COMPETETION

Competition in UK's Gas & Electricity Market

Competition in UK's Gas & Electricity Market

Introduction

Nearly, six billion Euros are spent by twenty million domestic consumers of UK on gas in a year. The UK's gas market structure has progressed through three different phases over a period of 10 years. The first phase involves the liberalization of the gas market to improve the service quality and price competition across the country. Second phase involves the policies regarding the complete openness of the gas market and third phase is associated with the post liberalizing complexities. The case given for the assignment is directly linked with the third phase, complexities of post liberalization. This assignment examines the complexities associated with the price competitiveness and competition in UK's gas market.

Discussion

Answer to question number 1

Part a - Level of competition

Privatization of energy markets in United Kingdom (UK) took place in the year of 1990 under the supervision of Margaret Thatcher's government. At that time, there was a monopoly of supplying gas and electricity in the hand of two key players British Gas and a local public electricity supplier. From 1996 to 1999, domestic consumers of energy got the freedom to make a rational decision associated with the selection of supplier. Finally, in 1998, UK's domestic gas and energy market was completely exposed to competition. Prior to privatisation, price controls were set by Ofgem (Office of gas and electricity market), Ofgem set a maximum of price which monopoly suppliers (British Gas & PES) could charge domestic consumers. Ofgem started removing these price controls after 2000. The decision of removing price control was based upon the assessment that competition was bringing positive consequences for industry and domestic users at that time. Consumer surveys showed good statistics regarding the consumer's awareness to switch from a monopoly supplier to more efficient competitors (Helm & Jenkinson, 1997, p.1-8)

On April 2004, Ofgem issued a detailed review about the state of competition in the domestic gas supply market, concluding the benefits consumers were driving from supply competition. Currently there are six big heads or corporations who are dominating the energy supply market in United Kingdom, and they all take price decision unanimously, which raised a question in the mind of public regarding the effectiveness of competition. Nearly, 99% of the total market share is acquired by these six companies.

However, some customer feels that the quality of service is same as before the competition while other think service quality is improved. Figure given below is showing the perspective of customers regarding the quality of service after the competition.

Source: National Audit Office/ OFGAS survey of customer by (MOR)

Part b - Market structure

Competition in the energy supply market is showing a mixed characteristic of different theoretical models, for example: like perfect market, products offered by all suppliers are same or close substitute to each other but the information is not symmetric, like monopoly all six companies can set their price, but there is no room for abnormal profits, and like monopolistic all ...