Household electricity prices: major savings possible by switching tariffs

Press Release of February 7, 2018

Retail electricity prices develop very differently depending on the provider and the tariff – Basic tariffs from default providers increased significantly between 2007 and 2014 while the most affordable tariffs offered in the market remained mostly constant – Providers passed the cost savings from falling wholesale prices on to households to varying degrees

The average electricity prices for German households have been rising almost constantly since 2007, but the rise in retail prices has affected customers to different degrees. While the basic tariffs offered by default providers—the most expensive tariffs available—increased by 50 percent by 2014, the most affordable tariffs on the market generally remained unchanged. The default providers are legally required to sell energy in the form of a default tariff to all households in their respective service areas. If consumers would switch from a default tariff to a cheaper tariff from a different provider, they would save a lot of money. In 2014, assuming average power consumption (2,800 kilowatt hours per year), it would have been possible to save an average of almost 400 euros. Nevertheless, only a relatively small number of households switch providers.

These are the most important results from a DIW Berlin study conducted by Tomaso Duso and Florian Szücs that took a closer look at the development of retail electricity prices based on detailed microdata for Germany from January 2007 to August 2014. Over six million monthly electricity prices for all German postcode regions were examined.

The prices for tariffs from default providers rose from around 21 cents per kilowatt hour (kWh) to around 32 cents/kWh from 2007 to 2014, an increase of around 50 percent. The cheapest tariff offered by default providers increased by around 40 percent from almost 21 cents/kWh to 29 cents/kWh. In contrast, the tariffs offered by the most affordable providers are between 16 and 19 cents/kWh on average.

“A part of the increase in electricity prices can be attributed to higher taxes and fees such as the EEG surcharge. However, they are not the only reason. The behavior of electricity providers, especially to what extent they pass on cost savings to consumers, plays a large role, as does the willingness of households to change providers,” said Tomaso Duso, an author of the study and head of the Firms and Markets department at DIW Berlin.

The analysis showed that the “Big Four” power providers (E.ON, RWE, EnBW, and Vattenfall) were the default providers in 59 percent of the areas examined but only offered the cheapest tariff 22 percent of the time. Sixty-one percent of the most affordable tariffs were offered by independent retailers who make up only three percent of the default providers.

In order to understand the extent to which cost savings, in particular due to reduced wholesale prices for the providers, were passed on to households, the authors of the study analyzed tariff development in conjunction with cost development. Only around 40 to 60 cents per every euro saved is passed on to households in the tariffs from default providers as opposed to in the cheapest tariffs on the market, where cost savings were almost completely passed on. This is mainly due to the fact that the customers of the most affordable providers are more willing to change providers if cost savings are not passed on to them.

“The results of the study show that the liberalization of the electricity market is at least working on the supply side. However, competition can only benefit consumers if they actually switch to less expensive providers,” said Duso. As in many other countries, this still happens far too rarely in Germany. “Almost a third of German households still have the basic and most expensive tariff from a default provider.” An awareness campaign could help educate consumers, but based on other countries’ experiences, it is questionable if such campaigns alone are enough. Additionally, light-handed regulatory instruments could be considered. One possibility are “opt-out options,” as discussed in Great Britain. Under such a system, the default providers would be instructed to forward customer information to the appropriate regulatory authority which would make this information available to competitors. They can then make offers that are more appealing to the default providers’ captive customers

Links

  • DIW Wochenbericht 6/2018 (in German) (PDF, 5.56 MB)
  • Interview with Tomaso Duso: "Die Grundversorger haben die Kostenersparnisse sehr begrenzt an die Kunden weitergegeben" (in German; Print (PDF, 0.51 MB) and
    O-Ton von Tomaso Duso
    Die Grundversorger haben die Kostenersparnisse sehr begrenzt an die Kunden weitergegeben - Interview mit Tomaso Duso
Tomaso Duso

Head of Department in the Firms and Markets Department