The United Kingdom Energy Sector - Case Study Example

UNITED KINGDOM ENERGY SECTOR Introduction The United Kingdom has one of the vast energy industries involved inthe supply of electricity and gas to its residents. Typically, the industry has a lot of work in supplying energy across the different areas but the core practices definitely entail generating electricity, conveying the different products (gas and products) and transacting with consumers through sales. Relative to the condition of the UK energy market, OFGEM conducted a comprehensive research in 2014 with the Competition and Markets Authority (CMA) and Office of Fair Trading (OFT) on the current competition stature. The basis of the investigation was on the UK energy market’s dominant companies and reviews on the financial progression; essentially, this knowledge formed a foundation for the problems. Some of the core challenges in the market entail weak customer response, adverse evidence of possible tacit coordination among others. Decisively, this essay entails an analysis of the OFGEM report findings on the UK energy market as a root for establishing whether more competition between the leading companies may benefit their consumers. The final summary and conclusions will act as a platform for resolving the core problems affecting the UK energy market. Analysis: The UK Energy Sector Analytically, the UK energy market has had paramount alterations since 2002; gas and electricity are the leading forms of energy and multiple companies compete to make sure they dominate a fair share of the market (Warren 2014). Moreover, the consumers play a great role in the market by creating the vast demand especially with a great percent of the households even the poor contributing to the overall profit. For instance, most of the poor households used over a tenth of their salary in 2012, a significant augmentation in ten years (OFGEM 2014). However, even with the manifold developments over a short time, the energy market still faces a number of challenges; principally, the adverse alterations in prices definitely lead to mounting profits (Carpenter 2013). Nonetheless, this only works for the companies but weak competition and lack of consumer trust still exist. Notably, the prices in electricity and gas increased by more than 20% in a period of four years, which made the energy market attention grow to an impressive depth; moreover, the profits also did especially from domestic supply. However, due to competition factors customer switch declined cuttingly. Up to half of the consumers in the United Kingdom do not trust their corporations especially when it comes to practices in supply and generation of electricity and gas. This cancels all the other achievements of the energy market since the customers trust is a requirement in such as a service industry. Evidently, the supply practices also contribute to the competition crisis because the involved corporations have higher charges for constant consumers for a product such as electricity than those who choose to switch (Carpenter 2013). This might seem as a good idea for the suppliers because they make assumptions that the constant customers are there to stay. Secondly, tacit coordination is also a familiar practice by corporations because it acts as a limitation for competition; obviously, this way they can hike prices whenever they want, typically adjust the energy market. The profits seem to increase even when costs of generation and supply are high because the corporations have the ability to change prices at their own pace. Significantly, the small companies that have the ability to supply do not stand a chance in general competition; the prices are high and they lack power to make any changes (Allen 2008). A large percentage of the UK residents make a great part of the energy market hence the small organizations cannot even supply on a wholesale platform (OFGEM 2014). Naturally, the problems are intermittent and one cause always leads to the other; moreover, despite the fact that small corporations are willing to take a chance and compete in the energy market there exists multiple hindrances. By generating cosmic electricity for the United Kingdom energy market, most of the large companies reduce the cost of supply barricading the minor corporations. Generally, the customers, small and large corporations have their downfall. UK Energy Market Sector as an Oligopoly The UK energy markets structure operates as an oligopoly where a few large corporations dominate the supply of gas and electricity; moreover, the firms have the power to control the economics of the comprehensive market. Nonetheless, the market control can only take place when the few dominating corporations combine efforts; otherwise, each of these firms is powerless without the others, which eliminates the monopoly type of structure. Definitely, with the leading corporations pulling their efforts together to regulate market practices there is limited competition. Comparatively, the United Kingdom has had big six corporations leading the energy industry; these companies have supplied gas and electricity for over 12 years without any significant competition because they have gained control by coordinating with each other (Warren 2014). The big six companies supply for over 90% of all the UK residents’ energy making it hard for other small corporations to get a share; matter of fact, the only chance they have at entering the market is the wholesale segment, but this is extensively out of their capabilities. Conversely, there are additional attributes define the market as oligopolistic with the core being that since the big six took charge the sector has only had limited development having a kinked demand curve. Generally, the big six firms maximize the profits at Q1 and even one of the firms decides to increase their supply price the others are reluctant so that they can remain in the market; typically, the due to the alterations in increase and decrease, the prices are elastic. In the end, MR and MC are constant variables but it does not mean that change in MC means a similar change in prices. However, the United Kingdom energy sector gurus initially agreed on liberating the market under the idea that this would increase competition, efficiency and comprehensive development (LMU 2006). Contrary to the vision, the energy sector has achieved very few of the set objectives mainly because there is no competition to the dominating companies on their feet. Proposed Reforms Resolutely, the liquidity reform by the OFGEM is a good starting point especially on aspects of competition because the small corporations that initially stood no chance again the big six will be able to overcome the barriers of entry (OFGEM 2014). Additionally, the reform will transform the UK energy sector in more than way; for instance, equivocation will be prevalent relative to the availability of products, the prices will change favoring both the consumers and the industry and effectiveness of the sector will definitely improve. Secondly, the proposals by the Electricity Market Reform could are potential facilitators of transformation and augmented success in the future especially for the electricity section of the market that currently faces multiple problems. Through the government’s initiatives, there is a guarantee of security, sustainability and affordability as part of the UK energy sector’s future; assertively, these are key facets that will help companies to earn consumer’s trust. Once the companies adopt the set policies, including the new entrants into the market, EMR and the government will be able to ensure that they are all reliable suppliers hence benefiting the consumers. On the other hand, the European integration reforms will not only facilitate domestic development but also eliminate other crucial challenges relative to incumbency, vertical integration and tacit coordination. Consequently, the companies deviate more time, effort and resources to dealing with the consumers. Additionally, the supply rate will be high making it easier for consumers to switch once they are not satisfied with certain suppliers of the electricity or gas. Naturally, the European integration initiative’s focus is extensively on transnational matters but the consumers will definitely have a fair share of the positive impact from the interconnector links especially for the wholesale dealers. Finally, the OFGEM has multiple reforms aimed at countering the financial demerits if the UK energy sector; however, the most beneficial to the consumers entail the European Financial Legislation and the reviews on electricity and gas cash out significant reviews. These reforms will deny the large companies power to alter prices or indulge in other activities that will guarantee an increase in profits even when the supply and generation costs are high (OFGEM 2014). Moreover, the cash out system purpose is ensuring that all corporations that participate in UK energy industry have organizational initiatives and policies that protect all transactions with their customers. Conclusion Relatively, the energy markets in the United Kingdom practices privatization for both electricity and gas hence the private corporations are in charge of most of the supply but the consumers have significant demerits that come from this freedom (LMU 2006). The big six prevalent corporation’s ability to involve in electricity and gas supply or just one depending on their core interests in the energy market eliminates the necessary competition. However, it is clear that in an oligopoly, the number of dominating firms is not a determinative factor as long as they are equally effective; in fact, the most important facet is their sizes and ability to control the industry just like the UK energy sector. In conclusion, the OFGEM report has comprehensive information on the problem and reforms that could apply to make the industry more efficient, especially to the consumers (OFGEM 2014). Fundamentally, the UK energy sector should consider the OFGEM reforms in countering the multiple problems in competition. BIBILIOGRAPHY Allen, S. 2008. Prospects For and Barriers to Domestic Micro-generation – A United Kingdom Perspective: Applied Energy, vol.85, pp.528-544 Carpenter, G, 2013, UK Energy Sector Economics Gone Wrong: New Economics, , viewed 7 February 2015, http://www.neweconomics.org/blog/entry/how-the-uks-energy-economics-have-gone-wrong London Metropolitan University (LMU), 2006, Liberalization, Privatization and Regulation in the UK Electricity Sector: Pique, vol.6, pp.779-785 OFGEM, 2014, Consultation on a Proposal to Make a Market Investigation Reference in Respect to the Supply and Acquisition of Energy in Great Britain, viewed 7 February 2015, www.ofgen.gov.uk/ofgen_energy_market_report.pdf Warren, P. 2014. A Review of Demand-side Management Policy in the UK: Renewable and Sustainable Energy Reviews, vol.29, pp.941-951 Read More