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Market Structure of Energy and Gas Providers in the UK

Added on - 25 Jan 2022

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Market Structure of Energy and Gas Providers in the UK.
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Introduction
In the United Kingdom, supplying energy to your home entails three main steps: generating
electricity, transferring gas and electricity, and selling it to the client. Companies in the energy
sector either specialize in one of these sectors or work in all three (electricity generation,
networks, and energy supply). Since the 1990s, British energy suppliers have operated in a
liberalized and competitive market. Customers can pick which firms supply their energy, and
private companies ensure that the UK has the energy supply it requires. The Gas and Electricity
Markets Authority regulates the energy market through the Office of Gas and Electricity Markets
(OFGEM). (My utility genius,2021). This essay seeks to understand the market structure of
energy and gas providers in the UK by using economic theories to provide arguments infavour
of a specific market. Also, it shows how energy and gas providers charge different consumers
different prices to access the same good. It also explains how the gas and electricity market
office protects consumers' interests. Finally, it discusses how the exit of some of the firms from
the market is likely to change the market structure of energy and gas providers in the UK.
An Overview of the UK Energy Market
Most electricity is produced in substantial power plants linked to the national transmission
network. However, electricity can be generated in smaller power plants connected to regional
distribution networks. The quantity and type of power plants produced is a decision made by
each corporation based on market signals and government legislation on environmental issues.
Electricity generation is diverse, including everything from major multinationals to tiny, family-
owned businesses operating a single plant. Transmission and distribution networks are the two
types of electricity networks (UK Energy,2021). Transmission networks transport high-voltage
power over great distances across the country. Distribution networks transport electricity from
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the transmission system to homes and businesses at lower voltages. National Grid manages the
transmission system and balances the system, and ensures that the power supply meets demand
on a second-by-second basis.
The transmission and distribution of gas have a similar infrastructure.Energy is purchased in the
wholesale market by suppliers, who then sell it to clients. Customers can choose any supplier to
furnish them with gas and electricity since suppliers compete in a competitive market.The Gas
and Electricity Markets Authority regulates the electricity and gas markets through the Office of
Gas and Electricity Markets (Ofgem). Ofgem's job is to defend consumers' interests by fostering
competition when it makes sense. Ofgem grants corporations licenses to operate in the electricity
and gas sectors determines the levels of return that monopoly networks companies can earn, and
makes market rule adjustments(My utility genius,2021).
Six companies control 96 percent of the UK electricity generation market: SSE, Scottish Power,
Centrica, RWE NPower, E. ON, and EDF Energy, forming an oligopoly market.The growing
price of electricity and gas in the UK has been the subject of virtually constant media debate in
recent years. It has become evident that there are numerous areas of worry about how the market
functions. These areas include weak consumer response. Despite increased pricing and the
possibility for significant savings, customer switching rates have been declining. Customer
confidence in suppliers has also dwindled. Besides, while industry regulator Ofgem stated
unequivocally that it had found no evidence of explicit collusion in the electricity and gas
markets, it did believe that tacit coordination may be a concern, especially when suppliers
aligned pricing hikes (Tutor 2u,2021).Supplier pricing tactics, regulatory constraints, and
reputational hazards are also likely to be significant barriers to entry into the industry.
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Furthermore, the six largest suppliers' structures are characterized by a high degree of vertical
integration between generation and supply, which may stifle competition. Consequently, there
had been evidence of rising average profitability among suppliers but no clear indication of the
efficiency gains that would be expected in a competitive setting.The CMA must take any
measures it deems reasonable and feasible to 'remedy, mitigate, or prevent' the negative impact
on competition and any negative impact on customers (in so far as those effects have resulted
from the adverse impact on competition). This could indicate that steps are being taken to alter
the industry's structure. The "Big Six" energy suppliers may be divided up to increase market
competition. They're all formidable vertically integrated firms with significant entry barriers to
profit (Tutor 2u,2021).
Figure1: Electricity markets and oligopolistic behaviours: The impact of a multimarket
structure
Source: (Boroumand, 2015)
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