Friday, May 20, 2011

Do we really need competition in the electricity market?

Ireland has only relatively recently introduced competition into the residential electricity market. As a result a considerable amount of broadcast time on both radio and TV is devoted to advertisements from the various electricity companies encouraging household to switch electricity suppliers. Naturally, I took advantage of this situation to switch to a company who is providing me with cheapest electricity, but at the same time I am confused by what is the point of the exercise.

I am not an economist, but as far as I understand the reason why they recommend the introduction of competition into markets is because the competitive pressure to win market share will encourage the various companies involved to introduce innovations that will reduce costs and/or increase quality of service.

I can see how this works in the telecoms market. Some of the companies active in the market provide high quality services and premium prices and others provide lower levels of service, but at cheaper prices. In practice it can be difficult to find out the quailty level of the service you will get from a particular service provider (in fact it can sometimes be hard to find out the exact price they will charge you either), but in general the market works well with different service offerings appealing to different market segments.

The trouble with the electricity market is that the electric grid is designed to deliver exactly the same voltage of electricity to all of the customers. I know that some of the companies like to boast about the fact that they use a high percentage of renewable energy sources such as wind, but there is no way to tell that the electricity delivered to their customers' houses is from these clean source sand not from the dirty coal fired stations owned by their competitors. Likewise, if the wind didn't blow and there was a shortage of electricity, fairness should dictate that the environmentally conscious customers should be the ones subjected to the inconvenience of a temporary loss of supply - but there is no way to cut off supply to these customers while maintaining supply to the customers who chose to go with the less environmentally friendly company.

As far as I can see the only way that the electricity companies can compete with each other is in their billing system. This is hardly the area where the greatest amount of innovation is to be found. Am I missing something?


  1. Competition forces the providers to compete not only on price, but on the customer service side as well. Billing is only one aspect of that customer service.

    As to the actual electricity being the same - it is true that the national grid ensures that the energy you receive could be from any source (or a mixture), but that's not the point. The situation is similar to when you withdraw money from an ATM - the actual notes you get were owned by the provider of the atm in question, but through electronic funds exchange it ensures that the money effectively came from your bank and your account. In simplistic terms, when you pay a particular supplier of electricity that supplier uses a proportion of that money (after their markup) to purchase the appropriate amount of electricity supply. It is up to the supplier whether this is renewable sources or not. Suppliers are forced to reveal the breakdown of their supply. Airtricity, having the greatest proportion of renewable usage, is the most vocal about these figures:

    You can also distill the issue down to supply and demand. Our choice of supplier increases demand from their sources. If we choose a supplier that tries to maintain a high percentage of renewable energy supply, then we are increasing demand for renewable energy which will ultimately lead to investment in renewable energy generation and a decreased demand for traditional energy sources.

  2. @ Fintan - Thanks for your explanation. Your analogy of the bank notes and the ATM helped me understand that this could indeed be a good competitive market.

  3. It's doesn't answer the question, but when was a Monopoly (or lack of competition) ever good for the consumers ? Reinhard

  4. @Fintan - I was thinking again about your analogy with the ATM. One key difference is that the banks know instantly who has withdrawn money from the ATM and hence they know which account to debit. In the case of electricity the network operator will see a temporary surge in demand, but they won't know who is using the electricity until the meters are read at the end of the month - hence they don't know whether to request more capacity from the environmentally friendly supplier or from one of their competitors.