The rapid changes occurring in the energy sector, both in Korea and around the world, are calling for overall change in the energy system. Globally, investments in renewable energy are increasing despite the decrease in oil prices, owing largely to the strengthened efforts to address climate change. Domestically, Korea is promoting demand-side energy policies due in part to the difficulty of building energy facilities as well as to achieve its greenhouse gas reduction goals.
Due to the strengthened efforts around the globe to reduce greenhouse gas emissions and the development and convergence of technologies, centralized energy supply systems are beginning to make the transition to self-sufficient, distributed energy systems. The liberalization of the energy market, which played a major role in the transformation of the energy system, accelerated the development and acceptance of technologies and enabled the development of various business models through competition.
Korea’s new energy industry, which has been gaining increasing attention recently for its promotion of the development of various energy services to counter climate change, can be further vitalized through the liberalization of the energy market. However, the Korean energy market, with the exception of the petroleum industry, is run as a monopoly. Now, with the development of information and communications technology, it is possible for the electric power industry to develop the energy service industry and create new business models based on smart grid technology. However, the monopolistic market structure poses a major obstacle to this. In countries that have already opened their retail electricity markets through the reorganization of the structure of their electricity industries, many different businesses have developed new revenue-generating business models and are providing a diverse range of bundled energy services to consumers.
Ultimately, in order for the new energy industry to develop new business models, such as an array of energy source bundles, and meet the needs of consumers, a competitive retail energy market is an absolute necessity. Therefore, prior to the opening of the retail electricity market in the future, it is important to gain an understanding of consumer preferences for bundled energy services, given the necessity of reviewing the design and operation of the market based on consumer preferences once the retail electricity market is opened.
In this study, we examined the different types of retail electricity markets and bundled energy services, analyzed consumer preferences, and used the results to discuss the possibility of competition in the retail electricity market and its implications.
Before we gain an understanding of consumer preferences for bundled energy services in an open retail electricity market, it is important to examine the changes in the retail electricity market, transaction methods, and the role of consumers and understand those changes, as they influence the emergence of bundled energy services. Market structures differ depending on the way competition is introduced into the retail electricity market, and the types of businesses and means of purchasing electricity vary depending on the methods of supply and demand. These differences are influenced by businesses’ market shares and market dominance and price decisions related to energy service bundles. In addition, the development of an advanced metering infrastructure (AMI) after the opening of the retail electricity market to competition would lead to the development of new business models and changes in the market structure that give consumers greater choice regarding their use and purchase of electricity. Consumers would be given the freedom to choose their electricity providers and various energy service bundles, including bundles of different energy sources and bundles of electricity and other products and services, additional services, and unrelated services.
Major foreign countries have already opened their retail electricity markets to competition in the process of reorganizing the structure of their energy markets, thus making various bundled energy services and electricity pricings available to consumers. In competitive retail electricity markets, businesses focus on providing new energy service bundles and discounts on electricity prices in order to attract more customers. Energy companies in different countries are changing the market in an effort to ensure their survival. While some are providing a range of diverse energy service and product bundles, others are offering various energy sources simultaneously. Ultimately, bundled energy services are a part of a phenomenon that emerges following the opening of a retail electricity market. With the increase in the number of choices for customers, more and more energy companies come to provide customized energy services as a means of attracting more customers. In addition, it is necessary for the energy market to become more flexible in order to elicit the active participation of consumers.
The general policy direction for Korea’s retail electricity market has already been set—the market will be opened, allowing diverse businesses to enter the market. However, the specifics have not yet been decided. Therefore, before the actual opening of the market, it will be helpful to explore the criteria by which consumers in an open market make decisions regarding bundled energy services.
Through surveys, we analyzed consumers’ criteria for selecting electricity service providers and bundles of electricity and other services. In studying consumer preference, we decided to focus on five characteristics: business types, gas and heating service bundles, Internet and communications service bundles, solar panel leasing services, and electricity rates.
We then divided each characteristic into different levels and conducted the survey. The results of the survey revealed that consumers would have greater preference for KEPCO in an open retail electricity market, making it difficult for other suppliers to acquire a customer base immediately following the opening of the market. In general, consumers seemed to favor the entry of other electricity suppliers in the retail electricity market, suggesting that while consumers supported a competitive market structure, the image of KEPCO as a corporation specializing in electricity supply would make it less likely that they would actually change their electricity supplier. This finding is in line with the problems faced by other countries, where the existing dominant electricity suppliers remained in the retail electricity markets after they were opened to competition.
The results also revealed that consumers would be more likely to make their decisions based on the discounts offered through bundles than on the content of those bundles. With all else being equal, consumers would prefer to continue receiving their energy services individually from energy companies specializing the supply of those particular energy sources. This revealed that it would be imperative for energy suppliers to provide considerable discounts or additional services for consumers, ensuring that they enjoy high levels of efficacy and satisfaction through the use of bundled energy services.
In the end, energy suppliers must achieve price competitiveness in order to attract customers in a retail electricity market that has been opened to competition. In other words, suppliers must be able to provide discounts or additional services through improvements in their productivity and efficiency, which are market conditions that are in their power to control. However, if there is discrimination in relation to market conditions that cannot be controlled by suppliers, it would be impossible to create a competitive market structure in the retail electricity market. Therefore, in an open retail electricity market, it is crucial to create a level playing field for all suppliers. Since the issue of creating a level playing field in the retail electricity market is related to the transaction structure in the wholesale market, it is also important to ensure that the design and operation of the overall market structure of the electricity industry allows for fair competition.
This issue of creating a level playing field would be particularly crucial if the Korean government were to decide to allow KEPCO, the dominant electricity supplier, to remain in the retail market after opening the market to other companies. Since KEPCO would likely remain dominant, owing to its long-established image as a reliable electricity provider, other companies would be unable to compete in the market without the conditions for fair competition.
To create a level playing field in the electricity market, it is imperative to realign the conditions for wholesale electricity transactions and the regulations for the use of the transmission and distribution network. At the very least, the same conditions that are applied to KEPCO’s electricity purchases in the wholesale market should be applied to all its competitors in the open retail electricity market. In addition, since KEPCO owns the electricity transmission and distribution network, the fees for using the transmission and distribution network should be kept fair and transparent.
Applying measures that are advantageous for new electricity providers, such as lower fees for the use of the electricity transmission and distribution network, or strengthening regulations on the dominant electricity provider would also help new electricity providers achieve competitiveness in the market.
Policies would need to be improved as well, allowing the integrated management of energy sources and strengthening the function of the market. Considering the possibility of other energy markets being opened in the future, which could result in the combined supply and provision of different energy sources, it is advisable for policymakers to focus on the efficient operation of the energy market rather than on monitoring fair competition.
The discussion above provides the following implications for the Korean retail electricity market: since consumer preference for bundled energy services is directly related to price competitiveness, the foremost factor to consider when opening the retail electricity market should be the creation of a level playing field. To achieve this, both the wholesale and retail markets must be designed and operated based on conditions that guarantee fair competition in areas that cannot be controlled by participating electricity suppliers. In addition, legislation and systems must be improved and policies changed in line with the new competitive structure of the market.
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