Energy Industry Case Study

Unit 4B June 2015 Revision

UK Faces Prospect of Gas RationingEv. A

Annotations

Limited Amount• Equity? Equality?Some people stay at home more than othersStops energy supply running out

Lack of supply drives up prices. Consumers have few alternatives leading to market failure.

Government need new alternatives – shouldrenewable resources be used? Should we lookto different countries to supply?

‘Forced’: there may be a sense of panic and worry for the resources running out.

uSwitch.com is a method used to get cheapesttariffs and encourages competition within the market.

Households have to pay more for heating. This would be likely due to longer cold weather spells of 2011-12 leading to increasing demand that pushes up the wholesale price.

• From the case study, we can understand that the UK needs spare capacity to cope with one-off occasions of cold weather.

• Building and maintaining supplies is expensive, therefore companies need to make sufficient profits to provide infrastructure.

• Green energy may be an option for the government as they may not have to rely on imported energies.

• Is nuclear energy an option? It can produce enough energy for one-off occasions, but bad for the environment due to toxic waste.

Ev. A UK Faces Prospect of Gas Rationing

Ev. B

Annotations

Oligopoly: High barriers to entry, price makers, high overheads, high profits, USP via branding

Risk of collusion/cartel? Affect of prices, output levels, discounts, price inelastic

Government failure by ‘putting profits before Fairness’

Energy companies voluntary agreements to ensure they have a strong brand reputation.

The government may make decisions that will generate them the highest tax revenue – risk of regulatory capture by Ofgem? ‘can only issue nominal fines such as £1’

Cosy Deal Means Energy Companies Avoid Big Payouts

• Should the fines that Ofgem impose be retroactive? (based upon past actions) It was legal at the time, therefore it raises the question whether they should be punished.

• The big six energy providers have competition to gain market share through misleading consumers – Ofgem have fined over £100m for breaching rules – could the case for regulatory capture be acceptable?

Ev. B Cosy Deal Means Energy Companies Avoid Big Payouts

Ev. C

Annotations

Overcharging consumers? Are companies abusing their monopoly power? Boost abnormal profits

Companies tax avoidance with 25% increase in ‘excessive profits’. Are profits needed to invest into infrastructure?

Are the profits being invested into power stations, equity issues, deficit, dividends, foreign companies may take majority of profits overseas, x-inefficiency

Gas has increased by 8.8% and electricity by 9.1%.

Better infrastructure can lead to better service, we need infrastructure (Ev.A), greener energies, better power stations, creation of jobs which leads to the multiplier effect.

Npower Profits Up 25% Just Months After Massive Hike in Prices

• The 2010-11 winter was unusually warm and the 2011-12 winter unusually cold. It could be argued that profits fell short in the first year, but in the second year the surge in demand pushed up wholesale prices as well as profits.

• Using Ev.A, it is clear the UK needs investment in infrastructure for secure energy – companies cannot expect to pay both corporation tax if they are also investing.

• Introduction of newer companies such as First Utility and Extra Energy are taking more market share.

Ev. C Npower Profits Up 25% Just Months After Massive Hike in Prices

Ev. D

AnnotationsOpportunity cost of wind farm subsidies. Could the money be put to better use? (NHS/Education Fees) High subsidy prices likely to translate to high consumer prices.

Green energies are renewable, sustainable and cheap in the long run however may be expensive. They contribute to less green house gas emissions as well as less of a need for labour in production.

Subsidies may end up in foreign companies, leading to money flowing out of the economy.

Newer technologies may be introduced which could lead to more efficient production with lower costs and prices for consumers.

Subsidies are funded using the tax payers money. Is there are better use for £100bn?

Creation of jobs could lead to the multiplier effect, contributing to GDP within the economy.

Foreign Companies’ £100bn Wind Farm Subsidies

Ev. D

• The foreign ownership of the companies makes not different in the UK’s efforts to reduce carbon emissions – just as the UK export 30% of GDP and is an open economy.

• Could a carbon tax be more effective as it would increase the price of fossil fuels, making green energies cheaper.

• The UK alone cannot reduce green house gas emissions, it may be more effective to give funds to poorer countries for them to reduce their emissions to have a greater global effect.

Foreign Companies’ £100bn Wind Farm Subsidies

Ev. E

Annotations6% renewable resources (7% including Hydro electric) Could show government failure – they are not using enough green energies.

Nuclear fusion, no emissions, radiation is difficult to store, high half life leading to negative externalities.

This could be applied to many questions, such as ‘However, as evidence E suggests, only 7% of energy is renewable…’

Coal releases Co2, worse for the environment than gas, mined, non-renewable, air quality issues.

Natural Gas if imported, harder to store as it is flammable, fracking makes it cheaper, liquefied storage can reduce costs.

93% non-renewable, 7% renewable

Energy Sources UK

Ev. E

• Oil stations have been replaced by gas as it is much cheaper and cleaner

• The drive towards renewables and away from coal has had a significant impact on the UK energy fuel mix.

• Questions the need for further renewable resources – Is the UK falling behind on using renewable technologies?

Energy Sources UK

Ev. F

AnnotationsInternalising externalities increases costs, however the outcome is carbon neutral and leads to reduced externalities associated with the environment.

Encourages profit incentives: could become subsidised by the government. As it may currently be a monopoly, they may get publicity to generate abnormal profits.

Private costs include start up, fines and competition.Private benefits include profits, cutting costs and better reputation. External cost include expensive infrastructure and methane contributes to green house gases. External benefits include being better for the environment, renewable and reduces waste.

Companies are obliged to buy back electricity generated by customers if they themselves do not use it. They are also bought back at a higher rate.

The energy cannot be produced ‘on demand’ as the process of decomposing takes time.

Severn Trent Turns Sewage Into Green Energy

Ev. F

• Severn Trent replace their old equipment with efficient, newer alternatives – this can make production cheaper and more effective.

• If the externalities associated with energy production are internalised, the free hand of the market can best decide how resources can be allocated efficiently.

Severn Trent Turns Sewage Into Green Energy

Ev. G

AnnotationsThe UK gas prices are the cheapest in Europe and within the bottom third for electricity. However, the UK are likely to use more energy more frequently, leading to higher consumption, demand and overall costs.

It could be argued that the UK energy market is efficient as they have lower prices in comparison to other countries. However, consumers are still struggling to pay bills.

Denmark has the highest prices for both electricity and gas. This could highlight their commitment to reducing emissions by Internalising the external cost through higher prices.

Denmark are hoping to be completely carbon neutral by 2050 – perhaps high prices are positive for countries like these who opt for greener technologies.

European Household Energy Prices

Ev. G

• The high prices of the EU compared to world rates could show their commitment to reducing green house gases.

• High prices can be beneficial for Internalising the externality

• Low prices could be a sign for efficient production techniques in the UK

• There must be a need for a global carbon tax to ensure all countries are contributing to green house gas emissions – especially countries like China who are the worlds largest polluters.

European Household Energy Prices

Ev. H

AnnotationsThe process of switching providers could be confusing to some people. However, the lack of competition has caused average bills to rise, leading to consumers having less disposable income.

Prepayment meters have only one tariff, making them more expensive for consumers – is there a case of regulatory capture?

Fuel poverty could be rising as a result, leading to the government having to give more benefits.

Is £4m enough to keep up with demand? £25 may not be enough to make a significant difference. It could be argued that energy companies are taking advantage of consumers.

More UK Household Owe Money to Energy Companies

Ev. H

• The rise of fuel poverty could show how it has become increasingly hard to pay back bills. This could suggest that energy companies who are making ‘excessive profits’ may be taking advantage of monopoly power in order to exploit consumers.

• However, it could be argued that within the warmer winter of 2010-11 there was less demand for energy, whilst in 2011-12 it was much colder, increasing demand which pushes up the wholesale price. When it is cold, consumers may go into debt, and when it is warm they are likely to go into credit.

• The 2008-09 recession where there was falling real incomes may still contribute to the increasing pressures in today’s society.

More UK Household Owe Money to Energy Companies

Ev. I

AnnotationsPrepayment meters are only under one tariff, therefore the best deals are not available. This could lead to increasing costs, putting consumers in a worse position than before.

As there is only one tariff, there is a lack of choice and information for consumers, contributing to market failure.

Old appliances may use more energy, therefore the elderly and poorer in society may not be able to afford the more energy efficient products.

Prepay meters could be beneficial for consumers as it helps them budget, they cannot get overcharged, can top-up online which is convenient, helps saving, reduces carbon footprint and it may be suitable for some.

Prepay meters may also be negative, as they are often based on higher tariffs making it more expensive, it can also be inconvenient and involves equity issues.

Prepay Meters Can Cost Poorer Households Hundreds of Pounds

Ev. I

• The cheapest method would be through direct debit as they have much lower administration costs. This makes prepayment meters expensive due to costs of running prepay account, installation and maintaining top-up shops.

• Consumers may be less likely to switch, therefore companies may take advantage by not making them aware of new rates. This could lead to market failure.

• Those on prepay meters are often from low income groups, then more likely to have cold weather payments and free energy saving measures, such as free household installation.

Prepay Meters Can Cost Poorer Households Hundreds of Pounds