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

Four Action Points from
Cambridge to Achieve a
Healthier Liberalised
Energy Market in Japan.
1

COPYRIGHT (C) CAMBRIDGE ENERGY DATA LAB LTD. ALL RIGHTS RESERVED.
Agenda
1. Corporate outline
2. UK Energy Market Review: What can Japan learn from the UK
3. Four Action Points for Japan
3.1. Simplified tariffs for consumers
3.2. Levy exemption for new entrants
3.3. Confidence code certification for switching websites
3.4. Smart meter data access for third parties
2

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.
3

1. Outline of the CEDL
4
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 consulting
Energy simulation model development
Team 7
Homepage http://camenergydatalab.com/

1. Key Members
5
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)
6

1. Cambridge University Collaboration
7
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.
8

2 Types of Market Competition
9
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].
10

2 The Reasons for Switching (2014)
11
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)
12
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].
13

2 ‘The other group’ Suppliers
14
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].
15
2 Profits & Prices (2000 and 2011)

3. Four Action Points for Japan
3. Four Action Points
3.1. Simplified tariffs for consumers
3.2. Levy exemption for new entrants
3.3. Confidence code certification for switching websites
3.4. Smart meter data access to third parties
16

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.
17

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].
18
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
19

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].
20
E.ON energy 4 tariffs OVO energy 4 tariffs

3.1 Effect 2: Upstream Competition
21
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].
22

3.2 Rationale 1: ‘Big Six’ Dominance
23
‘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
24
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
25

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.
26

3.4 Proposal: Confidence Code Certification for
Switching Websites
27
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 suppliers
2. Carry every tariff available
3. Meet higher standards of accuracy and reliability
● Amongst other things, accredited comparison sites are
required to:
1. Make commission arrangements transparent
2. End confusing language
3. 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].
28

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)
29
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’.
30

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.
31

3.5 Rationale 1: WAN (C-route) is Under the Control
and Regulation of the Government
32
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
33
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.
34

We are Honored to Support
the Freedom of Energy
Choice which will be given
to Japanese Customers
3535

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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