World record electricity customer switching: New Zealand's claim to utility industry fame

In 2001 the New Zealand electricity retail market recorded the world’s highest-ever electricity customer switch rates for a single quarter, when between April and June customers switched retail supplier at the staggering rate of 27% per year. T

he unprecedented level of switching activity continued into the third quarter; it eased only slightly to 26% per year. No other energy retail market in the world has matched these levels of customer switching. New Zealand’s customer switching activity has since declined, and in recent years has dropped beneath 10%. While this still represents a healthy level of competitive retail activity, New Zealand has taken a back seat to today’s more active markets, such as Victoria in Australia, and Great Britain, which boast customer switch rates in excess of 20% per year.

All electricity consumers in New Zealand were free to choose their retail supplier from April 1994. This world-first achievement of the full retail competition milestone did not immediately lead to significant levels of switching activity. The low interest of incumbent utilities in competing for each other’s customers, and the lack of a corresponding electricity wholesale market, meant that few customers switched electricity supplier for several years. For this reason many market commentators consider the New Zealand electricity retail market to have begun in a meaningful way only from 1999, when customer switching reached the 5% level.

Trends in utility business customer switching.JPG

Technical bottlenecks in market registry processing had previously restricted switching, but between April and June 2000 there was a sudden and significant increase (see Figure 1). The backdrop to this first dramatic spike was the beginning of severe and ongoing billing and customer service problems experienced by major energy retailer TransAlta New Zealand. Newspapers gleefully reported TransAlta’s problems with headlines such as “Thousands opt out of TransAlta” and “Thousands quit TransAlta as door-knockers sweep suburbs.”

In the midst of these customer issues TransAlta New Zealand had been acquired by gas utility NGC, and the now-larger NGC utility retail operation was re-branded On Energy. NGC’s reported one billion dollar investment in TransAlta/On Energy continued to be plagued by billing system issues and lengthy call waiting times that caused more customer losses. With the onset of winter generation shortages On-Energy increased its prices, which further sped the departure of customers. On- Energy eventually exited the market in July 2001.

Thereafter electricity customer switching subsided from record levels and moderated to the rate of 12% per year in 2002 before commencing a gradual decline. The customer switch rate has not exceeded 10% in any quarter since 2003.

The New Zealand electricity market today is dominated by five large retail energy utilities. They are often referred to as ‘Gentailers’ because of their involvement in both electricity generation and retail. One of the chief advantages of the Gentailer business model is that retail electricity demand provides a natural hedge to generation capacity and vice versa, thereby reducing risky exposure to fluctuating wholesale electricity prices. The downside of the Gentailer business model is that it can be an inhibitor to retail competition, for if a Gentailer can achieve a balance between its retail demand and its generation capacity, it will not be motivated to win greater retail market share.

A further factor that may be inhibiting electricity customer switching in New Zealand is the high level of government ownership. While Trustpower and Contact Energy are publicly listed companies, the other three Gentailers remain government-owned.

Despite the various criticisms that may be levelled at the New Zealand electricity market, it remains one of the most mature and successful in the world. New Zealand is ranked the sixth most active retail energy market, according to the Peace Software and VaasaEmg Utility Customer Switching Research Project, which monitors customer switch rates and trends in competitive retail energy markets worldwide.