Tariff Innovation in Energy UK Retail

Content

• Chapter 1 Executive Summary
  • If capped/fixed offers are seen to benefit rather than exploit customers, tariff innovation may grow from its niche position
• Chapter 2 Introduction To Tariff Innovation
  • Although the UK retail market has been liberalised, the level of tariff innovation has been low
  • The UK is one of the most competitive, liberalised energy markets, more so than any other EU nation
  • Although changes in market share have been high, this has not been through the marketing of innovative tariffs, but through the acquisition of incumbent power companies
  • Innovation has been low because it is not in the interest of dominant regional suppliers that retain 60% market share
  • Innovation comes from differences between companies, yet in the UK retail market the 6 major players are similar
  • Innovation comes from the need for organic growth in new markets (mobile telecommunications), rather than acquisitive growth in established markets (electricity and gas)
• Chapter 3 Innovations To Date
  • To date, innovation has focused on niche tariffs, exploiting regulatory opportunities, rather than structural change to the way energy is sold
  • Regulatory initiatives have not fuelled tariff innovation, with renewable power and the ROC scheme being a prime example
  • Initially there was no need for entrants to innovate, however the high wholesale energy prices of 2004-2005 have forced those that have not innovated to exit
  • To date tariff innovation has remained niche, although the many permutations can be classed into six categories
  • Centrica's home services proposition is the one exception to the multi-utility hangover being a diminishing factor on innovation
• Chapter 4 Datamonitor's Product Structure Framework
  • Most existing innovations are niche as they carry more risk than standard tariffs: the capped price offer is the exception
  • Datamonitor considers that there are four risks that need to be examined in assessing tariff innovations
  • Most existing innovations have remained niche as they carry more risk and associated costs than standard tariffs
  • Green innovations tend to carry more risk: thus, in a price sensitive market they will remain niche
  • Capped/fixed offers are the first to reduce risk, beating standard tariffs and becoming a viable mass innovation
  • There is sufficient space for tariff innovation in the retail market, by reducing the four risks
• Chapter 5 The Capped/Fixed Offer
  • A major innovation of recent times has been the capped/fixed price offer, this is a major shift for the UK retail market
  • Capped/fixed prices were developed by ScottishPower in exposing the market leader's transfer price policy
  • Capped/fixed energy offers are the only tariff innovation that has managed to secure a significant presence in the market
  • The uptake of capped/fixed price offers has been on the back of significant wholesale price increases and tariff "hikes"
  • Although British Gas*, ScottishPower and Powergen's original offers were good, the jury's out on whether others will also be
  • Although British Gas, ScottishPower and Powergen's original offers were good, the jury's out on whether others will be
  • Once British Gas used them to remain competitive, capped or fixed offers are being heavily promoted by all suppliers
• Chapter 6 Opportunities Exist For Further Wholesale-Market Innovations, Yet There Is Little Onus On Suppliers To Exploit Them
  • Capped/fixed offers provide a forward position in the market, other innovations could also relate to the wholesale market
  • Although the capped/fixed offer is a major development, there are four factors that that will continue to stifle innovation
  • Innovation should benefit customers and suppliers, but capped/fixed offers may be negative if they do not do this
• Chapter 7 Appendix
  • Research methodology
  • Report writing team
• List Of Figures
  • Figure 1: Datamonitor's market competitiveness index (MCI) for 2005, rates the UK highest across 10 EU markets
  • Figure 2: Although changes in market share have been high, this has not been through the marketing of innovative tariffs, but through the acquisition of incumbent power companies
  • Figure 3: The vast majority of accounts are either Tier 1 or in a Tier1-2 combination.
  • Figure 4: All the major retailers have developed a structural power hedge, to protect retail and wholesale operations.
  • Figure 5: Innovation comes from the need for organic growth in new markets (mobile telecommunications), rather than acquisitive growth in established markets (electricity and gas).
  • Figure 6: Suppliers can opt to produce or buy renewable power or they can buy RO certificates from a fund.
  • Figure 7: Although the RO scheme should force suppliers to have green power to market, in reality suppliers have elected to buy-out much of their RO commitment.
  • Figure 8: Initially there was no need for entrants to innovate, however the high wholesale energy prices of 2004-2005 have forced those that have not innovated to exit.
  • Figure 9: Centrica's home services proposition is the one exception to the multi-utility hangover being a diminishing factor on innovation.
  • Figure 10: Datamonitor's product structure framework
  • Figure 11: Most existing innovations have remained niche as they carry more risk and associated costs than standard tariffs.
  • Figure 12: Green innovations tend to carry more risk: thus, in a price sensitive market they will remain niche.
  • Figure 13: Capped/fixed offers are the first to reduce risk, beating standard tariffs and becoming a viable mass innovation.
  • Figure 14: Scores for the tariff innovations against the conventional tariff show that most innovations to date increase risk to a supplier.
  • Figure 15: There is sufficient space for tariff innovation in the retail market, by reducing the four risks.
  • Figure 16: Capped/fixed prices were developed by ScottishPower in exposing the market leader's transfer price policy.
  • Figure 17: Capped/fixed energy offers are the only tariff innovation that has managed to secure a significant presence in the market.
  • Figure 18: The uptake of capped/fixed price offers has been on the back of significant wholesale price increases and tariff "hikes".
  • Figure 19: Although British Gas*, ScottishPower and Powergen's original offers were good, the jury's out on whether others will also be.
  • Figure 20: Although British Gas, ScottishPower and Powergen's original offers were good, the jury's out on whether others will be. Accumulated savings of ScottishPower's two capped price offers versus dual fuel tariffs.
  • Figure 21: Once British Gas used them to remain competitive, capped or fixed offers are being heavily promoted by all suppliers.
  • Figure 22: Capped/fixed offers provide a forward position in the market, other innovations could also relate to the wholesale market.
  • Figure 23: Innovation should benefit customers and suppliers, but capped/fixed offers may be negative if they do not do this.