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Economics

Study Notes

Oligopoly - The UK Market for Electricity and Gas Supplies

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Six suppliers - SSE, Scottish Power, Centrica, RWE npower, E.ON and EDF Energy - control 96 percent of the UK electricity generation market

In June 2014, the Competition and Markets Authority (CMA) announced that it was launching a full investigation into the supply of energy in Great Britain.

Over recent years there has been almost continuous media debate about the soaring price of electricity and gas in the UK and it has become clear that there are many areas of concern about how the market is functioning.

These issues include the following:

  1. Weak customer response / low switching rates: Customer switching rates have been in decline despite higher prices and the potential for significant savings from switching. Customer trust in suppliers has also been in decline.
  2. Possible tacit coordination. While industry regulator Ofgem had been clear that it had found no evidence of explicit collusion in the market for electricity and gas, it did consider that tacit coordination could be a problem particularly with suppliers aligning price increases.
  3. Vertical integration and barriers to entry. There are likely to be high barriers to entry to the market including suppliers' pricing strategies, regulatory barriers and reputational risks. In addition, the structure of the six larger suppliers is characterized by a high degree of vertical integration between generation and supply that could potentially weaken competition.
  4. Increased supplier profits – There had been evidence of increasing average profitability among the suppliers with no clear indication of the corresponding efficiency improvements that might be expected in a competitive environment.

The CMA must take such action as it considers reasonable and practicable to 'remedy, mitigate or prevent' the adverse effect on competition and any detrimental effects on customers (in so far as those effects have resulted from the adverse effect on competition).

This might mean that action is taken to change the structure of the industry. The "Big Six" energy suppliers might be broken up in an attempt to inject more competition into the market. They are all powerful vertically integrated businesses and the barriers to profitable entry are high.

Market investgations take a long time - the Competition and Markets Authority (CMA) is expected to report its findings by December 25, 2015.

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