEM report from 2004).

Peter Dunn | alfa
Further information:
http://www.warwick.ac.uk

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