Rationality of supplier switching in retail electricity markets

Abstract

Purpose – This paper aims to study the rationality of residential electricity customers' decision-making based on their behavior in liberalized electricity markets. Design/methodology/approach – Finnish residential customers' saving opportunities from supplier switching are studied by using price data obtained from the Finnish Energy Market Authority. The saving opportunities are then compared with the switches accomplished. The paper also examines the dispersion of offer prices (the prices that are offered to customers who wish to switch away from the default contract) by comparing all the offers for one- and two-year contracts in the largest network area in Finland (2007-2010). Findings – About 60-70 percent of residential customers are estimated to purchase electricity under a default contract from their local supplier. However, notable savings might be achieved by switching from default contracts to competitive contracts. The analysis shows that for the majority of customers, the offer prices were always cheaper than the default contract prices during the examined period. For customers with electric heating, the average saving opportunity (compared to the default price) was over 200 year in 2009 and 2010. The range of offer prices for contracts with similar terms has not decreased despite the regulator's efforts to facilitate supplier switching by providing a price comparison service. The discrepancy between saving opportunities and switching rates reflects the effects of the limits of consumer rationality in the retail electricity markets. Originality/value – The paper presents a longitudinal study about the benefits of supplier switching and the development of offer price dispersion.