Unit 4B june 2015 revision.

1. Energy Industry Case Study
Unit 4B June 2015 Revision

2. UK Faces Prospect of Gas RationingEv. A
Annotations
Limited Amount
• Equity? Equality?
Some people stay at home more than others
Stops energy supply running out
Lack of supply drives up prices. Consumers
have few alternatives leading to market failure.
Government need new alternatives – should
renewable resources be used? Should we look
to 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 cheapest
tariffs 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.

3. • 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

4. 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

5. • 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

6. 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

7. • 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

8. Ev. D
Annotations
Opportunity 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

9. 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

10. Ev. E
Annotations
6% 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

11. 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

12. Ev. F
Annotations
Internalising 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

13. 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

14. Ev. G
Annotations
The 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

15. 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

16. Ev. H
Annotations
The 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

17. 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

18. Ev. I
Annotations
Prepayment 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

19. 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