Japan's Ofgem Action Points from Cambridge

Four Action Points from Cambridge to Achieve a Healthier Liberalised Energy Market in Japan.

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COPYRIGHT (C) CAMBRIDGE ENERGY DATA LAB LTD. ALL RIGHTS RESERVED.

Agenda

1. Corporate outline2. UK Energy Market Review: What can Japan learn from the UK3. Four Action Points for Japan

3.1. Simplified tariffs for consumers3.2. Levy exemption for new entrants3.3. Confidence code certification for switching websites3.4. Smart meter data access for third parties

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Acknowledgement

We would like to express our sincere gratitude to Ofgem, UK Energy Regulators and Laura Nell (Head of Smart Metering), Yasmin Valji (Senior Economist), Angelina Bradley (Head of Smarter Markets) for their valuable input and guidance during the course of the action plan.

In addition, a thank you to Gaffney, Cline & Associates, the global oil & gas consulting firm for their great insight of ‘upstream competition’ on page 21.

Japanese version is here.

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https://docs.google.com/presentation/d/1n-oM4k09NhUJmTyI4KqOWeXOoW4d1Rw2_opIwuVh1B4/edit#slide=id.p


1. Outline of the CEDL

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Name CAMBRIDGE ENERGY DATA LAB LTD

Address IdeaSpace, 3 Charles Babbage Road, Cambridge, CB3 0GT, United Kingdom

Foundation June 2013

CEO Yoshiyuki Iwasaki

Business domain

Energy consultingEnergy simulation model development

Team 7

Homepage http://camenergydatalab.com/


1. Key Members

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Sibel

Market Research

CEDL holds a team of highly skilled international data scientists with strong PhDs in mathematics, computer science, statistics and engineering from renowned institutions for example, the University of Cambridge. With deep sector experience and senior management, the company is currently headquartered in Cambridge.


1. Achievements

1. Consultation and Algorithm development for EneChange, Inc. (#1 energy switching service in Japan with 500K monthly users) (December 2013 to present)

2. Smart-meter data analysis for 2000 households in Japan. (April 2014 to present)

3. TOU tariff consultation for UK energy company. (September 2015)

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1. Cambridge University Collaboration

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EECi (Energy Efficient Cities Initiative) is a cross-disciplinary research project at the University of Cambridge [1]. The ‘Built Environment and Energy Systems’ team is lead by Dr. Ruchi Choudhary who has been our academic supervisor since 2013 and through a PhD programme for Yohei Kiguchi.


2 UK Energy Market Review

This chapter illustrates the UK energy market review. Based on UK’s experiences, the third chapter proposes 4 action points derived from UK cases for a Japanese Ofgem.

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2 Types of Market Competition

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Oligopoly Monopoly Fragmentation

Example UK, Japan France, Italy Germany

# Retailers (main) 31 (6), 10 (10) 183 (1), 412 (2) 1000+ (4)

# Main Generator 7, 12 1, 3 4

Churn rate 14%, ? 5.6% ,7.6% 10.4%

# Switching website 20, ? <10, 5 100

3 types of market situations observed. UK (oligopoly) has the greatest similarity to Japan’s situation, hence the fact learning from the UK is supposed to be effective. (EU Energy Markets, 2014)


2 Churn Rate (2014 and total)

Churn rate from meter point switches data has been over 10% over the last 10 years [2]. Ofgem’s consumer survey on monitoring and evaluating strategy determines that over the short term of 12 months 14% of consumers switched energy suppliers. Comparing to the long term figures of 60% of households having ever switched [3].

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2 The Reasons for Switching (2014)

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The main thing consumers want to achieve when switching is to save money at an estimating 91%. Saving money is the dominant motivation for customer’s motivation. Online switching at comparison website is the most common way to find the best deal with 44% [3]. Adding to ‘supplier’s website’ with 4%, online switching is roughly a half of the total switching.


2 Diversity of Suppliers (‘Big Six’ Evolution)

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After market liberalisation in 2002, when all controls were removed, 14 regional monopolies became five companies and together with British Gas became known as the ‘Big Six’ [4]. All electricity-origin companies provides dual-fuel tariffs.


2 UK ‘Big Six’ (Ofgem, 2015)

‘Big Six’ still keeps 90% of the market share, the remaining 10% is accounted for by independent suppliers. Generation portfolio varies, which consecutively brings price difference among ‘Big Six’ and it creates diversification and competition. Big six generation and supply do not necessarily match [5].

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2 ‘The other group’ Suppliers

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Four categories of ‘the other group’ suppliers. 1. Internet-driven

○ First Utility○ OVO

2. Green○ Ecotricity○ Good Energy

3. Bundling○ Utility Warehouse○ Co-operative energy

4. White Label○ Sainsbury’s Energy (British Gas)○ Marks and Spencer Energy (SSE)


Energy market liberalisation does not necessarily bring energy bill reduction since energy cost is essentially correlated with energy fuel price. Since 2000 till 2011 energy bills increased by 80% compared to fuel coal prices rising by 50% [6].

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2 Profits & Prices (2000 and 2011)


3. Four Action Points for Japan

3. Four Action Points3.1. Simplified tariffs for consumers3.2. Levy exemption for new entrants 3.3. Confidence code certification for switching websites3.4. Smart meter data access to third parties

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3 pillars of UK tariff simplification[12]. 1. Simpler

○ 4 core tariff for gas and electricity (respectively)○ One charging structure○ Only 2 cash discount (dual fuel, online account)

2. Clearer○ Personalised saving message on bills

3. Fairer○ Ofgem certifies energy switching services through its Confidence

Code; consumers using Code-accredited sites can be confident that the information is independent, transparent, accurate and reliable

3.1 Proposal: Consumers can have confidence in sites accredited to the Code.

Japanese Ofgem should consider promoting regulations to simplify tariffs, increasing customer trust and encouraging competition. These rules are not meant to be restrictive to innovation, only reactionary to certain problems; as such, they could be removed to encourage innovation.

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Rational 1: 300 Energy Tariffs Lose Consumer Confidence

The number of tariffs had risen to more than 300 in 2011. Coupled with opaque information surrounding rates, a lack of trust in the suppliers, and a view that many of the suppliers were identical, this resulted in fewer customers switching despite the significant savings available to many. As a result, Ofgem decided to tackle ‘complex and unfair energy bills’ and improve the comparability of tariffs in 2013 [7].

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There is a profound loss of consumer trust in energy companies.（Ofgem CEO)


3.1 Rational 2: Lack of Tariff Regulation in Germany Caused Problems for Consumers and Suppliers

Three major problem of unfair tariffs in Germany [8].1. Prepayments with expensive topup

○ TelDaFax and Flexstrom, with more than 1 million prepayment customer combined was bankrupted in 2011 and 2013

2. New customer bonuses in the first year lets tariff look cheaper than it is○ Many complaints that bonuses are

not paid out because of small print in the contracts

3. Very long contract runtime after automatic contract renewal

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3.1 Effect 1: Differences Become Distinctive

Companies differentiate the energy tariff within 4 core tariffs, by ‘fixed or variable, ‘green’, ‘online or full-customer support’, etc. Product differentiation allows suppliers to provide their consumers with prompts or incentives to engage and switch, and this is good in driving competition in the market [9].

20E.ON energy 4 tariffs OVO energy 4 tariffs


3.1 Effect 2: Upstream Competition

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Companies with long term contracts need to change the way they source energy to stay competitive with new suppliers sourcing on the spot market benefiting from price fluctuations. European countries moved toward spot-market significantly between 2005 and 2013 from 80% to 48%.


3.2 Proposal: Levy Exemption for New Entrants

Energy firms in the UK with less than 250,000 customers do not have to pay the Energy Companies Obligation (ECO), or the Warm Home Discount totalling £50 - £60 per household. (Jan 2014)Access to the wholesale products they need and even how complex the rulebook is are equally important.Japanese Ofgem should consider the introduction of similar Levy exemption for new entrants to promote a healthy competition between utilities and new challengers [10].

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3.2 Rationale 1: ‘Big Six’ Dominance

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‘Big Six’ kept 95% of market share in 2013, and gradually increased their gross margin over 10 years. ‘Big Six tacit co-ordination’ on the size and timing of prices rising are criticised by Ofgem and the media [10].


3.2 Rational 1: Small Suppliers Were Very Small

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Source: 2011 This is Money

Early entrants have mostly been driven out of the market and biggest ‘small suppliers’ market share in 2011 was less than 1% [11]. The government and Ofgem did not make any significant market changes beneficial to small suppliers at that time (EMR, 2013).


Small supplier shares have been flourishing as tariffs are shown on top of switching sites [12]. According to comparison site GoCompare.com, 70% of households that have switched energy suppliers in 2014 have chosen deals from smaller companies [13].

3.2 Effect 2: ‘Small Suppliers’ are Flourishing

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3.2 Effect 2: ‘Little 6’ is no more little

The share of ‘others’ has reached to 10% in 2014, and 6 biggest small suppliers are now called ‘Little 6’. OVO, one of the ‘Little 6’ reached 350,000 customer, which is above the levy exemption threshold, however, OVO raised £8 million capital from the Al Gore, and aim to acquire 1 million customers. ‘Little 6’ has gained a capability to compete with ‘Big 6’ now.

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3.4 Proposal: Confidence Code Certification for Switching Websites

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Japanese Ofgem should consider the introduction of a similar certification to promote fair and neutral comparison sites to encourage ‘energy shopping’ for customers.

UK Confidence Code Requirement [14]. ● Amongst other things, the Code gives customers assurance

that accredited sites are: 1. Independent of suppliers2. Carry every tariff available3. Meet higher standards of accuracy and reliability

● Amongst other things, accredited comparison sites are required to:

1. Make commission arrangements transparent2. End confusing language3. Ban a default partial view


3.4 Rational 1: Lack of Transparency and Fairness

Before 2013, confusion among consumers was the root cause along with tariff proliferation, tariff complexity, inadequate communications from suppliers and low levels of trust [15]. Energy suppliers lack of transparency in pricing and commission arrangements causes discouragement for both customers and potential new market entrants [16].

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3.4 Rational 1: Energy comparison site in Germany is criticised its intransparency.

Energy comparison sites in Germany are frequently criticised for their intransparency over presettings by the German consumer organisation. This means that only companies who have commission arrangements will be shown to the customer without sufficient indications [17]. (Table shows the 4 best scoring portals)

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The tables made by the German consumer organisation states that all comparison websites have lowest reputation in ‘filter and pre-set setting’.


3.4 Effect 1: Customers Can Trust Switching Sites

12 switching sites are accredited by the confidence code. Customer can see ‘unbiased’ results of recommendations; switching sites must show all tariffs as a default unless the customer makes an active choice to only see those tariffs on which the site receives commission’.

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3.5 Proposal: Smart Meter Data Access for Licensed Third Parties

DECC confirms that a third party (neither you nor your current energy supplier), such as other energy suppliers or price comparison websites, can have smart-meter data access if the customer permits [18].

Japanese Ofgem should consider a clear commitment towards a future with smart meter data access for licenced third parties.

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3.5 Rationale 1: WAN (C-route) is Under the Control and Regulation of the Government

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Two ways of accessing smart meter data for third parties: WAN (similar to C-route) and HAN (similar to B-route). WAN is more controlled and regulated by the government whereas HAN is controlled by the consumer [19].


3.5 Rational 2: Only SEC Parties are Licensed to Request Data Access Through the DCC

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Organisations that wish to use the DCC’s services are required by licence to accede to the Smart Energy Code (SEC) and become a SEC Party. 30+ companies are categorised as ‘Others’ such as Opower, uSwitch and Utilisoft [20].


3.5 Effect 1: Smart Value Added Services will Activate Future Smart-Energy Business.

USwitch, the leading online energy switcher, is expected to launch ‘smart-meter’ data utilised service around Spring 2016. Historical smart-meter data utilisation might improve accuracy of tariff recommendation, and thus churn rate [21]. Other types of smart value added services are also expected to emerge in 2016.

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We are Honored to Support the Freedom of Energy Choice which will be given to Japanese Customers

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Appendix: References

1. "The Built Environment and Energy Systems Team", University of Cambridge. http://www.eeci.cam.ac.uk/people/people_buildings.shtml.2. “Competition in British household energy supply markets”, Cornwall Energy, 2014. https://www.energy-uk.org.uk/publication.html?task=file.download&id=4886 3. “Retail Market Review Baseline Survey: Report prepared for ofgem”, TNS BMRB 2014. https://www.ofgem.gov.uk/ofgem-publications/89113/ofgemrmrbaselinefinalpdf.pdf. 4.. “The Real Bix Six”, Financial Times, 2013. http://blogs.ft.com/off-message/2013/10/21/the-real-big-six-the-problems-with-britains-energy-market/5. Koh, S.C. Lenny & Goucher, Liam, “Exploring key Questions around Entry to the UK Energy Supply Market for Small Firms”, University of Sheffield LSCM Research Centre April 2014. 6. “UK Energy Sector Indicators”, UK Department of Energy & Climate Change, 2012. www.gov.uk/government/uploads/system/uploads/attachment_data/file/65900/6801-uk-energy-sector-indicators-2012.pdf 7.“Retail markets: review and remedies”, Ofgem 2011. https://www.ofgem.gov.uk/ofgem-publications/64025/rmrfactsheetenergy-prices-update-fs.pdf. 8. “Billigstromanbieter: Nur 2 von 49 Tarifen sind fair”, test.de 2014. https://www.test.de/Billigstromanbieter-Nur-2-von-49-Tarifen-sind-fair-4660668-0/. 9. “Economic Appraisal of Ofgem’s domestic tariff proposals”, Oxera 2012. https://www.ofgem.gov.uk/ofgem-publications/39560/scottish-power-oxera-report.pdf. 10. “Energy Company Obligation (ECO) Information for suppliers”, Ofgem. https://www.ofgem.gov.uk/environmental-programmes/energy-company-obligation-eco/information-suppliers. 11. Frerk, Maxine, “State of the Market Assessment”, Ofgem 2014. https://www.ofgem.gov.uk/ofgem-publications/86804/assessmentdocumentpublished.pdf. 12. Nemeth, Hannah, “70% of energy customers switch to small providers”, Moneywise 2014. http://www.moneywise.co.uk/news/2014-09-08/70-energy-customers-switch-to-small-providers. 13. “Gas and Electricity”, gocompare.com. http://www.gocompare.com/gas-and-electricity/. 14. “Ofgem strengthens Confidence Code for price comparison websites”, Ofgem 2015. https://www.ofgem.gov.uk/publications-and-updates/ofgem-strengthens-confidence-code-price-comparison-websites. 15. “Consumer Focus response to Ofgem’s Retail Market Review consultation”, Consumer Focus 2012. https://www.ofgem.gov.uk/ofgem-publications/39398/consumer-focus.pdf. 16. “Energy suppliers ‘not transparent’”, Metro 2008. http://metro.co.uk/2008/08/11/energy-suppliers-not-transparent-359561/. 17. “Stromtarifrechner: Kein Vergleichsportal is gut”, test.de 2013. https://www.test.de/Stromtarifrechner-Kein-Vergleichsportal-ist-gut-4505887-0/. 18. Navigator, “Smart Metering Data Access and Privacy”, UK Department of Energy & Climate Change. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43045/7227-sm-data-access-privacy-public-att.pdf. 19. “Smart Meters, Smart Data, Smart Growth”, UK Department of Energy & Climate Change. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/397291/2903086_DECC_cad_leaflet.pdf. 20. “SEC Parties”, Smart Energy Code Company. https://www.smartenergycodecompany.co.uk/sec-parties/sec-parties. 21. “About DCC”, Data Communications Company. https://www.smartdcc.co.uk/about-dcc/.

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http://www.eeci.cam.ac.uk/people/people_buildings.shtml

https://www.energy-uk.org.uk/publication.html?task=file.download&id=4886

https://www.ofgem.gov.uk/ofgem-publications/89113/ofgemrmrbaselinefinalpdf.pdf

http://blogs.ft.com/off-message/2013/10/21/the-real-big-six-the-problems-with-britains-energy-market/

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65900/6801-uk-energy-sector-indicators-2012.pdf



https://www.ofgem.gov.uk/ofgem-publications/64025/rmrfactsheetenergy-prices-update-fs.pdf

https://www.test.de/Billigstromanbieter-Nur-2-von-49-Tarifen-sind-fair-4660668-0/

https://www.ofgem.gov.uk/ofgem-publications/39560/scottish-power-oxera-report.pdf

https://www.ofgem.gov.uk/environmental-programmes/energy-company-obligation-eco/information-suppliers

https://www.ofgem.gov.uk/ofgem-publications/86804/assessmentdocumentpublished.pdf

http://www.moneywise.co.uk/news/2014-09-08/70-energy-customers-switch-to-small-providers

http://www.gocompare.com/gas-and-electricity/

https://www.ofgem.gov.uk/publications-and-updates/ofgem-strengthens-confidence-code-price-comparison-websites



https://www.ofgem.gov.uk/ofgem-publications/39398/consumer-focus.pdf

http://metro.co.uk/2008/08/11/energy-suppliers-not-transparent-359561/

https://www.test.de/Stromtarifrechner-Kein-Vergleichsportal-ist-gut-4505887-0/

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43045/7227-sm-data-access-privacy-public-att.pdf



https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/397291/2903086_DECC_cad_leaflet.pdf



https://www.smartenergycodecompany.co.uk/sec-parties/sec-parties

https://www.smartdcc.co.uk/about-dcc/

Japan's Ofgem Action Points from Cambridge

Presentations & Public Speaking