Retail Competition: The Role of Price in Managing Demand

Content

• Catalyst
• Summary
• Analysis
  • Though at a market level energy demand is relatively price inelastic, in competitive markets the pricing function is revolutionised
  • Total demand in energy markets is largely price insensitive
  • Historically, with a captive customer base, utilities set prices to cover costs
  • in competitive markets, individual utilities' pricing decisions are fundamental to the overall success of the business
  • The pricing challenge for utilities is in keeping margin high while maintaining a customer base
  • despite the presence of competition, outside influences can still impact upon retail price formation
  • Wholesale price is the largest and most volatile component of end user price and heavily influences retail strategies
  • Wholesale costs are the largest and most volatile component of retail prices
  • The wholesale division must manage the balancing challenge, buying according to their customers demand
  • Trends in the wholesale market can deeply affect the retail landscape
  • Price is a strong lever for managing the Industrial and Commercial portfolio
  • Price is the most important aspect of service to I&C energy buyers
  • The I&C market features a range of product options reflecting usage profile and risk appetite
  • Competitive tendering removes hidden margin and introduces a role for intermediaries in demand management
  • Pricing strategies for smaller businesses consider willingness to switch and cost of acquisition when offering renewals
  • upon market liberalisation customers are divided along arbitrary lines
  • Specialisations develop as markets mature and new entrants target specific buyer segments
  • in competitive markets B2C customers are less sensitive to price than B2B customers, and utilities strategies reflect this fact, but it is still the most important factor
  • in B2C retail, products tend to be more standardized and offer less scope for influencing consumer behaviour via price differentials
  • Customer inertia remains dominant and therefore legacy customer power is a key opportunity
  • Cross selling may be a way of retaining customers on high margin products
• Appendix
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
• List of Figures
  • Figure 1: US electricity demand and price index 1994-2005
  • Figure 2: Price setting in a captive market
  • Figure 3: The evolution of absolute margin under competition
  • Figure 4: UK wholesale power and gas prices
  • Figure 5: Potential exposure to the balancing market
  • Figure 6: Margins and costs under a theoretical falling wholesale market scenario
  • Figure 7: Industrial buyer research, importance of various influencing factors upon choice of supplier
  • Figure 8: I&C contract types
  • Figure 9: The influence of TPIs under competition
  • Figure 10: Pricing matrix applied to Small Business customers
  • Figure 11: Market shares within buyer segments with regional segmentation
  • Figure 12: Market shares within buyer segments after supplier specialisation
  • Figure 13: B2C Market Churn rate UK 2002-2006
  • Figure 14: Indicative annual dual fuel bill (excluding DUoS), 2004 to date
  • Figure 15: Customer wins and losses and price relative to market
  • Figure 16: Margin tactics when cross selling dual fuel