Privatisation of Electricity in the United Kingdom - Case Study Example

Privatisation of electri in the United Kingdom A report submitted on how electri has been privatised in UK and the market structure Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Date Introduction This report gives an analysis of the electricity sector in the united Kingdom in terms of privatization, the market structure as well as an assessment whether the sector has been a success or not. The objective is to understand the notion of privatization while taking into consideration its benefits as well as limitations and also understand what the electricity structure entails by comparing various sectors. The United Kingdom was the first country in privatization of electricity as well as restructuring it. Electricity in the UK was reported to include of four segments that included generation, distribution, transmission and supply of the electricity. The distinct three areas that were in operation in electricity were Northern Ireland, England and Wales and also Scotland. Analysis What privatization entails Privatization is a situation where the government transfers its control on a public owned resource to a private sector that is normally commercial or business in nature. The transfer of control can either be partial or total, Hawkins, N, 2010.A total transfer is where the private sector stands on its own in terms of pricing and even choosing of the market share while in partial the government may step in. this is possible especially where the private sector sets high prices and the government comes in to act as a regulator. Privatization has many advantages in that it gives a customer a variety to choose from since there are many companies and products in the market. Another advantage is that it increases the level of competition among companies and in a result the customer ends up getting quality products. It also fosters development since many industries are allowed to the market. This in essence also increases productivity hence growth in the GDP. In spite of its advantages, the privatization has its shortcomings. It is normally business-oriented and hence prioritises on profits hence sets up higher prices that the consumer may not be able to meet. It also limits public access because they have little control over the sector. The three segments in the UK electricity industry The electricity industry was divided into three distinct segments by the government that was counteractive with the main aim for those who were new in the market to compete with those who were privatized. The segments included Powergen, Nuclear Electric and National Power. The Nuclear electric took over power stations that were nuclear and it remained to be owned publicly. It accounted for 14% of the capacity that was generated. The National Power took 52% of the generating capacity while Powergen was accountable for 34%. The Nuclear Power station was left from privatization totally. Powergen and National Power were allowed to directly supply larger consumers with electricity. In 1996, the Eastern Electric purchased the generating capacity of national power and Powergen. Market structure of the retails supply of electricity Market structure is normally comprised of how the market structure is organized as well as its characteristics. The main characteristic of this market structure includes the turn-over of the customers. This is the extent to which customers shift from one supply to another. Privatization saw a higher impact on the customer turn0over. Another characteristic is the number of firms which affects the level of competition in the industry. Indeed, the higher the number of the firms the higher the competition. The retail sector in electricity involved many firms. Another characteristic includes the nature of costs. Due to privatization, the nature of costs varied depending on the supply and demand curves. This is in relation to the Hybrid model that explains the process of price basing it on supply and demand. Wolyniec 2003 defines hybrid as a fusion of the supply/demand relationship with pure models. The assumptions of the theory are that electricity element is readily observable and deterministic and also that price-demand curve and mean-reverting residual term are stochastically independent. This leads to the understanding of the market structure as follows. Scottish Power got an acquisition of the regional electricity company that was situated in Manchester and North-west of England. In mid 1990s, 12 electricity companies in the region went through processes of mergers and take-overs. This is because the government wanted to withdraw the shares it had. After two years, only one company had not been taken over by the US. Regional companies supplied electricity directly to consumers and were responsible in the distribution of regional networks. In 1997, it became a requirement that companies were to separate their retail and distribution businesses. At the onset of the retail market there were major users only, about 5000 operations that consumed higher than 1MW in a year. It was expanded in 1994 to 50000 users and later opened in the year 1999 to all 26 million users (Ofgem, 2006). Pond, R 2006, Prices of electricity fell during privatization which led to commercial users benefiting from the fall compared to domestic customers. The retail market opening for all saw companies hit with large fines for miss-selling such as the Npower due to unfair practices such as high prices. This saw customers switch suppliers. This in turn impacted on customers because it hindered savings. Price 2005 found out that after customers switched suppliers, 42% paid more, 14% paid the same and 44% only made savings. Also different tariffs make it hard for customers in terms of choice. This is because they have to be keen in order to get the best deals. 52 companies owned power stations. 80% is owned by 10% generating companies that in total have a capacity of 77,500MW.powergen and nation power were no longer independent. Powergen became owned by E.ON and nation power was divided between Npower and international power. The Scottish companies remain independent and they have got an acquisition of regional companies that operate in Wales and England. The following table shows the percentage of market shares as at December 2006 Table 1 group 12/02 6/03 12/03 6/04 12/04 6/05 3/06 BGT (Centrica) 22 23 24 24 23 22 22 Powergen (E.ON) 22 22 21 21 21 21 20 SSE (Scottish & Southern) 13 14 14 15 15 16 16 power (RWE) 16 16 15 15 15 15 15 EDF Energy (EDF) 15 15 14 14 13 13 13 Scottish Power 10 10 11 12 13 13 13 Others 0 1 1 0 0 1 0 Source: Electricity distribution companies, as reported in Domestic Retail Market Report, March 2006 Comparison to other structures In comparison to other markets i.e. the wholesale market, they sell output at changing prices and created a pool of electric companies. These tools operated in terms of bids which are not the case in the retail sector. It comprised of larger companies compared to others which. These companies were responsible of setting the market price while the retail structure, the price was determined by individual companies and various factors in the region. The retail market seems to be working efficiently due to competition but prices have not been stabilized. Evaluations on the UK privatisation on success The UK privatisation of the electricity sector has far much more been a success story. Its main aim was to encourage competition which it did since more firms were incorporated into the market, Warner, J 1997. Privatisation has also been a success story because it has seen improvement in terms of the quality of products that are produced. Electricity has also acted as a regulation of price in the market where these oligopolistic firms exist. This arises from competition which leads to firms setting fair prices that will attract customers. In determining their success, these industries are evaluated form the customer’s point-of-view. Because customers want services that are affordable and efficient, this describes the process as being successful. Another success was the increased efficiency in the management which in turn saw customers as well as shareholders benefiting due to the windfall tax introduction on utilities in 1997. It has also been successful since there has been growth in the industries in terms of companies. Privatisation was also a success since it yielded benefits to the environment. This is due to the production of cleaner gas that replaced the old coal burning that usually polluted the environment. Evaluation and recommendations The oligopolistic nature of the electricity industry still faces many challenges which can still be addressed through privatisation. When I look at the privatisation of the UK electricity, I too agree that the move has been a worthwhile move. While the UK electricity industry is presently oligopolistic in nature, it is privatisation has certainly been much beneficial to the industry. . Privatisation has led to development in the sector though it is important to note that some companies benefit more than others. This is from the view that there are six dominant companies in the market that makes privatisation not equal. It can however be said that there is the flipside of the privatisation since other companies engaged in unscrupulous business that was unfair to customers. This was some sort of extortion that saw customers suffer, i.e. dominant companies setting higher prices. From these evaluations, I therefore make recommendations that for privatization to work out effectively, various companies should not use the notion of private ownership for their own commercial purposes. This may involve helping the government in the raising of funds. I also recommend that the government should also give various companies an equal chance of privatisation regardless of their size. This will see the overall growth in the sector as well as the encouragement of competition that is all round. Conclusion It is clear from the various researches done that it is the UK that is leading in the privatization of the electricity. Privatization has seen transformation in the sector such as employment, pricing, industrial relations and environment. It has also offered security of supply. There is a recent trend that calls for higher prices due to switching to gas contracts that are long-term. In a way, the privatisation of the industry has been a success in a number of ways as seen. Nevertheless, it should be stressed that the industry cannot still enjoy the full benefits of privatisation since there are still few dominant players in this oligopolistic market which can easily collude to the dissatisfaction of the consumers. References Geman, H 2006, ‘Understanding the fine structure of electricity prices, Journal of business, Vol. 79, no.3 pp. 1227-1240. Hawkins, N, 2010, Privatisation revisited, Cambridge university press, London. Pond, R, 2006, Liberalisation, privatisation and regulation in the UK electricity sector, London Metropolitan publisher, London. Ofgem, 2006, Ofgem reports 2005-2006. Warner, J 1997,’Why privatisation has been a success story’ The independent magazine, January 4th 1997. Wolyniec, 2003, Privatisation and economic performance, Oxford University Press, Oxford. Read More