Ronald Huisman. Electricity Market Reform: The Experience of the Netherlands

Publications about reform15 December 2017

Reform of the energy market is being implemented in Ukraine. As soon as in 2019, the Ukrainian energy market will be liberalized according to European standards. Ukrainska Energetika publishes a series of interviews with European experts about the implementation of energy reforms in their countries. Professor of finance at Erasmus University Ronald Huisman discusses the Netherlands' experience.

Ronald Huisman. Electricity Market Reform: The Experience of the Netherlands

Is it possiblе to call liberalization the ideal solution for the energy market?

I am an economist, and there is no such thing as absolute truth in economics; some believe in a liberal market, some in a socialist system. I belong to the first category. For example, if I have solar panels installed on my roof, I'd like to coordinate the price of energy with you under liberal conditions. I don't see why a central authority should set this price when it's possible for us to agree on it.

How exactly was the energy market reformed in the Netherlands?

The trend appeared in the U.S. back in the 1990s. It expanded to Asia and Central America, thus becoming a global trend. In 1999, it came to the Netherlands. It started with industrial consumers. The next step was the implementation of a liberal mechanism for domestic consumers. The entire process of transformation took approximately eight years.

Are the beginnings in Ukraine and the Netherlands the same?

The situation is slightly different. In your case, all the energy producers sell energy through one company (Energorynok — ed.), and all consumers buy from it, too. There were four regional companies in Holland. I live in The Hague, where there was one company, which I would buy energy and gas from. However, in certain areas, there was no choice, as in Ukraine.

What changes can consumers and the country in general expect?

In my country, along with the four regional companies, there are still about 80 (!) suppliers, in a country much smaller than yours. Competition makes the market honest, and the consumer gets to right to choose. In addition, the reform will lead to a general decrease in the consumption of raw materials — coal and gas — and thus reduce emissions. For the state, fewer emissions and the rational use of resources are important benefits of a liberalized market.

How important is the factor of choice for consumers?

After almost 25 years, we see that 65% of people in the Netherlands have changed electricity suppliers. As soon as a contract ends, they switch to a more advantageous supplier. This is a large part of the population, but we believe that it is not enough. We would like it to grow to 85%.

To what extent were consumers in the Netherlands ready for changes? What was the attitude toward the reform?

If you liberalize the market, there will be many possibilities for both companies and households. You can't predict exactly what will happen. But obviously new players will come, including foreign ones, bringing new offers. Many people in the Netherlands didn't change suppliers because they were afraid of changes. The energy market is too complicated for a common person, there are too many players: manufacturers, electricity network operators, suppliers. It's not as simple as buying an iPhone.

Did the government have some kind of information policy?

There was practically no communication. Yes, sure, it was said that we would have market liberalization, but there was no single campaign explaining how it would work in simple language. It was very difficult to tell consumers how electrons appear in their homes, and that they won't disappear if you sign a new contract.

What should the state do in this situation?

What Ukraine can do is avoid repeating mistakes and adopt best practices. It wasn't until 2005 that our government produced an advertisement about how we didn't need to worry about supplying electricity to our houses. They repeated this many times. Subsequently, people started to believe them and change suppliers. This, in essence, was when market liberalization really began. From my observations, I realized that as long as I wasn't able to choose a supplier, they didn't care about me. They knew I wouldn't go anywhere, they were just energy suppliers. Opportunities appear not only for households, but also for large companies. Today, there are many opportunities for investing funds in Holland. This is what our companies have encountered and what your big players, such as DTEK, Energoatom, and others will face.

Regarding players from other countries, didn't Dutch companies lose their positions when they arrived?

Of course, competition in the market has increased. At first, it was very difficult for them to make money. Clearly, these were hard times for energy companies, but at the same time, there were victories. There is a good example associated with Belgium. The local population didn't much like their old companies. But as soon as they came out to compete abroad, to us, for instance, with young companies, they found new customers.

Are there any state suppliers in the Netherlands today?

To this day, there are energy companies in the Netherlands that are partially owned by the state. There are just a few, the majority were sold. These agreements were extremely beneficial for the country. The money went to funds, and from there to testing renewable energy programs.

Who are the customers of these old companies? Are they diehards who resist any change?

Actually, no. They (energy companies - ed.) also changed, became modern. There's no need to worry about their future, because after liberalization, they have to accept the market conditions and improve.

How did the energy price change for domestic consumers in the Netherlands?

Our energy payments consist of two parts. The first is the cost of electricity itself. The number of suppliers increased, and this price fell. The other part is the tariff for connection to the central grid (the RAB tariff). This requires clarification. There were rather old lines in the Netherlands, from the 1960s. It was an old system, and in order for many new companies to be able to use the networks, it was necessary to build new lines. After liberalization, the network was upgraded. Technological losses dropped to 4%. This required investment. For that reason, the price of this part of bills increased. I don't know what the situation with networks is in Ukraine, but with the entry of new players into the market, the emergence of new renewable energy capacities, you will have to improve the system, invest money in it.

That is, modernization ended up in the final bills?

Yes, in the bill there is a percentage assigned for modernization. The regulator monitors the adequacy of this amount. Suppliers and distributors are allowed to charge their customers this fee.

In Ukraine, calls to stop paying for electricity arise in response to any increase in prices. What happens to non-payers in the Netherlands?

You won't be disconnected if you've missed one or two payments. If you don't pay for a long time, first you'll receive a warning from the supplier, and then you'll be disconnected from the system. And if you don't have electricity, you don't have gas, either.

Does the unprotected population in the Netherlands receive subsidies?

There is no direct support from the state for paying bills, but there is basic support for poor people. We have energy companies that focus on such types of customer. A person can be unable to plan their expenses without being poor. What do these companies do? They offer cheaper contracts for pre-payment, help customers save money by explaining how and when it's best to use electricity, and provide special offers for the poor.

One of the main elements of the reform is the division of regional companies (oblenergos), or unbundling. How did this happen in the Netherlands? (In the Netherlands, the division requirements are tougher than in most European countries; a company does not have the right to own a network and to have a supplier company at the same time - ed.)

In the EU, this process has taken place gradually. European controllers have given these companies (regional energy companies - ed.) a choice: either sell or distribute. This law was very strict, and many companies sold some of their obligations without thinking about it too much. In the Netherlands, every company has already decided which functions to perform.

In your country, who's in charge of maintaining equal conditions for suppliers on the part of distribution companies?

A consumer body whose central office is in the EU takes care of it.

And does a client conclude a contract only with a supplier, or with a distribution company, too?

Households sign two contracts, one with a supplier and the other with a distributor.

And does the end user understand who is responsible for what?

Yes, it's complicated. If the power goes out, you need to go to the distributor. If you have a question about tariffs, then you go to the supplier. At first, people didn't understand who was responsible for what. Then there was a state-sponsored information campaign. It was late, but it did its job. It is important for the energy companies themselves to pay attention to their consumers, explaining how they operate.

How do these suppliers compete with each other?

A characteristic feature of liberalization is the ability of the supplier to sell various package services to consumers. For example, when choosing an electricity supplier, you can choose a particular wind generator from which you want to receive energy, or a specific solar panel. Someone will offer lower prices, and another will supply cable television, gas, heat, and telephone services together with electricity. This greatly simplifies the purchasing process for consumers: they can buy all these home services in one package from one supplier.

In your lectures, you say that in a free market, there need to be prosumers. Who are they?

A prosumer is a person who produces and consumes electricity at the same time. There are households with solar panels installed on the roof. Farmers have wind generators. The number of these prosumers in the Netherlands is steadily increasing; you can see this everywhere. In the near future, we will see electricity generation much more localized than it is now. It won't be about five big or 150 medium-sized power plants; everyone will be able to produce energy. The market will be decentralized to thousands of small, local production facilities.

How does the accounting system at residences work?

The accounting situation has also been liberalized — companies sell meters to consumers, who can independently monitor their consumption information. But still, most Dutch people have old meters. This means they're checked once a year. I send data online, and the supplier company can check it. Our government is now implementing a smart meter program. At this point, only about 10% of consumers are using them, but all new homes are being built with smart meters installed. We are just starting down this path.

Is there demand for renewable energy in the Netherlands, or is this dictated by environmental concerns?

Unfortunately, only 20% of the population supports green energy. The remaining 80% of consumers look for low prices. At the same time, the number of wind generators is increasing. Many major companies are now investing in it. Shell, for instance. The government subsidizes both solar and wind energy. To do so, they've introduced special tariffs. Each kilowatt of energy produced is redeemed at a guaranteed price.

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