The Tale of the Evil Market and the Good Basic Supply Network

There’s a lot of political stalling and idealization going on. The Energy Commission of the Swiss National Council recently decided to stick with an only partially liberalized energy market. It’s following the lead of the Council of States, which has also rejected the idea of a full opening of the energy market. This breaks an even older political promise: Since 2014, the choice of electricity supplier should have been completely free for all consumers, but to date this has only been possible for large-scale consumers (100,000 kWh per year or more). Private households and small commercial businesses have no choice: Either they accept the electricity price of their local supply company, which is communicated once a year in advance, or they refrain from purchasing electricity at all.

Basic provision is the opposite of freedom

For years now, any progress has been braked. The roles in the drama playing out in Bern are clearly demarcated: On one side there’s the villain, the free market, and on the other the nice basic supply network. Greedy electricity companies (annual financial results with billions in profits!) and politicians who throw themselves protectively in front of consumers play the supporting acts. In the most recent performance, basic supply is elevated to the status of a freedom fighter. Companies should be able to break free from the yoke of the evil market; the return to the monopoly, sorry, the basic supply network, promises essential freedom – or at least this is the absurd view held by the Swiss trade association. The rationale behind it: The companies are to benefit from the low, fixed electricity prices under the monopoly. After all, spot market prices have not only increased substantially in the last twelve months, but they have also become more volatile. The fact that the situation was exactly the other way around six years ago has been completely ignored: there were record-low market prices and high tariffs for basic supply. At that time, no company willingly considered returning to the monopoly.

Fortunately, the industry association’s plea has not yet been acted upon, as the short-term inclusion of large consumers in the basic supply network would have resulted in costs being socialized with some delay. The energy supplier would have been forced to purchase the additionally required electricity on the open market at precisely the high prices that large consumers were fleeing. In the following year, the supplier would have had to pass on these costs to all customers. Such an action would have been further detrimental to the already tarnished image of the economy in large parts of the population.

Equally serious problems for businesses in the basic supply network

For a company to have really found itself in a life-threatening situation in recent months due to the rise in electricity prices on the free market, a large number of conditions would have had to be met all at once: The business (large consumer) would have to be trading in the free electricity market, buying electricity at short notice and not in tranches, unable to reduce electricity consumption promptly, and devoting a substantial proportion of its expenses on electricity. It would also have to have sparse financial reserves and be unable to bear the costs in the medium term. In addition, the company would have to face international competition – its competitors enjoy lower energy prices – and the additional costs incurred could not be passed on to customers.

An empirical analysis conducted by the Office for Economy and Labor of the Canton of Zurich found that less than a quarter of businesses claim they are experiencing substantial problems owing to increased energy prices. The difference between companies purchasing their electricity on the free market and those buying from their monopolist supplier is marginal. In other words, companies in the basic supply network are just as likely to complain of a life-threatening situation as those buying electricity on the open market. The survey also shows how the companies reacted: over 70 percent invested in improving their energy efficiency, and 45 percent passed on the increased costs to their customers (multiple responses were possible). The market price signal has probably had more impact on increasing energy efficiency over the past few months than legions of government-paid energy consultants have had over the past twenty years. This has to be good news for the environment.

Wide range of tariffs in the basic supply network

The following example shows that the distribution of roles between the “evil” market and the “good” basic supply network does not stand up to closer scrutiny: The range of electricity tariffs for 2023 in basic supply ranges from 8.49 to 70.78 centimes/kWh throughout Switzerland. In a well-functioning market and under competitive conditions, the difference between the lowest and the highest tariffs would be much smaller. If a power supplier has miscalculated when purchasing electricity, it can conveniently pass on the additional costs to customers under its monopoly. This is because most utilities do not have their own electricity generation facilities and have to purchase the electricity they need on the open market – usually in tranches. Hence, most small consumers are also dependent on the free market, just indirectly and without the possibility of switching suppliers.

This is particularly bitter, and at times even ruinous, as the following example shows: The municipality of Worb (BE) is served by two energy suppliers, BKW and a local cooperative. Now the cooperative seems to have purchased electricity too late, as it charges its entrapped customers the aforementioned 70.78 centimes/kWh. BKW supplies its customers for 26 centimes/kWh. Imagine two bakeries, one operating on the right side of the road in the BKW supply area, and the other on the left side of the road in the local cooperative’s area. Which business is likely to run into substantial difficulties first because of energy prices? The bottom line: the basic supply network is unfair because people have no real choice.

Market liberalization facilitates the energy transition

Complete market liberalization would not only strengthen consumer sovereignty but would also be an important step toward the desired energy transition. Owing to the growing share of fluctuating renewable energy, flexible consumption (so-called demand-side management) is becoming increasingly important as a contribution to system stability. However, this requires not only smart technologies that allow individual control of larger household appliances, but also smart tariff schemes. The latter create an incentive for consumers to have their heat pumps running when electricity prices are low during the day. Under the current structure – energy supply companies offering fixed tariffs for 365 days in a regional monopoly – an intelligent flexibilization of consumption is neither possible nor do the incentives exist for it. It would be important for consumers to behave in a system-friendly fashion, particularly during shortages in winter.

And last but not least: our relationship with the EU

Finally, the second stage of market liberalization in Switzerland would be a basic prerequisite for an energy agreement. To participate in the EU’s internal energy market, Switzerland has to create a level playing field, i.e. energy supply companies from the EU area would have to be allowed to offer their services in Switzerland. At the moment, it seems unlikely that Switzerland will create the conditions for this, let alone – the second obstacle to an electricity agreement – find an institutional solution with the EU. Yet an agreement would be urgently needed. After all, from 2025, the EU’s cross-border capacities to Switzerland are to be restricted if there is not enough power trading capacity available between member states. The consequence, in a not unlikely worst-case scenario, would be that Switzerland wouldn’t be able to import any more electricity from the EU on a cold and foggy winter’s day. Not because the neighbors themselves were short of electricity, but because intra-EU trade curtailed supply capacities vis-à-vis third countries like Switzerland. An agreement would substantially reduce this risk.

Enough of the drama! Switzerland must abandon idealized myths: supply security and the energy transition also depend on full market liberalization. Without it, things will get difficult, even if most politicians in Bern do not (yet) want to admit it.

“Avenir Suisse is an independent think tank that works for the future of Switzerland by developing evidence-based, liberal, free-market ideas.”

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