Impacts of Liberalisation to the energy prices in the UK
The issue of liberalization of the energy sector in the UK begun in the 1990s after the electricity act was adopted in 1989. The reasons for liberalization in this sector was to increase the consumers’ welfare by decreasing the prices of electricity in the country, promote energy efficiency, and encourages the use of renewable sources of energy, to introduce freedom of choice to the customers through opening up the energy market to competition just like what happens in the other sectors and also to guarantee the security of electricity. Before liberalization in the energy sector, the energy sector was under a national organization that was held under exclusive rights for electricity supply.
Currently, the UK is among the countries that provide the best example of a successful liberalized energy sector in the world. It was among the first countries to adopt this policy and succeed. Every energy consumer in the UK is currently able to choose the energy supplier freely and enjoy all the privileges of their chosen company. This paper focusses on the impact of liberalization in the energy sector in terms of prices. Don't use plagiarised sources.Get your custom essay just from $11/page
The improvement in the performance of the energy sector in the United Kingdom after liberalization was covered by different papers. In the first five years after liberalization, there was a 6% decrease in the price of electricity; the fuel cost dropped tremendously in the market and high investment rate. The liberalization process was carried out perfectly without being influenced by the politics of the country.
The liberalization process of the energy sector brought a reduction in cost, although it is suggested that it was as a result of job losses in the coal industry as well as in the electricity sector. Despite the cost of electricity reducing, it was not necessary to the favor of the consumers but mostly to the shareholders who increased their dividends so that the prices could be reduced. Liberalization resulted in an increase in the use of renewable energy sources in the UK, rising from 6% in the year 2009 to 11% in the year 2012.
The degree of competition brought by liberalization plays a significant role in evaluating the impacts of the policy on price differences in the energy sector. Based on an oligopoly case, it is not easy to identify whether price discrimination impacts the consumers because it changes the competitive nature by extending liberalization as a strategic tool.
To understand the impact of liberalization on electricity prices in the market, figure 1.0 gives an illustration since the years 2001 to 2012.
Figure 1.0: illustrate the electric price evaluation in the UK from 2001 to 2012
As indicated from the figure above, the prices of electricity in the UK dropped after the adoption of the liberalization policy in 2001 and later increased from the year 2004 to the year 2009. The electricity prices in the UK are calculated using the average between prices that are paid by the domestic consumers and industrial consumers and also as the national price average in Euro per kWh. The indicators on the figure show the prices of electricity as charged to the consumers. According to the figure, liberalization in the energy sector caused a reduction in prices to the consumers in a significant percentage from a 2.6% reduction in the year 2002 to a 13.6% reduction in the year 2004. From the year 2005 going ahead, there was another trend of increasing prices as a result of the reduction in resources in the country, climate change, and also due to consumer growth.
Figure 1.0 gives an illustration of the largest generator in the UK market share in %
Figure1.1 shows the larges generator market share evolution in the electricity market in the UK in a percentage of all electricity generation in the country. According to the figure, there is a low percentage ranging from 20% in total, which shows that liberalization was successful in the energy sector. The electric and generator suppliers had a 46% market share, which later dropped to 21% in the year 2010.
Figure 1.2 illustrates the Overall gains in the electricity sector in the UK (%)
The figure above gives an illustration of the electricity efficiency gain from the year 2001, which is calculated from the ODEX indicator. ODEX indicator is derived from calculating the weighted average from the sub-sectorial indices of electricity efficiency in the country. From the figure, there was a rise in the efficiency of the energy sector from the year 2001 to the year 2010 when it rose to 15.49%. The efficiency of electricity generally rises with economic growth in a country due to the continuous development of technology. According to all the indicators analyzed relating to liberalization in the energy sector, they show that there was a positive impact in the electricity sector. It is even better than what the vertically integrated market might have resulted.
Sticky pricing as explained in the oligopoly theory
Sticky Price is also referred to as normal rigidity or price stickiness. This is the Price that usually resists the changes occurring in the market. These prices do not either increase or decrease despite the demand for a product rising or dropping. The prices never fluctuate as a result of a change in the production cost neither. The prices do not also change as a result of a shift in supply; they remain at a particular point all through.
According to the oligopoly market theory, the prices of products are relatively stable despite the forces in the market, such the demand, and supply. This kind of market can be described in different ways, although the best way to illustrate it is by using the kinked demand curve. Sticky prices are most of the time resulted by companies deciding to keep their prices rigid due to the high cost of sustaining a business at a certain point, such as; making advertisements and printing new menus and brochures.
Advantages of liberalization
The process of liberalization results in an increase in the business processes due to the removal of the procedures that are inefficient that is hard to be achieved under the regulated market. Liberalization gives businesses the freedom to operate in the market and compete fairly.
Liberalization results in crushing of the monopoly type of businesses in the market because the regulations are dropped to a level that all the small businesses can be able to meet the standard requirement.
Liberalization in any field of business results in a significant reduction in prices. The price reduction favors the consumers greatly by reducing their expenditure. An example is the liberalization of the electricity sector in the UK.
Liberalization results in fair competition by ensuring that the market requirements are similar to all the businesses operating in a particular place. It enables small firms to survive and protect them from being exploited by big businesses.
Liberalization also results to the development of a country’s economy because of creating freedom in the market for the films to compete; this results to emerging of many new firms in the market which earn revenue to the government as a return.
Conclusion
Liberalization of the UK energy sector was a success, although there were some people who doubted its ability to function at the beginning. Liberalization impacted the prices of goods and economic development at large. It has benefited the consumers by reducing their expenditure on energy. Liberalization opened up the energy sector by reducing the regulations for entry in the market, creating a good environment for competition between all the energy-producing companies. Liberalization has resulted in to provision of efficient energy gains, encouraged the use of renewable energy sources, and also has led to giving the consumers the freedom to choose the companies they prefer to offer them with energy despite the size of the company.