Essay Example on Policymakers have struggled to secure greater levels of liberalization









Policymakers have struggled to secure greater levels of liberalisation and have attempted to attain an all embracing policy to improve the price margins reduce emissions and ensure the security of supply ever since the privatisation of gas and electricity in Great Britain CMA 2016a Among the following objectives the security of energy supply did not disappoint as there has been no significant incidents that threatens this in recent years Nevertheless unsettling news in correspondence to the affordability of energy as the rise in domestic prices have surpass inflation over the past ten years which leads us to the questionable profitability levels of firms CMA 2016a In addition to that the service quality provided has also declined Market structure The physical supply chains for gas and electricity are widely similar as electricity is transported to customers via high voltage transmission lines and low voltage distribution lines whereas gas is transported to customers via high pressure transmission pipes and low pressure distribution pipes CMA 2016a The difference between transmission and distribution transmission is meant for long distances and high voltages pressure around the country whereas distribution is for lower voltages pressures into homes and businesses Webxsol 2018 Energy suppliers work as the middle man as they buy energy in the wholesale market and sell it to the consumers who have an array of suppliers to choose from Electricity and gas wholesale markets have similar characteristics contracts can be arranged over multiple periods ranging from a number of years to on the day trading markets trading can occur bilaterally or on exchanges CMA 2016a 

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The retail market is the most common point between gas and electricity as they are often sold together by retailers through dual fuel tariffs CMA 2016a Up to 31st of January 2016 there were 28 million domestic electricity consumers and 23 million domestic gas consumers in addition to that there were 20 million dual fuel customers 8 million single fuel electricity customers and 3 million single fuel gas customers CMA 2016a The Six Large Energy Firms Centrica plc Centrica EDF Energy plc EDF Energy E ON UK plc E ON RWE npower plc RWE Scottish and Southern Energy plc SSE and Scottish Power are the former monopoly suppliers of gas Centrica and electricity EDF Energy E ON RWE SSE and Scottish Power to Great Britain customers CMA 2016a A little under 90 of the energy supplied to the domestic consumers in the Great Britain is by the Six Large Energy Firms which also generates around 70 of total electricity generation in Great Britain CMA 2016a In retail there are currently 34 suppliers selling both electricity and gas and the largest suppliers to domestic consumers outside the big six are Utility Warehouse First Utility and Ovo Energy which are collectively known as the Mid tier Suppliers CMA 2016a Breakdown of the costs incurred to the consumers are wholesale energy 40 50 network costs 25 retailing including profit margin is 20 CMA 2016a Social and environmental policies obligation costs are higher for electricity 15 compared to gas 5 CMA 2016a 

Price discrimination Based on the Competitions and Market Authority CMA report price discrimination is able to surface as market power is given to the six large suppliers due to the lack of customer response pricing their standard variable tariffs materially above a level that can be justified by cost differences from their non standard tariff CMA 2016a There have been multiple objections to this analysis by some suppliers which argued that they did not engage in price discrimination whereas other suppliers acknowledged that it occurred CMA 2016a RWE in particular has voiced out that this particular pricing model was embraced throughout the industry and not only did it not raise any competition concern it was often considered to stimulate competition CMA 2016a RWE also said that the CMA had failed to demonstrate why this raised any competition concern Price variation and price discrimination were features of many competitive markets and from an economic point of view were often considered to be efficient pro competitive CMA 2016a The CMA has therefore acknowledged that stimulating competition via discounted introductory offers are common practice in other markets CMA 2016a Although the CMA s findings show that in the retail energy markets price discrimination is not able to compete away the profits involved as on average customers have been paying prices that are above the competitive level CMA 2016a Price discrimination is definitely used in a broad spectrum of competitive markets although it is not necessarily evidence of market power

For example firms cannot sustain itself given that price is equal to marginal cost if there are economies of scale due to fixed cost as there would be less competition This will then lead to price mark ups above marginal cost hence indicating elasticities of demand Baldwin Cave 1999 Services where demand is relatively responsive to price should generally have a lower than average proportionate mark up while services where demand is relatively unresponsive to price should have a higher than average mark up over their marginal costs This enables common costs to be recovered in a way that reduces to a minimum the harmful effects of distortion in output caused by a markup over marginal cost Baldwin Cave 1999 This then suggests that in order for firms to recover their fixed costs in an efficient way lower markups are charged to more responsive customers compared to less responsive customer as opposed to charging every customer the same price Baldwin R B Cave M C 1999 Understanding Regulation Theory Strategy and Practice Oxford Oxford University Press CMA 2016a Energy Market Investigation Final Report 24 June Webxsol 2018 Energy uk org uk Online 6 January 2018 Available from http www energy uk org uk energy industry the energy market htm

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