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
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
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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