Switching Energy Suppliers - Case Study Example

Introduction The Gas industry in the UK has a long history. In the 1940s, there were several gas companies that supplied gas to the residents of UK.This was changed in the year 1948 when a new law was passed that put all the gas companies under autonomous groups called gas boards. A faction called the Gas council was established to link the two entities concerned with gas. (The BBC, 2007) In the 195Os, there was increased use of gas and showrooms were common, most of which promoted gas. In addition, there was the first entry of liquefied gas in the industry. In the 1960s, the UK saw rapid technological advancements in the sector. The decade was characterised by adoption of run on natural gas from town gas by majority of households. This was possible after the construction of a pipeline that imported natural gas from Algeria. In the 1970s, there was more centralisation in the industry. This was done by the creation of anew body called the British Gas Corporation. It took over control of all the twelve boards in these boards later changed their names to reveal the new standing. In the 1980s, the British gas industry was privatised through an act in parliament. The company’s (British Gas Corporation) stocks were available for trade. Its name now became British Gas Plc. This was followed shortly by the formation of a regulatory body called Ofgas. (The BBC, 2007) In the 1990s, there were crucial changes observed. The first was the entry of numerous suppliers into the market. This was then followed by formation of five units by British Gas. This was done by creation of five units in the company these included: Retail (afterwards changed to Energy Centres), Transportation and Storage (eventually called Transco), Service and Installation (now called Services), Contract trading and lastly Public Gas Supply (eventually called British Gas Trading). In the year 1996, there was dramatic increase in competition within the industry. This was later observed by the half a million customers who got their supplies from private competitors. This situation was further concretised in ‘98 by exposure of the entire market to competition. In ’97 British Gas was separated to form the following companies: Central Plc and BG plc. This was followed shortly by the formation of BG Group plc to oversee the latter mentioned two companies. Later, the latter company was again separated to form Lattice Group plc and BG group plc. In ’98 the company started providing electricity to customers. In the 2000s, there British Gas began supplying telecommunication services and appliances to households in the UK. (EnviroDaq, 2007) Why the six main suppliers are competing over a unique selling point Prices in gas supplies rise haphazardly. Most suppliers use fixed price schemes to gain an edge over others. The three main types of fixed schemes include; Standard fixed price Capped price Fix and fall The standard fixed price contract holds that there will be no changes to given prices whether or not prices fall in the market. This may turn out to be advantageous to suppliers when prices of gas fall. But it may also be beneficial to customers when prices in the general market start falling. This is because; they may be able to pay less for their bills even when the rest of the country is paying more. (Knight, 2006) The capped price scheme is not totally fixed. Here, the supplier decides to increase his prices only up to a certain level. When prices reach a certain level, which will be agreed on by both parties, the supplier cannot go beyond this point. The scheme also allows for a decrease in prices when market prices fall. This kind of arrangement will not depend on the time spent by the dealer. The last type of scheme is fix and fall. As the name suggests, this kind of arrangement depends on the kind of time agreed upon. During this period, prices cannot change. After completion of the period, then prices can be reduced. (Knight, 2006) Through these kinds of schemes, energy companies are able to provide consumers with alternatives. These kinds of arrangements are what give energy companies unique selling point. Privatisation and benefits to the British Public Privatisation is the process by which a public company or sector opens up its assets to the public. There are a number of companies that have involved themselves in the provision of gas supplies. This was started in the year 1986. The reason why the British government ventured into this field was the fact that the government was inefficient, and economic growth was getting weighed down and that a free market would be a step in the right direction. Privatisation was also introduced to reduce government expenditure. It would increase competition and hence boost accountability. Privatisation has been very beneficial to the average consumer of gas in the UK. This has been seen through comparisons made between the UK and other countries in Europe. Research and surveys done by Ofgem, which is the main regulator of the energy sector, have shown that the amount of money paid for gas has fallen drastically since the start of privatisation in the UK. (The BBC, 2007) It has been found that the amount of money paid by the UK in comparison to other suppliers is as follows; France pays 4.3 billion more than the UK Germany pays 7.9 billion more than UK Spain pays more than 3.6 billion more than UK Italy pays 1.8 billion more than UK From the statistics above, it can be seen that users in the UK have a lot to be thankful for since privatisation. This applies to both manufacturing and household users. The reason for this is because there are various companies involved in the supply of gas to the residents of the UK. This implies that most of them are trying to compete for customers and are using a number of methods to do this. Because customers keep complaining about increasing prices every now and then, companies have met this need by reducing their prices. This was all in an effort to give themselves an edge over the other suppliers in the industry. An example of how privatisation has helped British energy consumers is through the construction of pipelines. This year, there was construction of a pipeline in Norway. In addition, there are also other pipelines that are due for construction in the near future. Besides this, there is an LNG site that will be built in Teesside thus reducing the problem of shortage of supplies. In line with this, prices will reduce since they are inversely proportional to supply. In the long run, consumers in the UK benefit. (The BBC, 2007) In addition, privatisation has allowed a number of players to put their best foot forward in the industry. Service delivery in the UK has improved because there is no monopoly in the industry. Different suppliers can be sought by various companies. Besides this fact, there are a number of pipelines constantly in progress. One such example is in the month of October this year; delivery of Liquefied natural gas got an improvement by the establishment of a contract between Malaysia and Centrica. The beauty about LNG is that it could be delivered by the use of tankers rather than the use pipelines. (Pipelines cause countries to be in partnership even when they do not desire to do so.) This means that the supply of gas will increase in Wales and will also increase the economic potential of the country. This contract will last for close to fifteen years and will secure the future of gas in the country. This implies that there will be an increase in supply of gas thanks to privatisation. However there are a number of shortcomings that have arisen from privatisation. The first is that it is very difficult to monitor all the players/suppliers in the industry. Subsequently, some suppliers may not comply with safety or environmental regulations stipulated by the energy supervisor Ofgem. One such example is an explosion that occurred in the Larkhall. It involved one of the pipelines belonging to Transco which is one of the many gas suppliers in the UK gas industry. This explosion caused the destruction of property and one family (called the Findlay family) lost almost everything it owned after the explosion. This accident has not been fully investigated, but there are claims that the explosion was due to the use of an old pipeline. The type of piping was also in question as it is reported to be ductile piping. Investigations were done in after the tragedy and it was found that there were close to twenty leaks in the major pipes used by the company. This incident could have been avoided if there weren’t too may players in the industry charged with various responsibilities. If the gas industry was a monopoly like it was in the twentieth century, only one company was responsible for compliance with safety regulations. This is no longer possible due to the separate entities and agencies. This goes to show that privatisation has not only brought good news for the UK population, there are some disadvantages that have arisen as well. (The BBC, 2007) The suppliers involved in the gas industry enter into a number of contracts in their endeavour to expand their businesses. The problem with these contracts is that pipelines get built suddenly and some of the countries which these companies deal with may not be reliable. These pipelines are permanent and represent a commitment between signatories. There may be conflicts that could arise as a result of these agreements thus putting UK in trouble. Lastly, privatisation was introduced to boost competition and strengthen the industry. Unfortunately, prices have not reduced dramatically. Instead they keep increasing. There are a lot of dynamics involved in the determination of gas prices that may not necessarily be linked to the gas supply companies. But the million dollar question is; ‘why are gas companies making millions in profits while consumers keep paying more all the time?’ Just last year, Scottish Power Company announced a seventy seven increase in profit from the previous year. This goes to show that gas suppliers may simply be looking out for their own interests and leaving out the common man. (The BBC, 2007) PEST analysis of the gas industry in the UK Political factors There is no doubt that the most relevant political factor in the energy industry if its liberalisation. This means that there is room for competition at the same time. It should however be realised that these same competitors could cause harm to the energy industry by unfair prices, poor infrastructure and lack of regulation. The Middle East is a major player in the energy industry. But due to unrest in the region, gas and oil prices have been fluctuating thus affecting the residents of the United Kingdom. Another factor is that there is no regulation of take over bids within the country. This implies that foreign companies can come and invest in the industry and may begin domination of the industry. This also means that consumers can buy gas from other parts of Europe. Lastly, the country has a regulatory body that helps in protection of the consumers. This body Ofgem, ensures that suppliers do not keep prices up when wholesale prices have gone down (Middleton, 2006) Economic factors The supply of gas in the UK has faced high competition from other countries whose economies are growing at an alarming rate. One such country is China. It has changed its status from bringing in no oil some fifteen years ago to becoming the second highest importer of oil globally. (Middleton, 2006) There is decreasing output of the supply of gas by the British North Sea Oil. This started in the year 1999. Social factors British consumption of gas is relatively high. This is due to the fact there are numerous automobile users. Most residents in the UK have a preference for use of gas in their homes for cooking. This means that the demand is quite high in the sector. Most consumers are in serious need of electricity because UK is a developed country and most homes have appliances that require power supply. This has been shown by the increased profits recorded by suppliers in the industry Technological factors There are abundant reports about pipelines being constructed by gas supply companies. The gas industry is also adopting new forms of natural gas that can be transported by tankers. This could bring about an improvement in service delivery. There are a number of alternative sources of energy that have been suggested by the players in the industry. Some of these stakeholders include Green Clean Energy, Npower and Green peace. There are a number of researches being done by government regulators. These include photovoltaics, solar energy, biomass energy and wind energy. With renewed efforts, these will be adopted in the future. These alternatives could prove to be a disadvantage for gas supply as it will face increased competition. (Middleton, 2006) References EnviroDaq (2007): Road to Energy Improvements; retrieved from http://www.envirodaq.com/uploads/DOCS/32-20070622133745.pdf accessed on 15th December Knight, J. (2006): is it worth switching energy suppliers?; a report for the BBC News , 24th October Middleton, A. (2006): Energy Sector; a journal by the Privatisation and regulation seminar, 9th November The BBC (2007): The high price of gas retrieved from http://news.bbc.co.uk/1/hi/uk/7110592.stm accessed on 15th December Read More