Tariff Innovation in Energy UK Retail

Introduction

This brief examines tariff innovations in the UK residential energy market. Two categories of innovations are covered. Firstly, alternate pricing mechanisms in selling electricity and gas to residential consumers, such as a capped/fixed tariffs. Secondly, alternate products or services such as carbon neutral tariffs or energy saving plans

Scope

• An analysis of tariff innovations in the UK residential energy market.
• An assessment of risks associated with the innovations presently marketed, explaining why some are niche, whilst others are viable for mass-marketing.
• An explanation of how capped/fixed offers are presently the only viable mass-market innovation, with descriptions of every supplier's scheme.

Highlights

To date, innovation has focused on niche tariffs, exploiting regulatory opportunities, rather than structural change to the way energy is sold. Most existing innovations are niche as they carry more risk than standard tariffs: the capped/fixed offer is the exception.

If capped/fixed offers benefit rather than exploit customers, tariff innovation may grow from its current niche positioning.

A major innovation of recent times has been the capped/fixed price offer, this is a major shift for the UK retail market. Opportunities exist for further wholesale-market innovations, yet there is little onus on suppliers to exploit them.

Reasons to Purchase

• Gain insight into why tariff innovations have been niche and how capped/fixed offers may be the first wholesale-market related tariff to break this.
• Understand what tariff innovations exist in the UK residential energy market and their standing in the market.

• 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.