Zak Meziane
Lisa Petrovic
Datamonitor, London, UK

With falling prices and shifting market structures, customer acquisition and retention strategies have never been more important in Europe’s electricity markets as they are today. The success of these strategies begins with effective sales and marketing, and winners and losers are already emerging.


Figure 1. Germany: Why are the twitchers not switching?
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Deregulation of electricity markets within the European Union has brought many consumers the ability to switch energy supplier. In fully liberalized markets where competitive forces are strong, a high level of customer switching might be expected as consumers take advantage of savings offered by suppliers keen to increase their customer base.

The UK started to liberalize its power sector in 1990, and customer switching has been occurring for some years.

In 1998, Germany fully liberalized its electricity market, but unlike the UK it is characterized by low levels of switching and a low number of foreign entrants. Given that Germany represents the largest electricity market in western Europe, this fact seems something of an anomaly.

Foreign players

Foreign energy suppliers are yet to make their mark on the German industrial and commercial electricity market, but Datamonitor believes that this is set to change. Datamonitor’s recent survey of 300 of the country’s largest industrial and commercial energy users shows that foreign suppliers, such as France’s EDF and Sweden’s Vattenfall-VASA, are set to become a major force in the German electricity market in the near future.


Figure 2. Germany: How likely are survey respondents to be supplied for all or part of their electricity demand by a foreign supplier by 2002?
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Although foreign energy suppliers failed to make their mark during the last contract round in Germany, Datamonitor’s recent survey, carried out in January and February 2001, shows that times are changing. The results of the survey reveal that, although only two respondents out of 300 had already chosen a foreign energy company as their main electricity supplier, almost one third of them had held contract negotiations with at least one foreign supplier during the last contract round.

Europe’s largest electricity supplier, Electricit√© de France (EDF), was the most active. Almost 20 per cent of respondents who had been approached by a foreign supplier cited that they had held contract negotiations with EDF.

Sweden’s Vattenfall-VASA and Belgium’s Electrabel were not far behind EDF. The survey also showed that 14.3 per cent of those approached by foreign suppliers stated that they held contract negotiations with Vattenfall-VASA, against 9.5 per cent of them for Electrabel.

It is clear, therefore, that foreign suppliers already have sales and marketing operations in place, yet to date they seem to have seen little success in persuading customers to switch, despite entering into formal contract negotiations. There are a number of likely reasons for this consumer hesitance, the most notable of which is the issue of grid access. It is arguable that consumers will lack confidence in foreign suppliers being able to overcome grid access and the hurdles it presents. However, if an energy regulator is introduced in Germany, this obstacle should effectively be removed.

The majority of the energy users that were questioned as part of Datamonitor’s survey agreed that price competitiveness was one of the key strengths of foreign suppliers. However, despite attractive price offerings, many were concerned about supply reliability and whether foreign suppliers would be able to tackle problems in a timely fashion.


Figure 3. UK: Share of electricity sites and consumption surveyed that switched, twitched, or did not switch supplier, by consumption category
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Most respondents blamed this lack of confidence on distance and, as such, it is probable that as foreign suppliers establish a closer physical presence to their potential customers through regional offices and more face-to-face marketing approaches, consumer confidence will grow and new business will be secured.

Slow switching

Foreign companies were not the only suppliers to experience difficulties in persuading electricity customers to switch. Since Germany’s electricity market was liberalized, only seven per cent of the 9 GWh and above customers have switched suppliers, compared with 54 per cent of UK 1 MW and above customers who switched in the first years of deregulation. Similarly, less than two per cent of volumes in the German 0.5-9 GWh sector have switched, against 47 per cent in the UK’s equivalent 100 kW-1 MW market.

These problems have occurred mainly because the 1998 Electricity Act did not call for an industry regulator to be assigned, and instead left it to the Federal Cartel Office to regulate the market and to intervene retrospectively when anti-competitive behaviour was detected.

The new law also neglected to make provisions for regulating third party access to the transmission and distribution grids, and relies instead on voluntary industry agreements. However, despite the introduction of two such agreements between the utilities and end-user associations, there are still discrepancies between the grid charges imposed by the various different distributors.

Hindering factors

The results of Datamonitor’s survey confirmed that large discrepancies between distributors’ grid charges exist. Many survey respondents said that they had looked for a new supplier but had not yet managed to switch. This category, referred to as ‘twitchers’, cited several reasons for not making the final switch, the most popular of which was that they had been unable to find a supplier that could offer savings on their current contract. Indeed 40 per cent of ‘twitchers’ cited this as the main obstacle they faced.

However, as many as 15 per cent specifically blamed high grid charges as the reason for not switching. Only a very small percentage of respondents said that they did not need to switch, as their incumbent suppliers were happy to match the best offer received.

Both the Stadtwerke and the regional suppliers use prohibitive grid charges to fend off competition, with grid charges in many cases higher than the final electricity price they charge their own customers. In fact, it is not unrealistic to argue that high grid charges have either directly or indirectly affected at least 55 per cent of twitchers.

Winners and losers

So far, the national suppliers have been the main beneficiaries of switching. Datamonitor’s survey, which interviewed 20 per cent of the electricity industrial and commercial market by volume, found that major players such as RWE, E.ON and EnBW have claimed the majority of switchers to date, which comes as little surprise given the vicious price war that they conducted at the onset of competition and the rise in marketing and advertising spend.

Deregulation has not proved so fruitful for the Stadtwerke, however, who are unable to absorb the potential losses incurred through marketing contracts with extremely low prices. They have therefore had very limited success in winning new business. They have tried instead to defend their existing customer bases by charging excessively high grid access charges, which makes it very difficult for customers to switch to a new supplier. A great deal of consolidation has also been seen among the municipal utilities as they attempt to gain economies of scale and broaden their regional brands.

The good news for foreign suppliers is that respondents said that they are fairly receptive to the idea of being supplied by a foreign energy supplier. When asked how likely they were to be supplied by a foreign company for some or all of their electricity requirements, almost 20 per cent said that it was either likely or very likely that they would purchase electricity from a foreign supplier by 2002.

As demonstrated by Figure 2, the greatest opportunity lies with those customers who own different sites of varying sizes (mixed customers), as opposed to those with large sites only. This is mainly due to the fact that the latter are already enjoying significant discounts from their incumbent suppliers and as such lack the motivation to switch.

UK gathers pace

Datamonitor also carried out a survey of the UK industrial and commercial market segment to examine the strategies of energy suppliers and the needs of the end-users.

Datamonitor believes that there are two key forces in the UK utilities market which are impacting upon sales and marketing operations in the industrial and commercial (I&C) sector; price convergence and supplier consolidation. These forces reflect the gradual maturing of the market.

Price convergence is being driven by maturing competition and, while there still remains scope for customers to make significant savings by switching supply contracts, Datamonitor believes this trend will continue and gather pace in the short to medium term. The second force, entwined with the former, is that of supplier consolidation. There is evidenced of this as recently as February 2001 with Innogy’s acquisition of Yorkshire Electricity. Again, Datamonitor believes that there will be further supplier consolidation in the short to medium term.

While price will always remain the fundamental driver in all sectors of the I&C energy market, Datamonitor believes that the above forces will have a significant impact on consumer demands and thus the market in the short to medium term. As prices converge and suppliers consolidate there will be diminished price differentiation. Under these conditions consumers will place increasing emphasis on factors such as customer service, pre and post-sales care, add-on services, and energy management. As well as consumer pull, Datamonitor also believes that there will be a high degree of supplier push as utilities look to secure customer loyalty and increase revenues per customer by bundling in more products and services.

Under these market conditions the performance of sales and marketing teams will be increasingly important in customer retention and even more so in customer acquisition.

Converting the twitchers

The analysis of the switching trends reveals that, even after over ten years of competition, there are still a number of ways suppliers can unlock customer groups by improving their sales and marketing performance. Specifically, the research showed that there is a significant proportion of customers who looked to switch in their last contract round but could not find a deal which convinced them to. These twitchers accounted for as much as 43 per cent of consumption in the 100 kW-1 MW electricity sector.


Figure 4. UK: Share of gas sites and consumption surveyed that switched, twitched, or did not switch supplier by consumption category
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In the UK electricity sector, the sub-100 kW market demonstrates the highest level of switching across the traditional consumption categories. This is followed by sites in the above 1 MW bracket and sites in the 100 kW-1 MW category. Nearly 20 per cent of the 100 kW-1 MW sites surveyed by Datamonitor are twitchers, and only a small share of the sites surveyed have not considered switching supplier, representing the ‘entrenched’ group.

In the natural gas sector, the switching shares are lower compared to those for electricity. Up to 28 per cent of small firm sites have considered switching, but are yet to do so, and nearly 22 per cent of interruptible sites have considered switching as well. The interruptible sites, however, also represent the most entrenched customer base, with as much as 40 per cent having yet to look for an alternative supply.

The twitchers therefore represent the largest group and are a key group from a sales and marketing and customer acquisition potential point of view – these consumers actually looked for a new supplier, but for some reason chose not to switch. Datamonitor sought to probe these customers and find out why, after they took the time to look, they decided not to switch. The reasons given were largely consistent across sectors and can be broken down into five major categories:

  • Poor prices: A large number of those surveyed indicated that they had not switched after looking because of the poor prices available. The lack of competitive pricing was the most common reason for not switching, and according to the majority of twitchers, they ended their negotiations with suppliers for this reason. With increasing price convergence this is set to become an even more important barrier which must be overcome if companies are to expand their customer bases.
  • Poor response to tender enquiries: According to a number of respondents, suppliers did not respond effectively to their tender enquiries. Either they took too long to respond, or in some cases they did not even get back to the customer with an offer.
  • The process was too complicated and time consuming: Many customers stated that the process of moving from the tender enquiry to actually negotiating the contract was too long and protracted. They felt this was due to the inefficiency of the supplier.
  • Suppliers are not proactive enough: A number of respondents felt suppliers were not being proactive enough in capturing a potential audience and specifically in approaching them.
  • Lack of flexibility: A major area of contention was the suppliers’ lack of flexibility. A number of examples were given for this, such as the inability of some suppliers to provide nationwide contracts. Consumers feel that suppliers are not tailoring their supply contracts to suit the needs of their potential or even current customers. According to one customer, some suppliers have a ‘take it or leave it’ attitude.

Marketing is key

Datamonitor therefore believes that, even in the mature UK market, there is a definite opportunity for improved sales and marketing performance to directly impact upon converting these twitchers to switchers.

Specifically, the research showed that suppliers need to ‘raise their game’ in a number of ways:

  • Suppliers need to be quicker in presenting their contract offers, and in moving the process from tender to negotiation
  • Suppliers need to be more proactive in approaching customers and more flexible in contract negotiations
  • Suppliers need to communicate the non-price elements and benefits of switching especially when targeting the lower end of the market
  • Suppliers still need to explain the switching process and communicate its rewards to some customers.