Electricity Market Developments in Germany

The liberalization of the German energy market was implemented in 1998 on the assumption that competition among retail suppliers of electricity would lead to more efficient prices and thus gains for consumers. We note here that this is not what actually came to pass—at least not for all specific customer groups.

Although the general expectation was that competition would drive down the markups of retail suppliers of electricity, there is little proof that this has happened in the retail market for household electricity. Figure 1 shows data from BDEW (2014a) on the development of retailers’ reported combined costs for generation, transport and sales of electricity (all cost components excluding regulatory fees and taxes).

Figure 1 indicates that the costs of these components initially decreased after the liberalization of the energy market, but that over the course of the years 2002-2008 these prices rebounded to overtake their initial level in 1998. Compare this to the same statistics for industrial electricity customers’ retail prices in Fig. 2.

Retail costs of household electricity. Source

Fig. 1 Retail costs of household electricity. Source: BDEW (2014a)

Retail costs of industrial customers’ electricity. Source

Fig. 2 Retail costs of industrial customers’ electricity. Source: BDEW (2014a)

Figure 2 shows that the sum of costs associated with generation, transport and sales for industrial customers also fell initially after the beginning of liberalization in 1998 and rebounded over the period 2002-2008. Competition, and in particular the increasing tendency of firms to open their electricity contracts to open competitive bidding, however, seem to have had a significant effect on these prices since 2008. Industrial firms pay less for their electricity (not including surcharges and taxes), than they did in 1998—a stark contrast to the situation in Fig. 1 for household customers. Studies have also directly estimated the costs of sales of electricity retailers to households. The results from Brainpool (2013) and VKU (2013) are depicted in Fig. 3.

Given that the costs of wholesale power and the costs of distribution have undergone the same developments throughout this time period for both households and industrial customers, Figs. 1, 2 and 3 lead us to conclude that price competition is not as intense in the market for household electricity as it is in the market for

Estimates of retailers’ costs of sales (incl. markup) for household tariffs. Source

Fig.3 Estimates of retailers’ costs of sales (incl. markup) for household tariffs. Source: Brainpool (2013) and VKU (2013)

industrial users. These figures also emphasize a subtle point concerning the increased competition brought about by the new regulations in 1998: namely that liberalization of the retail market coincided with a fundamental change in the way in which households were forced to view electricity—namely as a good offered in different varieties by different firms. Electricity was, in a sense, coerced by the change to the new, open market structure, into being a heterogeneous good, which took on the properties of quality (e.g., in terms of renewable sources) and the attributes of the firm offering the tariff (regional identification, image, etc.), as well as a price component. Consumers discovered at the same time that they were expected to make a choice among a multitude of available electricity tariffs offered by hundreds of different firms.

Households were thus not only confronted with the choice of choosing the cheapest tariff. They were suddenly able to express support for the ongoing energy revolution by purchasing renewable electricity tariffs (Hamburg Institut Consulting 2013), to expect more service-oriented offerings of their provider (Schmolke 2010) and to even participate in civic- and stakeholder programs in their regions and cities (Flieger 2011). Although renewable energies have received much attention in the literature, especially concerning social acceptance in society and markets and in the innovation systems literature (e.g. Jacobsson and Bergek 2011), regionality seems also to have played a very important role in the aftermath of the liberalization of the German market. In the period 1998-2013, out of all German households, 34.3 % had changed their electricity provider at least once (BDEW 2014b). This does indeed represent a large number of households that have made an effort to find a better or cheaper electricity tariff than that provided by their local service provider. However, this also implies that 66.7 % of all households either never changed their tariff or changed their tariff to a different offering of their regional electricity firm. The market regulator in Germany, Bundesnetzagentur (2014), reports that 79.9 % of all households were supplied by their regional “basic services provider” (ger.“Grundversorger”) in 2012. 20.1 % of all households were respectively customers of a different electricity retailer than the one closest to them. Combined with

Percentage of German households having changed electricity providers since market liberalization vs

Fig. 4 Percentage of German households having changed electricity providers since market liberalization vs. percentage of households choosing the regional utility company for their electricity in 2012. The difference between the size of gray blocks is the implied percentage of households that changed suppliers during liberalization of the market, but decided to change back to their regional supplier at a later time

the cumulative 34.3 % of households that had changed providers at least one since the liberalization, we are led to conclude that there may even be a trend for households to return to their local municipal utility companies after having left them for a few years to try another provider. Figure 4 depicts this turnaround in the movement of households back to choosing their regional electricity utility company.

These regional dynamics could imply that the liberalization of the retail power market has indeed led to more competition, but that this competition appears not to be for one homogenous good. Utility companies are competing for customers who often exhibit a preference for firms with a vested interest in their region. Many households also prefer renewable energy to conventional energy, all other factors held equal (price, security of supply, etc.). In Sect. 3 we present a simulation framework for analyzing these aspects’ effects on electricity firms’ behaviors and prices.

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