Friday, November 30, 2012

Slovak energy market opens step by step

If the market in Czech republic serves as an example to Slovak market with electricity and natural gas, it's only an example. In a view of the numbers, intensity of competition in both countries is incomparable. It goes approximately like this: what happens in the electricity and natural gas market in Czech republic for a month, about the same will happen in the Slovak market for a year. We're talking here about rough figures of supplier changes. What's more, Slovak household consumers are seemingly not sure if the open market can bring them noticable price advantage.

Electricity and natural gas market in Slovakia gradually deregulates. Even though very easy so far.  For example in the household market that was deregulated as the last one the consumers for the past 5 years have by law the right to choose their supplier of natural gas. The problem is that up until the start of 2011 there had been no supllier willing to appeal households specifically and broadly.


The main goal of this analysis is brief description of the process and the background of Slovak market deregulation. Text primarily focuses on the natural gas market and mainly concerns household consumers. This segment is at the moment intensively discussed at the professional forums. Households are also the main target of the marketing effort by the new suppliers.

First alternative suppliers of natural gas

ČEZ Slovensko was the first company to start the full scale offering for Slovak household consumers in Januray 2011. The company is subsidiary of the Czech enterprise. Shortly afterwards RWE Gas Slovensko entered the market. Approximately at the same also Magna E.A started to test the market  – the company years known as the competitive alternative supplier of electricity for households. Many other small companies entered the market in the following months. One of them became more visible than the others – Energetické centrum. The reason was not „the offer you can't refuse“ though. Many clients of Energetické centrum considered the acting of its sales representatives as unfair and insistent.

The start of competition in natural gas market in the segment of corporate clients have been much more convincing. Approximately one year after RWE Gas Slovensko entered the market in the segment of corporate clients, SPP as the predominant player and former gas monopoly lost its biggest customer – Duslo Šala. It happened in 2009 - a year of January gas crises. New market players had to face state of emergency right in the first days of physical suplies. This moment in the Slovak market was also well documented in short video documentary by Shell Slovakia. One of Shell's first customers was the company producing brewers malt. Besides Duslo Šala, RWE Gas Slovensko acquired also other big companies like Tepláreň Košice, Mondi SCP Ružomberok, Heineken Slovensko, Vetropack Nemšová or SHP Harmanec.


It has to be reminded that RWE Gas Slovensko is subsidiary of RWE – a company with commercial and ownership connection to Východoslovenská energetika (VSE). VSE is one of three traditional suppliers of electricity in Slovakia. It's also the first traditional supplier that became alternative supplier in the second commodity using its subsidiary. On the other hand, ZSE Energia was the first traditional supplier that became alternative natural gas supplier under the same brand. ZSE Energia is part of the Západoslovenská energetika group. Lastly, in 2012 Stredoslovenská energetika (SSE) and SPP entered the market of second commodity as an alternative suppliers. SSE is traditional supplier of electricity and SPP is traditional supllier of natural gas.

Electricity market, both corporate clients or household consumers has been developing a little bit faster and sooner than natural gas market. The description of natural gas market is therefore much more authoritative considering examination of deregulation and the level of competition in the energy market.

What figures say

Energy market in Slovakia suffers from lack of publicly available figures and information. New suppliers from time to time publish number of their contracts but mostly for household consumers. This segment is not insignificant but considering lower consumption it also represents smaller business opportunity. As for the availability of natural gas for public use, Slovakia is number two country of EU 27. Better distribution network can be found only in Netherlands. According to the latest data of International Energy Agency (IEA)  energy mix of Slovakia consists of natural gas (30 %), nuclear energy (22 %) and crude oil (21 %). Occasionaly published figures usually give evidence of delivery points and not the shares of supplied volumes in particular segment.

Regulatory Office for Network Industries (ÚRSO) once a year publishes annual report. It has two major weak points: it's published once a year and for the previous year with a couple of months distance. Secondly, the article concerning energy market competition deals with biggest competitors of traditional suppliers but says nothing about ther market shares. ÚRSO informs only about figures of delivery points with changed supplier but not about market shares in particular segment.

So what are the figures for 2011? Let's start a little comparison with Czech republic. OTE is the Czech electricity and natural gas market operator. These are the published annual figures of changed suppliers for 2011:
  • 448.860 delivery points in electricity (twice as much as in 2010)
  • 361.941 delivery points in natural gas (four times as much as in 2010)

ÚRSO published the figures of supplier changes in Slovakia in 2011: 
  • 42.784 delivery points in electricity (twice as much as in 2010)
  • 27.012 delivery points in natural gas (8,5 as much as in 2010).

More detailed figures of supplier changes in electricity or natural gas show charts number 1 and number 2. If we look at the proportional annual changes it looks like the competition in the Slovak market is dynamically growing. However if we look closely to the figures of the previous year we'll realise that the competiton was growing only very slowly.


Chart number. 1: Figures of delivery points that changed supplier - electricity









Source: 2011 annual report of ÚRSO, energia.sk

 Chart number 2: Figures of delivery points that changed supplier – natural gas












Source: 2011 annual report of ÚRSO, energia.sk

Motivation of households to change their supplier

Web portal „energia.sk“ carried out from 13th until 31st August of 2012 its own online reader's survey. Ther main goal was to monitor motivation or demotivation of households to change their supplier of electricity or natural gas. The intial ambition of the survey was also to report the preferences of small and medium sized companies. However as many as 95,7 % of online respondents expressed their views as members of households so we finally decided to eliminate the opinions of companies. Online survey was voluntarily completed by 282 respondents. During the time of survey web portal „energia.sk“ had been viewed by 9.918 unique visitors. It has to be noticed that it's solely readers surveys and readers of „energia.sk“ can't be taken as representative sample of Slovak population. At the same time optionality of completing the survey didn't reflected the principle of randomness choice of the sample. Regardless the final results revelead the consumer behaviour of households or its members who as readers of „energia.sk“ show deeper interest in energy.

Here are the basic findings of the survey: Consumers (readers of energia.sk) know (95 %) their right by law to change their supplier of electricity or natural gas. Despite this fact almost 70 % of them didn't change their supplier. Only one third of those 70 % readers admitted that they can actually reconsider this in the future and change their supplier. As the main reason of not changing the supplier they checked „price savings is insignificant or none“. Almost 40 % of respondents who changed their supplier couldn't estimate their exact annual price savings. Respondents who changed their supplier and were able to estimate their annual savings most frequently stated:

  • the annual savings between 51-100 euros of the bill for natural gas (16,7 %)
  • the annual savings between 16-20 and 21-30 euros of the bill for electricity (in both cases 11,4 %)

Final results show that most of the respondents (59,3 %) checked as the main motivation of changing the supllier „the actual saving of total energy bill (euros/year)“. As the secondary reasons readers most frequently checked the options of „the credibility of supllier“ (37,4 %) and „complementary services of supplying energies“ (28,5 %). The other reasons are for respondents insignificant. In the open answer some of the respondents claimed as the motivation „ecological aspect“of the suplier i.e. renewable energies supllies.

Lower rate of market dynamics in the household segment especially if we compare Czech and Slovak market is most of all the consequence of conservative behaviour of consumer. One of the key findings of „energia.sk“ reader's survey is that household consumers don't have much trust to sales representatives. However if they decide to change supplier they prefer first-hand contact with particular supplier. Most preferred selling channel appeared to be „personal visit at the customer's centre of supplier“ (37,4 %), then „online website of supplier“ (24,4%) and the third preferred option is „beforehand arranged appointment of sales representative“ (15,4 %).  The choice of „random door-to-door sale“ checked as the most preferred selling channel less than 1 % of respondents. On the other hand (28,3 %) of respondents who changed their supplier realized this change using „random door-to-door“ sale. Finally, „door-to-door“ sale regard suplliers as their key selling channel. The view of consumers is different though. Households usually don't regard „door-to-door“ sale as their most preffered selling channel.

Validity of energy prices
 

Deregulation of the market and broadening competition of products for consumers to choose from should most of all result in lower price range. Although analysts stand for more pessimisstic position according to European Commission (EC) this approach proved to be as very successful in the field telecommunication. Therefore there shouldn't be an objective reason to not replicate this approach in energy sector as well. The Third Energy Package of the European Union (expecially directives 2009/72/ES and 2009/73/ES) contains  a special institution called „Energy poverty“. Every member country of the EU will have to deal with it. The most developed model of „Energy poverty“ has so far Great Britain. British household that spends tenth of its total income on energy expenses belongs to the group „Energy poverty“.

Suppliers are primarily competing each other with the price: price of the unit or the final energy bill in case of more developed market. In every case the issue of market deregulation is very closely linked with the social aspect as the energy expenses of the households are significant.

Slovakia will shortly afterwards have to deal with „Energy poverty“ as well. According to Energy regulation act ÚRSO will have to develope the concept in cooperation with relevant ministries until the end of 2013. Statistics of Eurostat states that the average Slovak household spends roughly 8,8 % of monthly income on electricity and natrual gas bills. Percentage share could be higher using other methodology though.

Statistical Office of the Slovak republic annualy release report “Incomes, expenses and consumption of private households in Slovakia“. The average expenses on electricity, natural gas and othe fuels (including heat) calculated on a single member of Slovak household was recently developing as we can see on chart number 3 below. The percentage share for the recent period didn't fall under 10 %. For a country like Slovakia that has not yet defined its criteria of „Energy poverty“ this can be viewed as a warning sign.

Chart number 3: The share of energy expenses of the incomes calculated on a single member of Slovak household





 





Source: Statistical Office of the Slovak republic, energia.sk 


Readers's survey of „energia.sk“ was therefore focused on household perception of energy prices and the final energy bill in deregulated market. In other words if deregulated market could really bring the price benefit that consumer expects.

Finally these are the findings of the survey about subjective perception of energy prices by households. Survey asked the readers if they are satisfied or unsatisfied with their present supplier. Almost 46 % of respondents checked their dissatisfaction with „monthly energy bill“. More than two thirds of respondents also marked that electricity and gas prices are „high and could be lower“. Approximately the same amount of respondents didn't consider energy prices as appropriate or couldn't judge if they are appropriate or not. Last but one question of survey asked about positives of deregulated market. Beside open question there were options as „price reduction“, „more competition“, "own choice of supplier“ and „customer's care“. Respondents most frequently ticked „own choice of supplier“ (75,7 %), then „more competition“ (54,8 %) and „price reduction“ (37,4 %).

Notice: Analysis was also published in PRO-ENERY magazine number 3/2012

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