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Enhancing Massachusetts Energy Market Competitiveness Through Innovative Retail Strategies

This report outlines development policies aimed at enhancing the Massachusetts mass market energy sector by leveraging insights from various international markets such as the UK, Alberta, and New York. Key objectives include empowering consumer choice, minimizing price volatility, and sustaining competitive retail options. The study identifies challenges in market entry and emphasizes the importance of preserving market size, improving customer engagement, and streamlining regulatory processes. Recommendations propose adopting innovative models to facilitate a robust and competitive retail market to better serve Massachusetts customers.

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Enhancing Massachusetts Energy Market Competitiveness Through Innovative Retail Strategies

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  1. Beyond the Standard OfferMass Market Development Policies Culled From Other Markets’ ExperiencesA Report to theMassachusetts Division of Energy Resources Plexus Research, Inc. Eric P. Cody, Principal Researcher

  2. Policy Goals Underlying DOER’s Project • Near Term: • Enable customers’ choice of retail supplier • Mitigate customers’ exposure to unwarranted price volatility • Long Term: • Sustain competitive options in the mass market • Enable the mass market to obtain the full benefits of retail competition 1

  3. UNITED KINGDOM COMPARISON MARKETS Comparative Market Assessment ALBERTA MAINE OREGON MASSACHUSETTS NEW YORK PENNSYLVANIA NEW JERSEY OHIO GEORGIA (GAS) TEXAS AUSTRALIA 2

  4. ‘Reality Checks’ withRetailers • Constellation New Energy • Direct Energy (Centrica) • Dominion Retail • Green Mountain Energy • Reliant Energy Retail Services • TXU Energy Services • WPS Energy Services 3

  5. Energy Retailer’s View Structure of Default Service Maintain Cash Flow Minimize Overheads Market Rules Size of Available Market Market Entry Decision Sustainable Operations Protect Margins Opportun-ities to Achieve Scale Manage Price Risk Wholesale Energy Cost Acquire Customers Retain Customers Regulated Retail Price 4

  6. Window into the Future:UK Residential Customer Experience • Satisfaction is high – 90% favorable • Price is the primary factor influencing switching • Price discounts are tied to method of payment • Dual fuel offers predominate – 80% of those who have switched buy electricity & gas from same source • Customer awareness of alternatives has increased • Non-price offers include loyalty points, bundled offers, green products and service differentiators 5

  7. Challenges Specific to “Mass Market” Entry • Cost to acquire customer high vs. margins • Expensive IT back office requirements • Minimum retailer scale ≈ 500K-1M customers • Projected customer savings modest • Pricing of regulated supply option can impede • Incumbent utility seen as competitor or barrier 6

  8. Current Retail Market Model Clusters 7

  9. % Residential Customers Served Competitively (2003) 100% Direct Customer Assignment Full Retail Separation Competitive Generation Supply Regulated Portfolio Options 8

  10. Competitive Benchmark Performance 9

  11. Findings • UK market alone has become ‘reasonably competitive’ • The most competitive electricity markets adopted Full Retail Transfer or a close derivative • Several of most competitive markets have unified regulatory authority over wholesale / retail • Early level of competitiveness may be proportional to market size • Sensible & consistent market practices have a positive effect on retailer entry 10

  12. Massachusetts Must Overcome Several Inherent Disadvantages • Market size • Customer usage patterns • Bifurcated regulatory authority • Prescriptive regulation of retailers 11

  13. Foundation Principles • Default service pricing must reflect market cost • Artificially increasing regulated supply price to create “headroom” does not create sustainable competition • Large-scale wholesale bidding works against retail competition • Preserving the largest possible market size is critical • Overly burdensome administrative requirements deter retailers from entering • Opportunities for retailers to build brand awareness are essential 12

  14. Key Policy Directions • RAPID SCALE ACHIEVEMENT: Adopt customer auction, direct assignment, or retail separation to move Standard Offer customers to non-regulated supply • RETAIL PRICE COMPARABILITY: Include components that accurately reflect the cost of retail services — such as billing and customer care — in default service pricing • MAINTAIN MARKET SIZE: Maintain a single, statewide model of retail choice that preserves effective market size • EXPAND MARKET SIZE: Simplify, standardize and regionalize business practices for customer enrollment & switching and other key processes to create a seamless New England retail market 13

  15. PlexusResearchInc. 629 Massachusetts Ave.Boxborough, MA 01719978-263-6080 ECody@PlexusResearch.com

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