Market-Based Retail Prices

Market-based, end-consumer prices expose consumers to the true cost of electricity and provide an incentive to consume optimally (the ‘how much and when’ method) and engage in energy efficiency and demand response. Regulated prices are most often not time-differentiated (but not always — see for example the long-lived Tempo tariff in France). Just like for network tariffs, the price of using electricity should reflect when they are scarce. Regulated prices do not motivate suppliers to lower cost or innovate to compete for consumers and unlock their flexibility. They may also shield incumbentsincumbents Market leading entity, often long standing with inherited customers or assets following privatisation/unbundling. It may also hold market power. from new entrants, sometimes by regulation as monopoly suppliers, but also via the low margin of or below cost regulated offers. If they are subsidised, they bar the market by hiding certain costs from consumers, which still have to be paid by someone. Consumers that have access to regulated services (‘eligible consumers’) prove to be difficult to reach with competitive offers.  

Even in a competitive retail supply market, switching rates — an indicator of competition — is often low due to barriers, including too many complex and bundled products that are difficult to compare, as well as lengthy and costly processes. Easy market entry needs to be balanced with some guarantees on business resilience in case of market volatility. Rules to ensure equitable sharing of costs borne by suppliers of last resort are to be developed.

Market-based retail prices are a core element of the European electricity target modelEuropean electricity target model Based on the principle of energy-only markets where the revenue of generators depends on the price of energy sold, and zonal markets are coupled so that the lowest prices bidsa re accepted up to point where netwrok congestion prohibit further trade.. Regulated prices are legacy measures that can apply for vulnerable consumers until the deadline of the final European phase-out is set (Article 5 of the Electricity Directive). Full Implementation is prevented by the political sensitivity around final electricity bills: 80% of Member States justified some price intervention with consumer protection. However, despite the liberalisation of the electricity sector, and formal opening of the markets, many Member States define a customer segment — usually the large majority — eligible for regulated end-user prices (Figure 1). Removing regulated tariffs is fundamentally a political decision with the transition that needs to be managed carefully so no excessive cost increases occur on those struggling to pay their bills.

Source: ACER/CEER. (2020.) Market Monitoring Report (MMR) 2019 — Volume 3: Energy Retail and Consumer Protection Volume.