Utility Switching in The Netherlands & Belgium

Utility Customer Switching

Research Project

Utility Customer Switching in the Netherlands and Belgium November 2005

TABLE OF CONTENTS

Utility Customer Switching in the Netherlands and Belgium

Summary Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

pg. 1

Netherlands Overview . . . . . . . . . . . . . . . . . . . . . . . .

Big Bang Avoided . . . . . . . . . . . . . . . . . . .

Switching Trending Upwards . . . . . . . . . . .

The Unbundling Driver . . . . . . . . . . . . . . . .

The Metering Driver . . . . . . . . . . . . . . . . . .

Looking Ahead . . . . . . . . . . . . . . . . . . . . . .

pg. 2 pg. 3 pg. 4 pg. 4 pg. 5 pg. 5

Belgium Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . .

pg. 6

Flanders

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pg. 6

Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

pg. 8

SUMMARY The Netherlands introduced full retail competition for both electricity and gas in July 2004 and today it is one of the most active European energy retail markets.

In the initial months after full market opening, most customer switching activity related to electricity rather than gas.

Electricity customer switching has continued steadily in the range of seven-to-15 per cent per year. In the first half of 2005 the Netherlands gas market has become more active and now matches electricity switching levels.

This healthy level of gas and electricity customer switching between suppliers can be attributed to Dutch consumer understanding of the switching process resulting from earlier exposure to green energy competition, as well as innovative marketing initiatives led by new entrant retailers that coincided with a spate of utility public relations crises.

Incumbent Netherlands utilities have lost significant market share to new entrants. With the arrival on the scene of utility giants Centrica, which acquired Dutch new entrant retailer Oxxio, and E.ON, which acquired NRE Energie, the Netherlands has become the new battleground for energy retail competition in Continental Europe. It is currently the second most active European utility retail market, following Great Britain.

We can expect to see the Netherlands continue to be a hotspot of energy retail competition in 2006 and 2007 given the Dutch Government's retail ownership unbundling initiative and the potential for new entrants to win market share based on their lower cost to serve business models.

In Belgium only the Flanders region is open to full gas and electricity retail competition. The other Belgian regions of Wallonia and Brussels are introducing full retail competition from July 2007.

Seven per cent of Flanders' electricity and gas customers switched supplier during 2004, earning Flanders a place in the top five most active electricity retail markets in Europe. Switching activity has since slowed to the rate of five per cent during the first nine months of 2005.

New market entrants including Nuon, Essent, and E.ON, have won sizable market share from the Flanders primary incumbent retailer Electrabel. However, Electrabel retains a 68 per cent market share by number of customers, and its market dominance will continue to inhibit successful retail competition in Flanders.

Utility Customer Switching in the Netherlands and Belgium

INTRODUCTION The Utility Customer Switching Research Project was initiated by Peace Software and VaasaEmg in 2004 to monitor and analyse customer switch rates and trends in competitive energy retail markets around the world, with the objective of providing valuable insights into successful competitive energy retailing.

Peace Software is the world's leading utility Customer Information System (CIS) software developer for utility billing and managing utility customer relationships. The company researches the dynamics of competitive energy retail markets so as to be able to develop advanced software products that anticipate and support utilities' business needs.

VaasaEmg is a renowned university-based research centre that specialises in utility marketing to end customers. It has researched utility customer psychology and loyalty in 45 countries to assist utilities to predict and influence customer behaviour and ultimately grow their market share. This research has led naturally to a desire to measure and analyse utility customer switching between suppliers as a quantifiable indicator of successful marketing strategies.

The combined utility market experience of Peace Software and VaasaEmg has enabled the Utility Customer Switching Research Project team to provide the first global view of utility customer switching activity. Over 30 competitive energy retail markets are monitored by the team and ranked according to customer switch rates. The ranking is published in the World Retail Energy Market Rankings Report and available through the Utility Customer Switching Research Project website (http://www.peace.com/customer-switching).

The standardized customer switch rate used in the Utility Customer Switching Research Project is calculated by dividing the number of customers that switched suppliers in a given period by the total number of customers in the market and converting the result to an annual rate. For example, if one per cent of customers switch supplier in a given month, that month has a 12 per cent annualised customer switch rate.

Customer switch rates are an important metric of energy retail market competitiveness and have the advantage of being objective, measurable and comparable between markets. While many utility market commentators tend to focus on the wholesale aspects of the utility value chain, such as generation sources, transmission interconnections, and wholesale market trading, Peace Software and VaasaEmg believe that both retail and wholesale markets must be successful for consumers to receive the full benefits of competition. In this context the Utility Customer Switching Research Project focuses its research on energy retail competition and the market participants that are all too frequently ignored: the customers.

This paper describes utility customer switching activity in the Netherlands and Belgium. Sources of data for this report include GreenPrices.com, EnergieNed, Datamonitor, Flemish regulator VREG, Amsterdam Economics, ENECO Energie, and Delta. The authors would like to acknowledge the assistance of Mark Schutz, Management Consultant, Energy & Utilities, LogicaCMG and Katrien Gielis, Economist, VREG.

Utility Customer Switching in the Netherlands and Belgium

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NETHERLANDS OVERVIEW The Netherlands introduced its first phase of energy retail competition in 1998 when 650 large industrial and commercial (I&C) electricity customers and 200 large I&C gas customers became eligible to choose supplier. Mass market competition commenced when the market allowed choice of green energy supplier for all electricity customers in 2001. Full market opening occurred in July 2004 and today all households in the Netherlands may choose their electricity and gas suppliers (Figure 1).

THE NETHERLANDS Population: 16.4 million Electricity Customers: 7.4 million including 600,000 I&C

s

Gas Customers: 6.7 million including 500,000 I&C Electricity and Gas Retailers: Nuon; Essent; Eneco; Electrabel; Oxxio (Centrica); NRE Energie (E.ON); Green Choice; RWE; Energie Direct; Gasunie

During the 2001-to-2004 'green period' when all electricity customers could switch to green energy suppliers, customer switch rates reached impressive levels, up to 10 per cent per year. Figure 2 shows the rapid penetration of green energy in the Netherlands during this period. The proportion of utility customers consuming green energy grew from one per cent to approximately 40 per cent in less than four years. This green energy statistic includes both customers switching to green energy suppliers and customers signing green energy contracts with their existing incumbent utilities.

1

Preliberalisation

2

Phased opening of industrial and commercial tranches

Utility Customer Switching in the Netherlands and Belgium

Aug 1998 Customers >2MW

Gas

Aug 1998 Customers >10 million m続 volume

Jul 2001 Green customers

3

Full market opening

Jan 2002 Customers >3x80 amps

Jul 2004 Full market opening

Jan 2002 Customers >1 million m続 volume

Jul 2004 Full market opening

4

Maturing competition

Source: Peace Software and VaasaEmg

Figure 1: Electricity and gas retail market opening in the Netherlands New market entrants such as Oxxio, Shell Groene Stroom and Green Choice capitalised on the popularity of green energy and by July 2004 accounted for more than half of green energy customers. Despite new entrants being able to offer only green energy products, overall they acquired a significant 26 per cent share of the total electricity customer base in the Netherlands. This 26 percent is remarkable when considered in contrast to other competitive retail markets where the aggregated new entrant market share rarely exceeds a single digit percentage.

The rapid consumer uptake of green energy products in the 2001-to-2004 period was seen by market commentators as a sign that overwhelming numbers of residential customers would switch gas and electricity supplier when the market fully

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opened in 2004. This prediction, combined with fears that utilities would be unprepared for full market opening as many had been unprepared for earlier I&C competition, led some market commentators to voice concerns that there would be a 'big bang' of explosive customer switching activity when the full market opened and consequently market processes and systems would fail to support the anticipated massive switching volume.

Millions of customers 8 7 6

Green

5 4

Green energy market share in the Netherlands grew from one per cent to approximately 40 per cent in less than four years

3 2

Grey

1 Source: Peace Software and VaasaEmg

0 Jul 2001

Oct

Jan

Apr

Jul

Oct

2002

Jan

Apr

Jul

2003

Oct

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Apr

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2004

Figure 2: Transformation of the Netherlands market from grey to green The earlier problems encountered with I&C competition were related to billing errors and to technical difficulties in the switching process. Chris IJsbrandy, Vice President, Cap Gemini Ernst & Young, explained: "Utilities were not really prepared for (I&C) market opening and their customer information systems struggled to cope. And when customers started to switch, administrative concerns only increased."

BIG BANG AVOIDED

However, the anticipated almighty 'big bang' of explosive customer switching activity did not occur.

One reason is the summer timing of full market opening since much of the population was on vacation at that time of the year. A second reason is the apparent reluctance of new entrant energy retailers to embark on aggressive sales campaigns and door-todoor selling until they grew comfortable with the new market requirements and processes. Defensive marketing from some of the incumbent utilities further inhibited customer switching in the first months after full market opening.

29%

12%

Utility Customer Switching in the Netherlands and Belgium

Full market opening in July 2004 did in fact see significant customer switching. EnergieNed, the federation of energy companies in the Netherlands, estimated that 150,000 electricity customers and 9,000 gas customers switched supplier immediately and a further combined 90,000 customers switched in the following four weeks.

Essent Nuon

27%

23%

Others 5.5% 2% Delta 1.4% Oxxio NRE Energie

ENECO Energie

Source: Peace Software and VaasaEmg

Figure 3: Netherlands electricity retail market share - 2005

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Customer switching did not escalate out of control and neither did the market fail as anticipated. Market commentators instead observed a relatively problem-free switching process that enabled customer registrations to be processed within a week, the result of an extensive programme of automation and testing of systems and processes in the two years leading up to full market opening. However, the market has not been without the issues common to newly opened markets, such as problems in achieving the timely delivery of meter data and difficulties processing final billings for customer move-out situations.

SWITCHING TRENDING UPWARDS In the initial months after full market opening, most customer switching activity related to electricity rather than gas.

Aggressive sales campaigns emerged in the final quarter of 2004 and early 2005 and customer switching began to trend upwards. Electricity customer switching since full market opening has continued steadily in the range of seven-to-15 per cent per year. This healthy level of switching can be attributed to Dutch consumer awareness and understanding of the switching process resulting from earlier exposure to green energy competition, and innovative marketing initiatives led by new entrant retailers, which notably included a series of humorous television advertising campaigns.

Furthermore, a spate of public relations crises for a number of the incumbent utilities eroded customer trust in the traditional utility brands and encouraged customers to switch to new entrant retailers. It is believed, for example, that incumbent Nuon had lost more than 10 per cent of its customer base by mid-2005. Figure 3 shows the market share of electricity retailers in the Netherlands by number of customers.

The Netherlands gas market has recently become more active and in the first half of 2005 matched the levels exhibited for electricity. As competitive utility retail markets mature over time, gas and electricity customer switching rates often converge, due in some part to the take up of dual fuel products.

Figure 4 shows the customer switching trend in the Netherlands for electricity since July 2001 when the market opened to green energy competition and incorporates gas switching since July 2004.

Annualised percentage of customers switching per quarter 20% Source: Peace Software, VaasaEmg

15% Full market opening

Utility Customer Switching in the Netherlands and Belgium

10%

5%

0%

Green electricity market opens

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar JunSep

2001

2002

2003

2004

2005

Figure 4: Electricity customer switch rates in the Netherlands

THE UNBUNDLING DRIVER The Netherlands is fast becoming the latest battleground for competition between European utility giants. Two of Europe's biggest utility players - Centrica and E.ON - have converged on the Netherlands. The UK's Centrica bought new entrant Dutch retailer Oxxio, the largest of the new entrant retailers with 400,000 electricity and 140,000 gas customers. Germany's E.ON acquired NRE Energie and their 100,000 electricity and 175,000 gas customers.

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According to Centrica, the Benelux governments - Belgium, Netherlands and Luxembourg - are leading the way in deregulation in Continental Europe. Sir Roy Gardner, Chief Executive Officer of Centrica, said at the time of purchasing Oxxio in June 2005: "Entering the Dutch market at this formative stage, when there is a commitment from the Government to require incumbent energy companies to un-bundle their supply businesses, offers an opportunity to grow the Oxxio business whilst also monitoring opportunities for further acquisitions in the Benelux region."

Merger and acquisition (M&A) activity has also occurred between the Netherlands incumbent utilities. The third largest utility ENECO Energie acquired fellow incumbent REMU, and in addition acquired the customer base of green energy retailer Shell Groene Stroom when it exited the market.

M&A activity has been fuelled by the Dutch Government's vigorous implementation of European Union directives to foster energy retail competition. In March 2005 the Dutch Government approved a controversial draft 'unbundling' law for separate ownership of utility retail and distribution operations by January 2008. This echoes a similar move in New Zealand in 1999 which led to dramatic retail customer base consolidation and a sustained increase in customer switching activity.

Disaggregated (unbundled) Netherlands retail or combined retail-generation businesses will likely become new acquisition targets. "We have certainly not seen the end of the M&A spree", stated prominent analyst group Datamonitor, which rates the Netherlands second only to the United Kingdom in their Market Competitiveness Index.

THE METERING DRIVER The Dutch Government's desire to achieve a nationwide roll-out of smart meters is a subject of major debate in the Netherlands. Metering is already competitive in the Netherlands, and taking advantage of this opportunity is Oxxio which offers smart metering products for residential customers. The government is considering two scenarios to facilitate the smart metering deployment: to maintain competitive metering or to return to monopoly metering service within regulated distribution territories.

Once smart metering is in place one might assume that retailers will begin to offer, or be required to offer, retail products and pricing to encourage customers to reduce peak energy demand. However, there is as yet a lack of evidence that smart metering will significantly enhance customer switching activity or that there is more than niche customer demand for retail energy products that require smart metering.

LOOKING AHEAD Cap Gemini Ernst & Young assert in their 2005 newsletter 'Fuel for Thought', "it is a safe assumption that their [Dutch utilities'] cost-to-serve is currently at a peak, an ideal situation for new entrants who lack the large administrative load of traditional utilities - due to their moderate size and the fact they do not have to contend with legacy systems."

Utility Customer Switching in the Netherlands and Belgium

Given the potential for new entrants to win market share based on lower cost to serve business models, coupled with the Dutch Government's drive to foster market competitiveness through initiatives such as retail ownership unbundling, we can expect to see the Netherlands continue to be a hotspot of energy retail competition in 2006 and 2007.

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BELGIUM OVERVIEW

BELGIUM

The 10 provinces of Belgium are governed in three regions Flanders, Brussels and Wallonia - which administer their own energy retail markets through separate regulatory bodies that operate in addition to the federal Commission for the Regulation of Electricity (CREG). Brussels and Wallonia introduced I&C retail energy Flanders Region competition in 2004 and are Brussels Region scheduled to introduce full retail competition in 2007. The Flanders Belgium region has been the first to move to Wallonia Region full retail competition, reaching that milestone for both electricity and gas in 2003, and consequently this report focuses on utility customer switching activity in Flanders rather than Belgium as a whole.

Population: 10.3 million Brussels (capital region) Population: 1 million Wallonia Region Population: 3.3 million Flanders Region Population: 6 million Electricity Customers (Flanders): 3.1 million, including 450,000 I&C customers Gas Customers (Flanders): 1.6 million, including 180,000 I&C customers Electricity and Gas Retailers: Electrabel; Luminus; Nuon Belgium; SPE; Essent Belgium; E.On Belgium; Eneco Energie International; EDF Belgium; Citypower

FLANDERS Flanders electricity customers with annual consumption greater than 1GWh were able to switch supplier from January 2002.

Electricity customers with distribution network connections of 56 kVA or more became eligible to choose their supplier in January 2003. The key market opening milestone was achieved in July 2003 when all electricity customers in Flanders were able to switch supplier (figure 5).

From January 2003 Flanders gas customers with annual consumption greater than one million m³ were able to switch supplier, and in July that same year all gas customers in Flanders were given choice of supplier (figure 5). Thus since July 2003 all consumers in Flanders have enjoyed full retail competition for both their gas and electricity supply.

1

Preliberalisation

2

3

Phased opening of industrial and commercial tranches

Full market opening

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Maturing competition

Flanders Utility Customer Switching in the Netherlands and Belgium

Jan 2002 – Customers >1GWh consumption

Jan 2003 – Customers >56 kVA demand

Jul 2003 Full market opening

Flanders

Gas

Jan 2003 Customers >1 million m³ volume

Jul 2003 Full market opening

Brussels/Wallonia Jan 2003 customers >1 million m³ volume Source: Peace Software and VaasaEmg

Figure 5: Electricity and gas market opening in Belgium

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To date much retail market activity has been attributed to customers signing new contracts with their existing incumbent supplier, earning Belgium a reputation for low retail activity. However, customer switching statistics show that this low activity reputation is not entirely deserved when considering the Flanders region alone.

At seven per cent customer switching during 2004, with a peak of over 10 per cent, Flanders ranked in the top five most active energy retail markets in Europe, following Great Britain, Netherlands, Finland and Sweden. Figure 6 shows combined electricity and gas customer switching in Flanders since July 2003 when the market fully opened. The rate of switching has slowed to an average five per cent during the first nine months of 2005.

Annualised percentage of customers switching per quarter 20% Source: Peace Software, VaasaEmg

15%

10%

5%

0%

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar JunSep

2001

2002

2003

2004

2005

Figure 6: Electricity customer switch rates in Flanders The largest incumbent supplier of both electricity and gas in Flanders is Electrabel. Figure 7 shows the market share of electricity retailers in Flanders by number of customers. The success of the new market entrants has led to Electrabel's retail electricity market share falling from 76 per cent of customers at market opening to under 68 per cent in 2005.

However, 68 per cent still represents heavy retail market concentration - the economic concept that when market share is concentrated amongst a small number of organisations, those organisations may exercise market power to inhibit competition. The continued existence of a supplier with such market share dominance will remain a barrier to sustainable retail competition in Flanders.

The drop in market share that Electrabel has experienced can be attributed in part to the sales activity of neighbouring utilities, such as Nuon, Essent, and Eneco from the Netherlands, E.ON from Germany and EDF from France, all of which have entered Flanders in an energy retail role. Centrica also has a major presence in Flanders and in Belgium as a whole, with its joint venture investments in Luminus and SPE.

Utility Customer Switching in the Netherlands and Belgium

Electrabel 68%

2% Others City Power 1% 5.5% 2% Essent Belgium Nuon Belgium

23% Luminus

Source: Peace Software and VaasaEmg

Figure 7: Flanders electricity market share - 2005

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Nuon has been the most successful of the Flanders new market entrants, having been aggressive in its pricing and sales, and successful at building affinity partnerships with organisations such as the Family Association, a partnership which has won it an estimated 40,000 new customers.

Whilst lower prices and sales campaigns have been the major driving forces behind customer switching in the Flanders market, there is also a significant element of 'customer dissatisfaction switching' based on customer annoyance with incumbent suppliers and with the utility industry in general.

LOOKING AHEAD

Utility Customer Switching in the Netherlands and Belgium

Utility customer switching in Flanders is expected to recover from the 2005 downturn. It will increase gradually as incumbents feel the pinch of lost customers and launch win-back campaigns, as new entrants gain confidence and expertise in the market, and as Belgian consumers become increasingly aware of their retail energy supply options.

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Utility Customer Switching Research Project The Peace Software & VaasaEmg Utility Customer Switching Research Project was initiated in 2004 to monitor and analyse utility customer switch rates and trends in competitive utility retail markets around the world with the objective of providing valuable insights into successful competitive retailing. www.peace.com/customer-sswitching

VaasaEmg VaasaEmg is the world's leading, largest established university-based research centre specialising in electricity, gas & related utilities marketing to end customers. Based in Finland, the group's leading edge research focuses on predicting and influencing customer behaviour and value through a deep understanding of customer psychology. It has researched over 300,000 customers in 45 countries around the world, providing research and consultancy to over 250 energy and utility organisations including Shell, ABB, Fortum, the European Regulators Group for Electricity and Gas, Nokia and the Finnish Parliament. www.vaasaemg.com

Peace Software Peace Software develops dependable off-the-shelf software products for retail and distribution utilities operating in competitive and regulated electricity and gas markets. Its flexible Peace™ software products include customer acquisition, billing, customer care, collections, online self-service, network revenue management and meter data management, which supported by its advanced research into global competitive energy markets, provide a platform of knowledge and excellence for competitive retail and distribution utilities. www.peace.com

Authors Mr. Paul Grey, Chief Market Strategist, Peace Software Dr. Philip Lewis, Group Director, VaasaEmg, University of Vaasa, Finland Mr. James Griffin, Manager, Editorial and Research, Peace Software Utility Customer Switching in the Netherlands and Belgium

Š 2005 Peace Software and VaasaEmg. All rights reserved.

Reproduction is authorised, provided the source is acknowledged, save where otherwise stated.

Whilst every effort has been made to ensure the high quality and accuracy of the collated customer switching data and related information, Peace Software and VaasaEmg are not responsible for any errors or omissions in these materials. Peace Software and VaasaEmg are not liable for losses, damages, costs and other consequences resulting directly or indirectly from using this information.

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