How liberalisation can go wrong

Liberalisation was supposed to make energy markets more consumer-friendly. But without proper safeguards, liberalisation can open a new world of problems: dishonest doorstep salesmen, forged signatures and inaccurate bills.

The UK, which liberalised its energy market in the mid-1990s, has arguably the most mature and liberalised energy market in the EU, offering insight into what can go right or wrong for consumers. Other countries are in the process of liberalising - July is the EU deadline for opening the household electricity market.

Initially after liberalisation, energy prices in the UK declined substantially. But Energywatch, a UK consumer advocate group, points to a number of problems experienced by consumers. "In the early days of domestic retail competition, low prices came at a cost in terms of service," said Allan Asher, chief executive of Energywatch, at a conference on energy earlier this year.

"At the time, door-to-door energy salespeople were targeting the elderly to persuade them to change supplier on the understanding that they would receive free CDs or cheap airline tickets." The door-to-door selling of energy became so dubious that energy companies were advising vulnerable consumers not to listen to their own salespeople, Energywatch discovered.

The low prices brought by liberalisation have not stayed low. Since 2003, prices have been climbing back up. Levi Nietvelt, at BEUC, the European consumers’ organisation, blames increased vertical integration in the power supply sector. He says that UK liberalisation started out well, with 22 companies involved in power generation and distribution, but subsequent consolidation has left only six companies on the market.

The vertical integration that took place in the UK is bad for consumers because if a company controls both generation and the means of distribution it is harder for other power-generation companies to get access to consumers. Belgium, which completed the liberalisation of the national household market in January of this year (the region of Flanders liberalised in 2003), presents similar obstacles to consumer choice, with Electrabel still controlling the vast majority of the market. Switching rates, which provide a measure for the competitiveness of an energy market, are only about 17% in Belgium. In a March report from the European Commission rating pro-gress towards liberalisation, Greece, Estonia and Latvia were listed as having non-functioning electricity markets. Countries listed as having taken only the initial steps were Belgium, Luxembourg, Portugal, Poland, the Czech Republic, Slovakia and Lithuania.

A further problem for consumers is guaranteeing universal service in a liberalised market, especially for hard-to-reach areas. Gas companies in the UK, for instance, charged high connection fees for houses further than 23 metres from a connection. Nitevelt says that regulators are often too caught up working out the technical framework for liberalisation to think about questions such as "What happens when you move?" and "What happens when there is no electricity for a certain time?"

Consumer advocates hope regulators learn from the pitfalls of the past and make sure that, with further rounds of liberalisation, consumers, especially vulnerable ones, are not left in the dark.

Liberalisation was supposed to make energy markets more consumer-friendly. But without proper safeguards, liberalisation can open a new world of problems: dishonest doorstep salesmen, forged signatures and inaccurate bills.