Around 2.5 million French SME (small- and medium-sized enterprise) customers will be free to choose their electricity supplier come July of this year in the third tranche of French deregulation. However, whereas other market openings have led to competition between a number of suppliers, the choice for the French SME customer will be very limited, and rather unappealing as matters presently stand. The major switching driver in the market – price – has been undermined by regulated tariffs that are low enough to minimise margins for potential entrants to an unpalatable extent.

The regulator is now considering the removal of these tariffs, be that through their definitive abolition or the alternative of a spot linked regulated tariff. However, Electricité de France (EdF) should not be unduly troubled by competition even if tariffs are removed.

A strong position

EdF’s dominance of the market stretches from its nuclear fleet down to the individual customer relationships that it holds. It still controls 96% of retail supply and 94% of generation. Indeed, this market concentration gives it significant advantages in terms of market risk when sourcing power. France’s reliance upon nuclear power had led to low base prices, whilst the political decision to keep France independent in energy terms has led to overcapacity. The consequence has been that EdF’s business tariffs are already low, limiting the room in which new entrants can discount to win business.

The nuclear fleet in France also means that the otherwise natural neighbouring competitors that would enter the market – RWE, E.ON, EnBW, Vattenfall, Endesa, and Electrabel – may not be able to make an impact. Whilst these integrated utilities have overcapacity, the price differential that they could offer is likely to be minimal.

On the supply side a new entrant will face a prodigious task in educating the customer base. Customer apathy has been the greatest barrier to switching activity in most liberalised markets, and EdF is unlikely to be communicating the merits of such behaviour to its customer base. The new entrants and the Commission de Régulation de l’Énergie (CRE, the French regulator) will therefore have to shoulder the burden of energising SMEs into action. Unfortunately, EdF looks set to carry its trump card through liberalisation in the form of its sales and marketing muscle. If we then combine this advantage with EdF’s possession of a commercial network and client file with detailed knowledge of SME customers’ needs, brand opinions, and service experience, the balance tips even further in its favour.

New entrants

Despite these factors, the suppliers intending to enter the liberalised SME market have still set themselves ambitious targets. Suez looks set to capitalise upon its scale, French market knowledge, and its majority stake in Electrabel (enabling low cost sourcing of power) to win a 10% market share of the gas and electricity markets.

The openings in other markets suggest that small-scale operations can also win market share through price propositions. Poweo has already been winning multi-site businesses with a 5-10% discount offer, and intends to target the lower end of the SME market from July.

New entrants like Poweo may be unable to match EdF’s ability to source generation cheaply without risk, but it should be confident of its ability to control its own operating costs more efficiently than the incumbent. That said, however, this element of the final customer bill is only a small proportion of the whole. Given the greater weighting of generation, transmission, and distribution in the bill, even a 30% saving on the supply part may only equate to a 7% maximum bill discount should this all be passed on to the customer.

The new entrants’ hope for success may therefore lie in a combination of keen price sensitivity, and possible dissatisfaction with EdF – consequently limiting the importance of price. Nevertheless, experiences in other liberalised markets suggest that a strong brand – and EdF’s brand is one of the strongest – can often counteract the effect of individual mistakes.

Whilst the regulated tariff should rightly be cause for concern amongst potential new suppliers, the pillars of customer apathy, brand power, customer education, and energy sourcing should all support EdF’s dominant position. Indeed, without radical action to level the playing field – an unlikely prospect given the traditional public service attitude towards EdF – serious customer choice and a vigorous switching market looks to be a very distant prospect.

Author Info:

Alex Patient, Energy Analyst, Datamonitor, Charles House, 108-110 Finchley Road, London NW3 5JJ, UK

Steve Kidd August 2004 pullquote
There are good grounds to see
40GWe by 2020 as realistic