Tariff Innovation: A comparison of practice and potential across liberalised and liberalising markets

Tariff development and innovation has gathered pace since the liberalisation of markets in Europe. Whilst some features are common across all markets, others are not. Tariff designers need to have a view of all the options when designing the optimum products for their market.



Report Highlights
Whilst many tariff building blocks are common across geographies, there are significant differences deriving from historical pre-competition circumstances or the degree to which the market is still influenced by state regulated tariffs In those markets which are still highly influenced by state controlled tariffs, change will come as state controls are removed later in 2008. The palette of alternative products which have developed elsewhere is a useful challenge to current practice With the availability of real time energy consumption data we will see new products coming on to the market


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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
SOURCES 1
ANALYSIS 2
Tariffing can be a creator of value for energy retailers 2
Tariffing is likely to be increasingly used buy energy companies as a means of increasing value 2
Different markets have evolved at different speeds, but their tariffing innovations are based on common drivers 2
An inventory of current and potential tariffing innovation provides a useful tariff design palette 3
The development of tariff innovation varies greatly by market 3
Banded tariffs have been developed in order to respond to some consumers' dislike of standing orders 3
Banded tariffs are used to manage customer preference and size of household economics 3
In the UK, British Gas has a three-tier pricing structure 4
In the Netherlands, Essent has developed a tariff structure based on household size 5
In Italy, AGSM of Verona has six bands in its pricing structure 5
In Spain, banded tariffs vary by maximum offtake capacity rather than total consumption 6
Geographical tariffs are used for competitive positioning, taking into account costs, competitive strengths, and levels of competition 6
The use of geographical tariff structures differs significantly between the four markets covered 6
In the UK, factors other than distribution cost are impacting upon pricing 7
Postalized pricing is the norm for electricity in the Netherlands 8
Due to the consumer protection tariff, there are hundreds of regional tariffs in Italy 9
In Spain, the regulated price is postalized, varying by power rather than by geography 9
Dual fuel tariffs are the established norm in the UK but are absent in the Netherlands, Italy and Spain 10
In the UK, the norm is for discounts to be offered to customers who opt to buy both fuels from one supplier 10
In the Netherlands, bundled gas and electricity exists as a product, but dual fuel discounts are not a feature of the market 11
In Italy, although dual fuel price competition is emerging, offerings are contingent on both fuels being purchased 13
In Spain, although dual fuel competition is emerging, dual fuel tariffs are not yet a feature of the market 14
Dual rate tariffs exploit profile differences of evening use 15
In the UK, dual rate tariffs are an option within a tariff class 15
In the Netherlands, dual rate tariffs are simply an alternative offering within a tariff class 17
In Italy, dual rate tariffs are profiled as an innovation for marketing purposes 18
In Spain, dual rate tariffs are established by the regulator 19
Affinity and loyalty tariffs can provide greater customer acquisition and retention 20
In the UK, loyalty and affinity tariffs lock into popular or specific appeal programs outside those of the energy supplier 20
In the Netherlands, loyalty and affinity tariffs are not a feature of the market 21
In Spain, loyalty and affinity tariffs are managed in-house schemes 23
While budget plans exist in all geographies their penetration varies significantly 24
In the UK, budget plan tariffs account for 50% of the market 24
In the Netherlands, budget plan tariffs are the industry standard 25
In Italy, budget plan tariffs are marketed as new innovations of the liberalized market 25
In Spain, the incentives to develop budget plan tariffs have been limited 27
Fixed and capped tariffs are a significant new feature of all markets with the exception of Spain 27
In the UK, fixed and capped tariffs have captured a significant share of the new contract market 27
In the Netherlands, consumers can opt for fixed and capped tariffs 28
In Italy, fixed and capped tariffs are appearing as an alternative to the traditional state-controlled tariffs 29
Green tariffs offer 'conscience satisfaction' and will increasingly offer routes to satisfy mandatory regulatory requirements 30
In the UK, green tariffs were originally positioned at a price premium but are becoming more and more mainstream 30
Green tariffs have become the mainstream in the Netherlands 31
In Italy, green tariffs are being used in combined offerings in the competitive market 32
In Spain, green tariffs are offered as an alternative to the state-controlled tariff 34
Internet-based tariffs offer suppliers lower cost to serve, and to acquire, and offer customers convenience and easy access 34
In the UK, internet-based tariffs are a source of consumer discounts, as suppliers share the cost savings with customers 34
In the Netherlands, internet dealing is promoted as an additional service to customers 35
Similarly, in Italy, internet facilities are an additional customer service rather than a source of discounts 36
All of the major providers in Spain enable customers to pay their bill over the internet 37
Looking to the future, the industry expects smart metering to bring in additional tariffing innovation 38
Looking to the future, the industry expects smart metering to bring in additional tariffing innovation 38
The Oxxio program is Europe's leading example of where smart metering may take tariffs 38
The Energy Service company may provide a view of the future 39
While the building blocks of tariffs are similar across all of the geographies studied, some significant differences are evident 40
APPENDIX 41
Methodology 41
Ask the analyst 41
• The Energy & Utilities analyst team can be contacted at asken@datamonitor.com 41
Datamonitor consulting 41
Disclaimer 41

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Table 1: British Gas uses its three-tier pricing structure to ensure price competitiveness with high offtake households 4
Table 2: The differences in cost between the 'budget' and 'standaard' tariffs are significant 5
Table 3: AGSM has six variable price bands 5
Table 4: Electricity costs per kWh can be almost a third higher for the biggest users 6
Table 5: All of the UK's major suppliers offer a discount for dual fuel 10
Table 6: All of the large suppliers offer reductions for budget plan tariffs 24
Table 7: npower and SSE offer green energy without charging a premium tariff 30


Figure 1: The UK is currently the most innovative market with regards to tariffing 3
Figure 2: UK gross margins vary greatly by region 7
Figure 3: In the Netherlands, distribution costs are billed separately from electricity costs 8
Figure 4: Iberdrola's tariff structure 9
Figure 5: Nuon does not offer any discount for dual fuel 11
Figure 6: Eni offers dual fuel customers the equivalent of one free day per month 13
Figure 7: Endesa is offering dual fuel customers a 5% discount 14
Figure 8: npower's dual rate tariff is available to consumers using up to 728kWh per annum 15
Figure 9: British Gas offers both a 'Single Rate' tariff and an 'Economy 7' tariff 16
Figure 10: DONG's tariff listings 17
Figure 11: Enel's tariff listing 18
Figure 12: Iberdrola offers different prices depending on the time of day consumption takes place 19
Figure 13: EDF links into the Nectar points scheme 20
Figure 14: Enel's scheme offers points for servicing the account online 21
Figure 15: Eni's loyalty scheme was originally put in place for its petrol stations 22
Figure 16: The Union Fenosa scheme is the most developed of the schemes in Spain 23
Figure 17: Enel offers a budget plan option 25
Figure 18: Italcogim offers customers monthly or bi-monthly billing options 26
Figure 19: Price-capping has become a core part of E.ON's marketing strategy 27
Figure 20: DONG in the Netherlands offers both fixed and capped prices 28
Figure 21: Enel in Italy offers fixed electricity and gas prices for two years 29
Figure 22: Essent offers customers its 'green' option at the same price as its 'grey' option 31
Figure 23: Enel's 'green' tariff offers a fixed price for two years 32
Figure 24: ABM's fixed and green prices are combined into a single offering 33
Figure 25: British Gas claims average savings of up to £222 for customers on its Click Energy 4 tariff 34
Figure 26: Asmea is one example of an electricity provider that allows customers to manage their accounts online 36
Figure 27: Endesa has launched the 'e-bill', whereby customers receive their bill via email 37
Figure 28: Enel has been a leader in the use of technology 39

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