Elsevier

Utilities Policy

Volume 16, Issue 4, December 2008, Pages 254-261
Utilities Policy

Households' switching behavior between electricity suppliers in Sweden

https://doi.org/10.1016/j.jup.2008.04.005Get rights and content

Abstract

The overall purpose of this paper is to analyze the factors affecting households' decisions to: (a) switch to a new electricity supplier; and (b) actively renegotiate the electricity contract with the prevailing supplier. The study is based on 536 survey responses from Swedish households and they are analyzed econometrically using probit regression techniques. The analysis is based on a theoretical framework, which embraces both economic and psychological motives behind household decision-making. The results show that households that anticipate significant economic benefits from choosing a more active behavior are also more likely to purse this, while those with smaller potential gains (e.g., households without electric heating) are less likely to change supplier and/or renegotiate their contracts. The impact of overall electricity costs and knowledge about these is particularly important for the latter decision, while respondents that perceive relatively high search and information costs are less likely to switch to an alternative electricity supplier. Moreover, constraints on time, attention, and the ability to process information, may lead to optimizing analyses being replaced by imprecise routines and rules of thumb, and the benefits of the status quo appear to represent one of those simplifying rules. This also opens up for other influences on households' activity such as social interaction and media discourses that raise the attention level. Our results show that these influences are more likely to affect households' choice to switch to new service providers, i.e., the one area of the two investigated here that put the most demand on people's ability to search for and process information.

Introduction

As a result of the deregulation of electricity markets in a large number of countries, a significant share of household customers can choose to sign contract with any of the electricity suppliers that are connected to the grid. In this way the deregulation has made product differentiation a potentially important strategy to attract consumers, and intense consumer activity could help curb anti-competitive behavior in the electricity market. This suggests also that public policy may play an important role in stimulating increased consumer ‘migration’ across electricity companies, but the extent and the nature of such policy intervention will depend largely on the factors that induce or inhibit consumers to actively switch supplier or renegotiate contracts with their existing supplier. For instance, if few consumers are well-informed about their possibilities to switch and how to go about, targeted information campaigns may be effective. However, consumers may also face significant switching costs, which only may be overcome by costly investment in new knowledge or regulations. Given the potential importance of consumer activity in the electricity market, this paper analyzes supplier switching behavior and the active renegotiation of electricity contracts among Swedish households.

Between 1996, the year at which the Swedish electricity market was deregulated, and 2005 the total electricity costs for a typical apartment household (with a standard contract) increased by over 50 percent (Swedish Energy Markets Inspectorate, 2006). These cost increases have been frequently debated in the media and many analysts stress that market competition is too low (Swedish Energy Markets Inspectorate, 2006).1 The Swedish Energy Markets Inspectorate and the Swedish Consumer Agency has worked actively to encourage households to be more active in the market.2 Although the proportion of Swedish households that change electricity supplier has increased during the last years (Statistics Sweden, 2007), the general understanding is that the average Swedish household is not active enough in exerting its possibility to choose between different electricity suppliers and/or to renegotiate contracts with the existing supplier (e.g., Gamble et al., 2007, Green, 2003, Swedish Consumer Agency, 2002). For this reason a number of additional policy measures have been suggested, and these include information campaigns and standardized electricity bills. However, the impacts and the efficiency of these policies deserve further scrutiny before being implemented.

It is important to note that active households ‘migrating’ between suppliers and/or renegotiating contracts are no guarantee against poorly functioning electricity markets. The electricity consumed by Swedish households represents only a modest proportion of total Swedish electricity consumption (in 2003 it contributed to 28 percent) and if the industry sector is active and contributes to intense competition among suppliers this benefits Swedish households as well (Brennan, 2005). Moreover, forcing every household to become a more active electricity market actor would probably be economically inefficient. Some consumers may face high search costs (e.g., time input needed to make new choice), while others could become more active at relatively low costs if fed by new information. As was noted above, in order to implement and design efficient policies in this field it is important to know more about the determinants of household behavior and how the benefits and costs associated with a more active behavior are perceived.

Following the above, the purpose of this paper is to analyze the factors that promote and prevent increased activity in the electricity market among Swedish households. We pay particular attention to households' decision to change electricity supplier and to actively renegotiate the prevailing contract. The analysis is based on a postal survey that was sent out to 1200 randomly selected Swedish households in December 2005. The questionnaire collected information about behavior in the electricity market, socio-economic characteristics as well as knowledge about and attitudes towards electricity consumption and the electricity market. Past decisions on whether or not to switch supplier and renegotiate existing contracts, respectively, have been analyzed econometrically within a binary choice framework (using probit regression techniques). The present study differs from a lot of the previous work on consumer switching behavior in that it employs a theoretical framework which embraces both economic and psychological motives behind such behavior, and the study also adds to the rather limited empirical work conducted in the past (see Section 2).

The paper proceeds as follows. Section 2 provides a brief presentation of the theoretical and methodological basis of the analysis, while Section 3 outlines the main features of the survey investigation, variable definitions as well as selected survey responses. In Section 4 we present and discuss the results of the econometric analysis, while Section 5 provides some concluding remarks and implications.

Section snippets

The economics and psychology of household switching behavior

A majority of the previous studies aiming at explaining differences in consumer behavior in the Swedish electricity market have primarily used qualitative approaches (e.g., Bladh, 2005, Nyberg, 2002) while another set of studies only focus on the impact of socio-economic variables such as education level, income, age, gender, etc. (e.g., Swedish Consumer Agency, 2002, Statistics Sweden, 2007). An important limitation of the above studies is also that they analyze the impact of each variable

Survey design and responses

In November 2005, 1200 questionnaires were sent out to a sample of randomly drawn Swedish households. The questionnaire was sent out both to people living in their own houses and to those living in apartments. All owner-occupied households can change electricity supplier as can the large majority of people living in apartments (the only exception is people with the electricity bill included in the total rent). The response rate after two reminders was 47 percent, which should be considered

Analyzing the determinants of household activity

In this section we present the results of the econometric analyses. By applying a binary probit model we aim at explaining inter-household differences in supplier switching behavior and in renegotiating behavior, respectively. The dependent variables are equal to one in each of the mentioned cases for respondents reporting that they have changed supplier/renegotiated their contract during the last 5 years.8

Concluding remarks and implications

This paper has focused on analyzing and scrutinizing the determinants of household activity in the deregulated Swedish electricity market. Specifically, we have analyzed the factors affecting: (a) the decision to switch to an alternative electricity supplier; and (b) the decision to actively renegotiate the electricity contract with the prevailing supplier.

Our results suggest that both economic and psychological factors help understand households' activities in the electricity market. Consumers

Acknowledgements

Financial support from the Swedish Energy Markets Inspectorate is gratefully acknowledged as are valuable help and comments from Andreas Stubelius, Kenneth Andersson, Maria Persson, seminar participants at the Economics Unit, Luleå University of Technology, Sweden, and two anonymous reviewers. Any remaining errors, however, reside solely with the authors.

References (28)

  • K. Ek et al.

    Aktiva och passiva elkonsumenter

    (2006)
  • Ek, K., Söderholm, P., forthcoming. Norms and economic motivation in the Swedish green electricity market. Ecological...
  • Gamble, A., Juliusson, A., Gärling, T., 2007. Consumer Decision Making in the Swedish Electricity Market: Determinants...
  • Green, R., 2003. Electricity markets: challenges for economic research. In: the Research Symposium European Electricity...
  • Cited by (58)

    • Underpinnings of consumer preferences and participation in Japan's liberalized energy market

      2022, Utilities Policy
      Citation Excerpt :

      Demographic factors have also been influential in the behavior of switching energy companies in previous studies. Educational achievement level positively impacts consumers’ participation in the energy market (Ek and Söderholm, 2008; McDaniel and Groothuis, 2012). Also, men were more positively engaged with the market in some studies (Gamble et al., 2009; McDaniel and Groothuis, 2012).

    View all citing articles on Scopus
    View full text