27.02.2024 | Supplier choice for small-scale consumers too?

Full market liberalisation: opportunity, not a must

This year, the Federal Council is returning to the proposed electricity agreement with the EU. For the EU, full market liberalisation is a key prerequisite for a potential agreement. Critics fear that the full market liberalisation will jeopardise protections for small-scale consumers. But the additional freedom of choice would have precisely the opposite effect. An assessment.

On 15 December 2023, the Federal Council published the draft of its negotiating mandate for an electricity agreement with the EU. This agreement would secure Switzerland’s integration into the European single electricity market, significantly boosting security of supply. For this integration, the EU is demanding that Switzerland liberalise its market for all end consumers as a «conditio-sine-qua-non». While the Federal Council has included full market liberalisation in its negotiation guidelines, it would like to see this accompanied by optional basic supply, in line with EU provisions. This means that in the future consumers would remain covered by basic supply if they don’t explicitly opt for another supplier. How exactly the basic supply of the future will be arranged is yet to be detailed. Critics fear that full market liberalisation will lead to less protection for small-scale consumers.

Less protection from current basic supply

The term may suggest otherwise, but the current cost regulation only offers limited protection for the end consumer. Basic suppliers charge consumers for their costs, but that doesn’t tell us anything about the extent of these costs. For example, if a supplier procures electricity when market prices are high, the costs are passed on in full to the consumer locked into basic supply. The huge sporadic price spikes in basic supply over recent years illustrate this very clearly. Even if the electricity supplier charges for generating energy in their own production plants, that doesn’t offer protection in and of itself. Consumers may be shielded from particularly high market prices, but they don’t reap the benefits when prices are low. On top of that, according to the federal government, on average production costs only represent around a third of electricity sales in basic supply – many suppliers don’t have production facilities of their own, and Switzerland is dependent on electricity imports in winter. 

Complete market liberalisation for efficiency and innovation

Critics say that for such a homogeneous, essential product as electricity, full market liberalisation would be of little benefit. But there are many counterexamples to this claim:

  • Consumers would no longer be dependent on their local basic supplier and would instead be free to switch if they were unsatisfied – for example, because of the procurement strategy, tariffs or customer service.

  • Consumers would have greater freedom of choice regarding the quality of their electricity (e.g. domestic rather than imported renewable energy). Conversely, local electricity products would be easier to market.

  • Electricity suppliers could offer innovative products and additional services which are highly limited or entirely absent under the current regulatory framework. For example, suppliers could offer dynamic energy tariffs that provide even small-scale consumers with beneficial flexibility (e.g. batteries and electric vehicles) while reducing the burden on the grid. Suppliers would have greater freedom to offer community products, for example, which would see consumers joining together to invest in production plants.

  • The competition would result in greater cost pressure among energy suppliers, which in turn would have a positive effect on efficiency in electricity production and procurement.

To sum up, a full market liberalisation would offer small-scale consumers the freedom to benefit from a broader range of products, innovative solutions and lower electricity tariffs. 

Continued basic supply

Even in the event of full market liberalisation, under the federal government’s guidelines basic supply would still continue. The EU explicitly foresees this scenario for households and small businesses. This means households could continue to rely on their designated basic supplier in the future if they don’t explicitly opt for another supplier. Under EU provisions, basic supply prices would have to be competitive, transparent and non-discriminatory. But in general they would have to adapt to market conditions; state-subsidised tariffs are only offered on an exceptional basis for customers in particular need. 

The electricity market reform recently introduced by the EU offers further protection for consumers. To prevent price spikes, in the future suppliers will be obliged to offer additional contracts with fixed rates, with a minimum term of one year, and hedge against price fluctuations in procurement. 

Under full market liberalisation, these elements could also offer Swiss consumers protection against price surges, and perhaps even more than they do now. But consumers would also benefit from what is ultimately the greatest protection – the freedom to choose suppliers.

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