In this chapter, we use the results of the analysis on consumer propensity for bundled energy services from Chapter 4 to determine the potential for retail electricity competition and its policy implications. The results of the analysis bear significant similarities to the situations in other nations where the retail electricity market has already been opened to competition among a wide variety of companies. Therefore, once Korea’s retail electricity market is opened, it is expected that Korea will face problems similar to those other countries are now facing. In the retail electricity market, the competitiveness of businesses depends largely on consumers’ satisfaction with the prices and additional services provided and is closely related to the design and structure of the wholesale and retail electricity markets. In this context, we would like to discuss related policy implications with a focus on market design and operation methodologies that would allow for the more effective operation of the retail electricity market after it becomes open to competition.
1. Consumer Propensity and the Structure of the Retail Electricity Market
A common phenomenon that has emerged in foreign countries that opened their retail electricity markets and adopted competitive structures is the existence of a market-dominating utility that makes it difficult for new electricity providers to gain competitiveness. A detailed examination of the rate at which consumers switch electricity providers showed that the rate, which was insignificant immediately following the opening of the retail electricity market, climbed with time but still remained low. There are various reasons for this, but one of the major ones is that consumers are inclined to stay with their current electricity provider unless other providers offer large discounts on electricity prices, due to the brand image of their existing electricity provider as a company that specializes in electricity supply, in addition to the various fees and procedures involved in switching providers.
The analysis of the questionnaire revealed similar results. Due to the strong brand image of KEPCO, the sole electricity provider in Korea’s current monopolistic retail electricity market, as a company specializing in the field, it would not be easy for other companies to gain competitiveness in the market. However, since there is positive sentiment among consumers regarding the entry of other companies into the retail electricity market, it would not be excessively difficult to open the market and create a competitive structure with an array of diverse electricity providers.
In terms of bundled energy services, the key for electricity providers in a competitive retail electricity market lies not necessarily in the types of bundles they offer but in meeting customer satisfaction in relation to prices and additional services. Although bundled energy services can provide convenience, it was found that consumers prefer price discounts and the provision of additional desired services. Therefore, even when the retail electricity market is opened to competition, allowing companies to enter the market and provide bundled energy services under the same conditions, consumers will likely prefer purchasing energy and other products and services from individual companies specialized in those areas.
Ultimately, in order for various companies to secure consumers by providing energy service bundles, they would have to provide significant price discounts through cost reductions or, if they opt to maintain the same prices for their services, exceptional additional services. While competition with other companies should be taken into consideration, the most important factor for new electricity providers would be whether they could gain competitive advantage over KEPCO. In terms of prices, KEPCO’s electricity prices would become a standard for other electricity providers, meaning that new electricity providers would have to achieve cost reductions in order to offer the same or lower prices. However, it would be difficult for electricity providers to increase their productivity or efficiency so as to offer such competitive prices, since other cost factors beyond the control of electricity providers are largely determined by the current market structure and its operation. Therefore, if the current market structure were to remain in place after the opening of the retail electricity market to other electricity providers, the realization of a truly level playing field would be quite difficult.
Based on the understanding that the operation of the wholesale and retail electricity markets has more impact on new electricity providers in terms of gaining price competitiveness over the existing electricity provider in the retail electricity market than their own efforts to improve efficiency, the next section will explore ways of designing the wholesale and retail electricity markets and review the possibility for true retail competition.
2. Designing the Wholesale and Retail Electricity Markets and the Possibility of Retail Competition
Designing the wholesale and retail electricity markets would influence the possibility of just and fair retail competition if the retail electricity market were to be opened in the future. With the opening of the retail electricity market, consumers
would have a larger pool of electricity providers from which to choose, and it would be important to provide a fair environment for competition where diverse electricity providers could bundle different energy services and additional services and continue to provide them with competitive advantages. Since the consumers who receive bundled energy services in the retail market are mainly residential consumers, rather than general or commercial consumers, it is important to discuss the retail electricity market as if it has been completely opened all the way to the residential consumers, rather than in the process of a phased opening depending based on the number of consumers.
The first question would be, “In what way could we open and liberalize the retail electricity market?” During the restructuring of South Korea’s electricity industry in 2001, the government set the goal of completely liberalizing the retail market by 2009. However, the division of KEPCO’s retail electricity sector was put on hold in 2004. As a result, the electricity sector today still retains the cost-based pool (CBP) transaction system. For a while, discussions were being held on the division of KEPCO’s retail electricity sector and the liberalization of the retail electricity market, but the monopolistic system remains in place in the retail electricity market today. There have been exhaustive discussions on returning to KEPCO’s vertically integrated system or proceeding with the liberalization of the retail electricity market, but no decisions have yet been made in the electricity market, which is currently operated under a transitional competitive power generation system.
Considering the various possible situations, the most realistic alternative in creating a competitive retail system is to relax the regulations so that various companies may enter the current retail electricity market. This approach is similar to that adopted by Japan, as there is an advantage in transitioning to a competitive market structure, while avoiding excessive debate, by allowing the dominant electricity provider to compete with new electricity providers. To gain the same advantage, Korea could create a competitive environment in which other companies are allowed to sell electricity by opening up the monopolistic retail market currently dominated by KEPCO.
However, since KEPCO is a dominant electricity provider in an already established electricity sales network, it would not be easy for other companies to compete with KEPCO on a level playing field. Therefore, the second question would be, “How do we create regulations that ensure fair and just sales activities?” First, it needs to be noted that besides KEPCO and community energy suppliers, there are no companies that have any experience in the retail electricity business or owns distribution networks. City gas corporations have their own distribution networks in the regions where they supply gas, which would make it easier for them to provide electricity along with gas. Telecommunications companies, on the other hand, have experience providing bundled offers, which could be an advantage, but since they have never supplied electricity, the key to their success would be in securing consumers willing to purchase electricity from them.
The most important factor, however, in creating a set of fair and just rules for competitors in the retail electricity market is price competitiveness. As deduced from the results of the survey, consumers change their electricity providers or new consumers select their providers depending on the price discounts or benefits, such as additional services, offered. In order for companies to provide price discounts or additional services, they have to bundle their own services with electricity, thereby utilizing economies of scope, or reduce costs by increasing productivity. However, retailers in Korea would be limited in their capability to reduce costs as a means of making their services more price competitive. If the rules for competition in the market are not fair and just, competition will be unfair from the very beginning. The largest obstacle to fair competition in the retail electricity market is the problem of supplying electricity and accessing the transmission and distribution network.
First, it is necessary to apply the same conditions to both the dominant supplier and new suppliers in the retail electricity market in relation to purchasing electricity from the wholesale market. Under the current structure of the electricity market in Korea, the conditions for fair competition depend on the conditions for purchasing electricity from the wholesale market. KEPCO does not purchase all its electricity at the system marginal price. The energy supplied by KEPCO’s power generation subsidiaries (Gencos) is purchased by KEPCO at below the system marginal price by adjusting the profits of the subsidiaries using the settlement adjustment coefficient (compensating coefficient), while the electricity supplied by private companies is purchased at the system marginal price. Therefore, if new companies are forced to purchase all their retail electricity at the system marginal price, unlike KEPCO, the competition between these companies and KEPCO would be unfair.30
30 Electricity trade outside the wholesale electricity market is not permitted in South Korea. Retailers must therefore procure electricity from the wholesale market through the Korea Power Exchange (“Electric Power Trading,” Article 31, Electric Utility Act). In order to create fair competition rules for an open retail electricity market in Korea, it would thus be necessary to reorganize the price calculation method for wholesale trading that is currently applied to KEPCO so that the same calculation method could be applied to all electricity providers. In addition, restructuring of wholesale transactions is believed to be necessary
More fundamentally, since there would be a number of electricity providers in the retail market, it would be worth considering changing the method for determining prices in the wholesale market so that all providers could bid on electricity supply under the same conditions. The supply bid system could also be changed so that the current system, in which prices are determined by generators submitting cost information and bidding on electricity supply, could be changed to a price bid system that allows retailers to bid on electricity. In an open retail electricity market, KEPCO would no longer be a monopolistic provider, as many retailers would be able to make bids. It would therefore be possible for both supply and demand bids to be made under equal conditions. In this case, competition among the suppliers and retailers could drive down the system marginal price.
In addition, the costs involved in using the transmission and distribution network could be unfair as well. In other words, it is highly likely that KEPCO, as the owner of the transmission and distribution network, would discriminate against its competitors, which would be forced to use KEPCO’s transmission and distribution network in the retail market. Therefore, to create a level playing field in the open retail electricity market, it would be necessary to address the issue of ownership of the transmission and distribution network. Fundamentally, accounting separation must be mandated; furthermore, legal separation should be considered regarding KEPCO’s transmission and distribution network and the sales sector. To maintain neutrality in the use of the transmission and distribution network, it would ultimately be necessary to consider separating ownership. However, if such separation proves difficult to achieve, it would at least be necessary to consider legal separation. The common issue among countries that have opened their retail electricity markets to competition has been prohibiting the dominant electricity provider, which also possesses the transmission and distribution network, from treating other retail providers differently. Some countries have attempted to solve this problem by establishing a separate company to be responsible for the operation of the transmission and distribution network.31
Aside from resolving the issues concerning electricity procurement and the use of the transmission and distribution network, measures are required to help electricity providers, other than the existing dominant company, gain some level of competitiveness. One such measure would be the implementation of asymmetric regulations favoring new electricity providers for a certain period following the opening of the retail electricity market, allowing them to gain competitiveness and ultimately creating a competitive environment. For instance, giving new electricity providers discounts on the usage fees for the transmission and distribution network would be one means of improving their competitiveness. Strong regulations on the dominant provider would also provide a way for the new electricity providers to compete on an equal level.
3. Functions of Policies on the Retail Electricity Market
It is also important to examine the policies on the market in the event various companies begin conducting business in the retail electricity market after the market is opened to competition. When the retail electricity market is so opened and electricity providers begin offering various bundled services, the prices of the bundles will differ depending on the content of the bundles. In the same way that bundled offers containing different combinations of TV broadcasting, telecommunications, and Internet services are priced differently, it might be possible to bundle different energy sources or bundle energy sources with TV broadcasting, telecommunications, or Internet services, and offer those bundles at different prices. In this, it will be necessary to improve the policies on the retail electricity market in order to create a level playing field.
In a monopolistic retail electricity market, there are often policy regulations that protect consumers through price caps.
In an open retail electricity market, however, such regulations need to be restructured in accordance with the competitive structure of the market. Aside from the design and operation of the electricity market, it is necessary to change the policies related to regulations. Instead of implementing price regulations under the monopolistic market structure, we need to strengthen market monitoring with a focus on fair competition. In addition, policies need to be adjusted toward strengthening such market monitoring with the aim of preventing unfair or anti-competitive practices among electricity providers. It is also necessary to reorganize related laws and systems, currently divided by energy type, so that they are organized by function, and review them so that all regulations can be integrated.
We have discussed the creation of a competitive market and related policies under the presumption that the retail
in order to incorporate new methods, such as direct transactions between retail electricity and power generation companies.
31 In Japan and France, the dominant electricity providers, TEPCO and the EDF, respectively, owned the transmission and distribution networks. After France opened its retail electricity market, the transmission and distribution network was legally separated from the EDF through the establishment of a separate company. Currently, Japan is considering the separation of the network through a holding company structure.
electricity market is open and there is a variety of companies offering service and product bundles. However, if other energy markets, such as gas and heating, were opened to competition, it would no longer be useful to manage energy sources by type. An effective means of handling the open retail electricity market and competitive structure would be to integrate the laws, systems, and management methods that had been implemented separately for each energy source under the traditional system, and realign them centering on their functions in the market.
4. Policy Implications
In this study, we have analyzed consumer propensity for bundled energy services and discussed the creation of a competitive retail electricity market with an array of electricity providers based on consumer propensity. Bundled energy services are provided by many different companies in a competitive market structure, making it very important to create a set of fair rules for all electricity providers in the market. Since consumers’ priorities in choosing bundled energy services will ultimately depend on price competitiveness, it is of utmost priority for the government to establish an institutional foundation and create fair market conditions that cannot be controlled by energy providers. In this section, we will therefore explore the policy implications of the related changes in laws on and systems of the market in line with the changes in market conditions and the creation of a level playing field in the open retail electricity market.
First, bundled energy services can be realized by opening the retail electricity market and creating a market structure with a range of electricity providers. In this way, consumers would have the freedom to choose their electricity providers, thus prompting competition among electricity providers, encouraging them to provide electricity and other services at competitive prices in order to secure customers, and ultimately changing the market. Competing electricity providers can increase their competitiveness by offering service bundles and reducing costs through improvements in efficiency and secure customers by providing discounts for the same products or keeping their prices the same while offering additional services. However, if the market conditions that cannot be controlled by electricity providers are not the same for all providers, fair competition will be impossible. If the ways in which electricity providers in the retail market are able to procure electricity supply is limited and not varied, the operational environment of the market will have an impact on providers greater than that of costs or services, which they are able to control. We therefore need to presume that the same conditions would be applied to all providers in the competitive market structure.
Second, it is necessary to conduct a preliminary review of the retail electricity market to identify any factors that could distort the level playing field and find ways to design and operate a market that enables fair competition. As for the retail electricity market, the conditions for fair competition are directly related to electricity providers’ procurement of electricity supply and the use of the transmission and distribution network, making it necessary to also conduct a general review of the design and operation of the wholesale electricity market in addition to the retail electricity market.
Ultimately, the opening of the retail electricity market and creation of a set of fair rules for electricity providers are related to the operational mechanism of the electricity market. It is therefore necessary to review the creation of a level playing field for electricity providers in the retail market in relation to the general operational structure of the electricity market.
Third, the laws, systems, and policies that have been created for the monopolistic retail electricity market need to be changed, along with policy management, in line with the transition of the retail electricity market to a competitive structure.