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The Privatisation WITH THE Energy Sector Economics Essay

The problem of energy is a turbulent one, with different governments changing and restructuring the processes where energy is produced, transmitted and distributed. Both dominating energy policies are the opposing privatisation, where there is minimal government intervention, and price regulation, where in fact the government actively sets controls on the pricing of energy supply. The aim of intervention would be to reduce costs for industry and domestic users, as well as fulfilling sufficient energy supply. This report will discuss the annals of the policies in the united kingdom and the result of the recent changes that British Prime Minister David Cameron has proposed. It will demonstrate if the policy of price regulation works with with efficient energy distribution.

A Brief History of the Privatisation of the power Sector

After the Conservative Party election in 1975, policies implemented by Margaret Thatcher where coined 'Thatcherism'. Thatcherism is often set alongside the American policies of Ronald Reagan in the 70's which were called 'Reaganomics'. Thatcher and Reagan both shared the view that deregulating the marketplace would lead to more competition between businesses, therefore higher productivity, more efficiency and lower prices overall. Therefore, all previously nationalized industries were privatized, with desire to to transform the economy into a more market-oriented one, encouraging an enterprise culture such as investing and risk-taking, without government intervention, to lead to wealth maximisation. Thatcher believed that the private sector would become more efficient, as the private sector is profit driven and would lead to greater efficiency that government owned companies; desire to was to eliminate state socialism and increase "popular capitalism" giving more ordinary people the chance to become shareholders. Indeed, between 1988 and 1989 the British government derived over 7 billion from privatisation, which drastically improved Britain's economic situation. From the period of 1992 until 1996, the government continued to push privatisations in the required areas, selling British Coal, National Power and Powergen. The United Kingdom's electric utility industry privatisation started in 1990 and ended in 1996. The aim of deregulation was to eliminate price ceilings and become profitable for the firms, subsequently attracting new companies in to the market. A rise in competitive markets would then, in principle, then drive prices down towards a price that is socially affordable. This might benefit customers in the obvious way in addition to forcing producers to become more efficient in their productivity to compete.

The price of domestic gas and electricity has generally increased within the last eight years after around a decade of falling prices; although there have been some price cuts within the last couple of years, these have been smaller than the price rises. So far, this autumn five of the big six energy suppliers have increases gas and electricity prices by between 6% and 11%. These price increases have been related to higher operating, network and environmental costs. In the long term, the pressures on the price all appear to be increasing; the only way that domestic and industry consumers can reduce the effect of increased unit costs and reduce bills is by improving energy efficiency. This note targets trends in the domestic market - the costs of gas, electricity and other fuels used for heating and its own effect on fuel poverty. An analysis of the impact of earlier price trends on levels on consumption are available in energy price rises and their impact on demand. The note fuel poverty looks at trends, patterns and projections of fuel poverty and the article Energy prices and fuel poverty provides brief snapshot of trends in prices, fuel poverty and prospects for the future.

Setting and controlling energy/electricity prices and recent price changes in the UK

There are four elements to the price of electricity charged to the nal consumer. There will be the wholesale prices charged by the generators, the prices charged by the National Grid company for use of the national transmission network, the costs charged by the owners of the regional distribution networks and nally the costs charged by the supply companies to nal consumers. British Prime Minister David Cameron said his government will change the law to tackle rising energy bills by forcing companies to charge each customer the lowest rate because of their type of use. Cameron's statement came after announcements of price increases by energy companies in October. British Gas, the largest supplier of power and gas, said it would raise prices for both gas and electricity by typically 6%; RWE Npower Plc said it would increase rates for power by an average 9. 1% and and 8. 8% for gas. Field said that only a minority of consumers were taking benefit of the probability of switching providers to find the lowest gas and electricity prices. "We have to place more obligation on companies, " he said. "At the moment, everything is down to the consumer. We feel we need to go further, " (Field). A number of companies have suggested their increases in costs are the consequence of wholesale increases or government environmental schemes which affect their costs. The energy companies blame wholesale price increases but even the regulator has discovered that prices don't fall when the wholesale price drops. The sector is dominated by a small number of big and powerful players who are seemingly unaffected by the standard competitive pressure of price and customer support. Folks are questioning whether they are paying a good price for his or her gas and electricity.

More on recent energy price changes

As part of Ofgem's aim to make a "simpler, clearer, fairer and even more competitive" energy market, suppliers would need to tell each customer about the least expensive offer open to them based about how they pay their bill - whether by direct debit, pre-payment or credit. Customers would also default to the least expensive option at the end of fixed-term contracts. Ofgem also proposes a cap of just four "core" tariffs. At the same time, it wants to trial a proposal to provide vulnerable customers, and the ones who have not switched supplier for three years or more, with information about the least expensive market deal. Ignacio Galan, Iberdrola's executive chairman told the Financial Times that it might be better to move to a fully regulated energy market i. e. stepping away from privatisation and moving towards a power market with government intervention. He also commented that if companies had to provide all customers their cheapest deal there would be no point in energy providers enticing customers with loyalty plans, products and services, different payment plans and other incentives. Ofgem, the industry regulator, stopped endorsing Mr Cameron's plan, publishing its proposals that could force suppliers to cut the amount of tariffs and tell customers about the cheapest deal available, but would not force them to put all consumers on the lowest tariff.

If firms had to own "cheapest" deal to householders, there would be nothing to stop them ditching their lowest tariffs so that more expensive deals became the "cheapest". However, "the risk is that they can pull their cheap deals and put everyone on more expensive standard tariffs, meaning that folks will finish up paying more, " says Mark Todd, director of energyhelpline. com. Even consumer groups argued that it was unworkable and would destroy what little competition there is in the energy market, forcing prices up not down. The Prime Minister has been warned he will kill off competition in the power market if companies are forced to give all their customers the cheapest tariff available.

Government intervention - yes or no? Impact on producers, consumers and fuel poverty

Generally, the proposed government intervention is unable with the free market system. As in the wild market system, prices are determined purely by the market forces of supply and demand with no government intervention. Moreover, the costs of goods and services are determined by unrestricted competition between privately owned businesses. At rst glance, regulated prices seem to be to be contrary to the principles of the competitive retail market. Government intervention in a functioning and open market may possibly be anti-competitive would certainly not in favor of the beliefs of all Tory and Lib Dem MPs. The primary problem lies in if the regulated prices should be set higher or lower compared to market prices. This section will review whether governmental price regulation is beneficial for producers, distributors, consumers and the problem of fuel poverty.

Price regulation should be permitted under certain conditions, one which is that it should never distort competition; price regulation prevents suppliers from offering attractive services and personal, dynamic pricing schemes. Setting regulated prices too low is also not appropriate for the introduction of competitive markets. Regulated prices can be qualied to be lower than market prices. Low degree of regulated prices distorts the functioning of the market, both at wholesale and retail levels, by decreasing the functioning of the retail market as well as the whole liberalisation process. If regulated prices are not consistent with wholesale market conditions, suppliers without signicant low-cost generation capacity or equivalent long-term contracts will never be in a position to make competitive offers that will allow them to recuperate their costs. Consequently, with a restricted volume of suppliers, you will see no development of the wholesale markets - liquidity will remain at a minimal level. As a result, neither the wholesale nor retail markets will compete. Regulated prices limit the opportunities and incentives for customers to switch suppliers and thereby limit competition in the market. Alternatively raising the amount of regulated prices might not be the perfect solution is either, because the expenses to be recovered are nearly impossible to evaluate and even regulated prices set at wholesale prices will not ensure that incumbent suppliers can recover their costs. It could be that the type of regulated prices itself is incompatible with the checking of electricity and gas markets to competition. The problem of setting regulated prices at an appropriate level is a lot more complicated that it seems at rst sight.

There are two significant reasons explaining that despite their levels, regulated prices are deemed to be incompatible with a competitive market. First, options for establishing regulated end-user prices are contrary to market price-setting mechanisms. Regulated prices are set by an external authority, while market prices emerge when supply meets demand. Suppliers and customers are directly interested in nding a "fair price" to meet their needs, while an external authority may be motivated by reasons apart from those of a well-functioning market. Therefore, the process and methods for setting regulated prices will probably have an impact on the marketplace. Secondly, regulated prices are not created for competitive markets. Some regulated prices (or price control mechanisms) were designed to regulate monopolistic electricity and gas sectors, and predominantly, vertically-integrated undertakings. The goal of monopoly price control has often been the introduction of optimal capacity at the cheapest possible cost for the whole of society. Not only are the levels of regulated prices more likely to impede the development of liberalised markets, however the mere existence of the prices has effects on liberalised markets.

However, there are price regulations that could present benets inside a liberalised market and even be considered as essential for the achievement of market opening, with regards to the structure of the relevant market. Among the best practices in the region of price regulation is holland, where for both electricity and gas retail markets, the regulatory authority sets the utmost reasonable price for household customers and SMEs per product (price capping). This price is not made public, so as never to distort the mechanisms for setting market prices, but the regulatory authority may oblige suppliers to comply with these regulated prices if their prices are above the regulated prices.

It is also important to identify that consumers can be harmed therefore of underpricing, because under-pricing tends to restrict the supply-side of the markets; certainly in the long-term by discouraging investment and innovation and possibly also in the short-term by reducing reliability and security of supply. Therefore, it is crucial to inform customers of their rights and their ability to change supplier is certainly the rst step to promoting customer empowerment also to permitting them to benet from the effect of competition on electricity and gas retail markets. Regulated prices can have direct damaging effects for consumers in open electricity and gas markets. Price regulation may impede customer's access to information, diversity in offers or it can offer the chance for the collusion of suppliers deciding to exert their market power. Some household customers wouldn't normally find any suitable offers and customer surplus is not reached. A sufficient level of information should allow customers to exert their choice on the market.

Regarding fuel poverty, especially protecting vulnerable customers, regulation is necessary in a competitive market. Under EU law, "vulnerable customers" are safeguarded under the liberalised market framework, because they are considered more vunerable to suffering in open markets and to becoming victims of misleading commercial practices. Vulnerable customers may be protected through specially established social schemes, like social aids ensuring their continuous access to electricity and gas. Furthermore, tools used for the protection of these customers must work consistent with and support the prerequisites of competitive markets. Protecting "vulnerable customers' shouldn't be confused with maintaining regulated energy charges for all, or certain types of customers. Any policy aimed at protecting vulnerable customers must be brought into line with market conditions. It is of the utmost importance that any attempt to protect vulnerable customers does not hinder the efcient functioning of any competitive market.

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