The Residential Gas Market in Israel—Industry Characteristics, Pricing, and Encouragement of Competition
- In the residential gas (LPG) industry in Israel, there are price gaps between the large veteran companies, which control most of the market, and the new, smaller, companies. The price differences are particularly large—approximately 40 percent—for consumers who use stored gas, the most common use in multifamily buildings. The gaps for consumers of cylinders are much smaller—only about 7 percent.
- The small gap for consumers of cylinders reflects the fact that large companies sell the gas in cylinders at a much lower price than stored gas, and the small companies sell the gas to both type of consumers at a similar price.
- The barriers to switching between companies for stored gas consumers can explain the price difference between the companies of this type of supply, in contrast to the small gaps among consumers of cylinders, for whom the barriers are lower.
- A policy of reducing the switching costs (financial costs as well as the complexity of the switching process) could contribute to reducing the excess cost for consumers of stored gas.
Residential gas (LPG) in Israel is marketed through 2 main channels: in cylinders, mainly at private homes, or in storage tanks, mainly in multifamily buildings. In delivery by cylinder, the companies replace an empty cylinder with a full one, and in storage tanks, they stream gas into the permanent tank located near the building. In Israel, there is no oversight of the price of residential gas, and in theory the conditions are those of a free market. In actuality, the market has 4 veteran companies with a large share of the market and several relatively new companies with a small market share. There are high barriers to switching between the gas companies, particularly for customers who live in a multifamily building—meaning stored-gas consumers—while the switching costs among cylinder consumers are lower.
An analysis by Dr. Ran Shahrabani of the Bank of Israel’s Research Department, using a unique database of the Ministry of Energy on cooking gas at the level of the locality, company, and type of connection (stored or 12 kg cylinder), found that average gas prices are much higher in stored gas tanks than in cylinders, and that the price charged by the veteran companies is higher than that of the new companies. The gap is large in stored gas and small in cylinders (Figure 1).
An analysis based on a theoretical model indicates high barriers to switching for stored gas consumers, which derive from the need for a joint action of the majority of the residents in the building, as a factor that may explain the picture of the prices that was found. Thus, it appears that a policy to reduce the switching costs could contribute to reducing the excess cost for consumers of stored gas. Such a policy can be expressed in a reduction of the complexity of the process of switching between companies for consumers in multifamily buildings, and in the limitation of the veteran companies’ ability to take actions that will make it difficult for consumers to switch suppliers.