To What Extent Does Market Liberalisation Influence Competition In Gas And Electricity Sector

ABSTRACT Market liberalization is a modern notion adopted by umteen government activitys around the world. It has gained fame ascribable to its top executive to enhance efficiency and quality due to contest. This paper presented an analysis of the liberalization of grease-gun and oil heavenss in the United Kingdom. The analysis was limited to the train and personal effects of downriver liberalization of these vault of heavens.The entree adopted by this paper included review of several sources that relate the various variegates that have taken place in the UK electricity and throttle domain since 1980s. From the analysis of the concept of relaxation and its application in the atom smasher and electricity areas in the UK, it is evident that it is directly linked to the opening of arguing. Liberalisation in these sectors involved unbundling of downstream infrastructure and activities, opening up the sectors for contest. The fact that UK produces most of its electric ity and fluid makes it to have full control of its downstream relaxation method. UK has effectively managed to introduce and maintain downstream rivalry enhancing the impact of liberalisation in the sectors. In addition, the separation of the activities of the sectors promotes free competition in the downward section of the two industries as the government is in a position to offer independent regulatory framework that promotes liberalisation in the sectors. INTRODUCTIONMarket liberalisation has been a major policy in most developed economies in regard to electricity and fluff sectors1. The push of introducing competition by means of privatisation in the gas and electricity sectors emerged in the 1980s with the United Kingdom and the United States pi matchlessering liberalisation in these sectors with a success2. The adoption of liberalisation in the gas and electricity sectors has military issueed to crusade from evidence owned vertically integrated monopolies to privatel y owned, liberalised grocery store participants that operate under government regulations argon well as environmentally conscious environment3. Consequently, the traditionalistic approach to doing business in the gas and electricity sectors has been changed as the industries move from large dependence on the capacity to reliance on short-term foodstuff impairment signals, flexible cipher policies and tentative environmental regulations4. therefore, the ultimate approach adopted in introducing downstream liberalisation in the oil and gas sectors was through the understructure of various reforms by the government that initiated a shift from government owned monopolies to a competitive formation5. As much as the eventual return of downstream liberalisation is increased efficiency and competitiveness that results to lower outlays for commodities in the market, government regulations play a central role in regulating trading operations of these sectors6. This paper will focus o n analysing downstream liberalisation in the gas and electricity sectors in UK and how it promotes competitionBACKGROUND INFORMATION ON electrical energy AND GAS SECTORS IN THE UKThe underlying principles for reforms in this sector was that privatisation of the sectors would provide better competition than direct state self-possession7. The analysis of the two sectors was conducted independently for development of deeper insights of the level liberalisation as well as future prospects in terms of downstream competition.The bobble SectorUK is the third largest consumer of gas in the world. Its use of gas is not limited to a source of energy as its use as a fuel in electricity generation is on the increase as the use of coal is being slobberped due to its heavy carbon footprint. nearly of the gas used in the UK is sourced from its offshore gas fields however, this is bound to change in the future as its deposits are diminishing8. The offshore drudgery process in UK is very compet itive with numerous fields exhibiting diffuse ownership.9 Onshore dividing line operations are dominated by Transco as much as there are 11 separate independent pipeline operators in the UK10. downstream competitiveness is also boosted by over 100 wholesale gas outlets who mainly deal with gas shipment.Compared to other countries in Europe, competition in UKs gas sector is very steep due to the boundless extraction potential in its offshore sources,11 enhancing downstream competition. Before liberalisation of the gas sector in UK, wholesale gas contracts were restricted take-or-pay commitments, long-term and linked to international oil prices. The emergence of liberalisation in the 1990s resulted to competition with an upsurge of players12. This automatically resulted to reduced contract periods, take-or-pay commitments were lessened, and the price of gas is no longer linked to the oil prices. Furthermore, the UK has implemented measures that promote relationships between gas tra nsports as a assist and gas supply as energy has enhanced the level of stratification of the gas sector as more wholesalers enter into the business13. Subsequently, the process of drudgery of gas and transportation of gas in the UK are separated and operated by different companies.The UK gas pipeline administration is connected to the mainland Europe which functions in two ways. Most of the connection is used for gas export purposes to other European countries while during winter the pipeline is used for importation to bridge the demand gap as production is slowed down during those times14. The large size of Europe market relative to UK results to price arbitrage between UK and Europe, which in most cases increases the wholesale prices of gas in UK. The effect of low level of downstream liberalisation in the European gas sector makes the shift in gas prices in UK insignificant due to poor levels of downstream competition in Europe15.The 1972 Gas exercise resulted to the merger o f the coal gas supply industry to a government owned monopoly. This monopoly was strengthened by the fact that the government owned all onshore gas infrastructures. The liberalisation program was introduced in 1980s by formulation of the Oil and Gas Act of 1982 that looked to introduce competition in the sectors16. This act passively promoted competition through the development of a better framework for awarding contracts17. The 1986 Gas Act initiated privatization of government owned BG Company as an effort of cultivating liberalisation and competition in the gas sector. However, real competition in the gas sector in UK emerged in 1990s. This was boosted by the Gas Act of 1995 that promoted unbiased competition in the gas market where production process and transportation process were separated and price control for storage and transportation was split18. This was an important aspect that promoted an increase in the number of players in the field promoting competition.The Electri city SectorThe process of liberalisation of the electricity sector in UK was initiated in 199019. This was initiated by splitting of the government owned Electricity Company into four companies20. Three companies were involved in generation while one was involved in transmission of electricity in UK. The two non-nuclear companies were privatised by 1991while the nuclear company remained a public company. The supply ashes was transferred to 12 regional private companies21. The main aspect of this shift of ownership from government to private in the electricity sector was the horizontal downstream severance, which resulted to competition. To enhance downstream competition, the pool corpse was introduced with the aim of centralizing trade in the electricity as well as develops a balance between demand and supply22. The pool system is a single price system that is defined by the bids offered by the generators. The government also introduced adjust reintegration of the electricity pr oduction and supply sectors as an approach to promoting efficiency. In 2001, the pool system was abandoned in favour of the wholesale market framework based on New Electricity Trading Agreements (NETA) that promoted integration of gas and electricity sectors as gas became a major fuel for electricity generation in the UK23.The excogitation of NETA as the main regulatory system in the electricity sector enabled the development of effective linkages between the regulated monopoly of balancing and the competitive market. This system promoted segregated downstream ownership, which has reduced the number of regulations compulsory to guarantee non-biased access to the networks. Downstream competition is no longer managed by price regulations. Quality has become the main threshold of downstream regulations resulting to intensification of quality controlled competition24. There are numerous reasons that affect the process of liberalisation in this segmentFirstly, the changes in the UK el ectricity sector were based on reforms that aim to develop competition through privatization25. The argument was that a pro-competitive industry is better that one that is devised based in regulations in managing maker provides. The privatization of electricity generation implyd numerous regulations, which ingest a long period of time to completely eliminate all the anti-competitive forces in the sector. Secondly, the use of regulations is slowly defining activities that promote completion in a sector that had a high level of monopoly. The competition problem in this sector emerge due to various activities require application of natural monopoly. These challenges are handled by sustained changes in the regulatory framework to promote complete downstream liberalisation in the electricity sector26.The strong vertical relationship in the electricity sector also results to complications where downstream competition problems affect upstream competition27. For instance, capacity proble ms at one production unit may require other production system to alter their production to compensate the deficit. Likewise, vertical competition is easy to distort due to availability of various avenues that may promote twirl of competition. This is common where the returns of the market are regulated below the monopoly price. As a result, competitive activities by former monopolies results to various challenges with regard to regulations28.The main successes realised in the reforms of the electricity sector in the UK is the implementation of the Ofgem proposal29. This proposal has resulted to extension of NETA by introducing tradable electricity, financial firm, and development of market based electricity production system. Generally, the electricity reforms pickings place currently aims to completely eradicate regulation systems such that the downstream liberalisation in the electricity sector is fully realised to promote all-out competition, where the operations of the sectors are fully controlled by the market forces30.DESCRIPTION OF ELECTRICITY AND GAS SECTORS IN THE UKFrom the above preview of what is happening in the electricity and gas sectors in the UK, it is evident that the sectors are moving towards the realization of complete liberalisation as regulations loosen. The development of regulations was initiated with a focus on price regulation tho as time went by, they are mainly focussed on quality control. These changes have raised some issues that require detailed analysis to develop a comprehensive presentation of how downstream liberalisation in these sectors promotes competition.Downstream Gas sectorThis is majorly driven by the 1995 act provisions that define the activities of downstream gas sector and how competition is achieved. To be able to analyse the process of downstream competitiveness, it is necessary analyse the elements of the code as it determines how downstream competition in the gas sector is achieved. The root aspect of the c ode is that the shippers book supply to the national transmission system for a 12-month period where the price of supply are resolute by status of injection point31. Gas is bought and sold by Transco based on flexibility mechanism to insure no shortfalls are experienced as a result of shippers imbalances32. Transco is also responsible of ensuring the available inventory sustains peak seasons such as during winter33.Analysis of the offshore gas mining fields reveals intense liberalisation strategies that promoted competition. Specifically, the northward Sea gas fields in UK are managed by 25 different operators that share 129 gas exploration licences34. The introduction of various players in the production process automatically eliminated monopoly, which has been a major problem in downstream gas liberalisation. However, government still regulates the production process of gas resulting to partial liberalisation in the production system35.Downstream oligopoly in the gas sectorThe fact that gas supply is limited to a few locations that are mostly offshore and some merchandise from a few countries that are globally known for their huge amounts of gas reserves, there are very few players in the production and supply of gas in the UK. The ability of UK to produce its gas locally makes its supply chain manageable and directed to full liberalisation covering both upstream and downstream36. Oligopoly as a market structure in the gas sectors has been in existence in the UK since 1970s with its upstream market. The perception of oligopoly in the UK gas sector is founded on the fact that a market that is exposed to perfect competition has players that have fewer concerns about the operations of their counterparts. An action by one players results to a response by the other. For instance, if one firm is unable to meet its production requirements, some other company increases its supplies to break the gap left by the other firm is levelled. similar case is evident in product pricing where all the companies develop more or less similar pricing partly regulated by regional demand within the UK37.Therefore, UK gas supply system is operated based on oligopoly of its 25 main supplies from the offshore gas fields where the final price of the gas is determined by the effects of informal collision between the suppliers. The collision price of gas in UK is also affected by the global oil price that is normally used as a reference point in most cases. The fact that currently there is no excessive dominance in the downstream segment as most government operations have been privatized the prices charged by the wholesale suppliers is similar.Implications of liberalisation in UKs Gas SectorBefore the concept of liberalisation was introduced in the gas sector in the UK, there was a high level of monopoly in the gas production system with the government owning almost all offshore gas fields in the UK38. Liberalisation has resulted to entry of new players wi th government monopoly being eliminated and competition taking its roots. However, downstream gas sector in the UK is not fully liberalised as in the case of upstream due to high levels of government regulations in an effort of ensuring supplies meet the demands and prices are regulated within acceptable standards. Furthermore, the high costs of investments needed in downstream segment of UKs gas sector limit entry of new players resulting oligopoly as the main approach to downstream competition in the gas sector. Therefore, downstream liberalisation in the gas sector has opened it up to competition through processes that resulted to separation of the production chain from supply chain, introduction of competition through privatization of government monopolies, and development of regulatory frameworks that control areas that are still affected by natural monopoly39.Downstream Electricity SectorThe production of electricity in the UK has undergone numerous changes since early 1990s w hen coal and nuclear dominated the generation system. New plants that operate utilise gas and nuclear have been installed while several coal and oil based plants have been shut down as the country embraces the spirit of gullible energy. The concept of liberalisation is also evident in the system as most of the new generation systems developed from the 1990s are privately owned40. The introduction of private companies in the power generation automatically resulted to the decline of dominance in the sector by national power and power gen which are state owned companies. This is evident as government dominance in power generation is lowest in the UK as compared to the rest of Europe. The success of UK electricity sector is founded in its effective regulatory framework that has protected it from the faults that were evident in California and Australia when downstream liberalisation was introduced41. The regulatory system adopted in downstream electricity sector in the UK is market bas ed. Moreover, the UK downstream electricity sector is devised based on strong market incentives that promote entry of new players as a way of fostering competition42. NETA has successfully managed to keep the wholesale electricity prices low making it possible for new players to enter into the production system and debate favourably. The fact that the transmission system is still monopolised, downstream liberalisation is limited to production as much as the government has set various measures to ensure it does not interfere with downstream and upstream liberalisation43.The government has initiated various regulatory changes that promote competition between market players. The main aspect that promotes completion is the market share that is defined by a companys effectiveness and competitiveness. The most important aspect of liberalisation in the electricity production system is to introduce competition as the main aspect of promoting innovativeness and efficiency among the players in the sector44. The success of UK system is founded in its approach that promoted competition amid independent producers and existing government firms.Competition as a result of liberalisation of the UKs electricity downstream sector was promoted by development of regulation of monopolies in the sector with the aim of eliminating the traditional vertical integrated system. Liberalisation broke down the structure into three sections, which were downstream, transmission, and upstream where competitive markets replace the vertically integrated firms with government monitor and regulation. The approach to liberalisation in the UKs electricity sector was based on transmission system operators (TSOs)45. This system is based on the concept that ownership and transmission planning are integrated components of the market and system operation46. The state ownership of the transmission system is central to the success of the system as it ensure unbiased treatment of the firms involved in the downstream production of electricity. More so, the use of TSOs has enhanced coordination between the electricity producers enhancing competitiveness as information deputize is encouraged47.The electricity market is complex due to inability of the producers to store the produced power in large quantities and the existence of varied demand conditions. The need of electricity production system to meet the demand needs and flexibility makes the process of downstream liberalisation to be regulated to ensure system stability48. The lack of constant using up pattern in electricity results to price volatility in the wholesale electricity market. These complexities tend to play down on competition as authentic supplies are used during peak seasons resulting to instances of oligopoly in the downstream electricity sector.Generally, there are some complexities in downstream electricity sector in UK however, the introduction of liberalisation that has been subjected to continuous improvement to ensure liberalisation is fully realised has created competition as evident in the introduction of the pull system that resulted to competition lowering prices49. NETA is another major body that not only enhanced competition in the electricity sector but also resulted to further drop of prices as players increased promoting price competitiveness50. The recent vertical reintegration in the UK electricity sector where large electricity producing companies are acquiring retail distribution businesses this is another factor that will further enhance competitiveness in the sector as players develop links that offer them direct access to the final consumer of their product51. terminalThe analysis of the concept of liberalisation and its application in the gas and electricity sectors in the UK reveals its direct link to the introduction of competition due to the introduction of many players in the downstream segment and the eventual opening up of the segments to market forces that are in effective to monopolistic market structure52.The paper examined a historical reputation of the regulatory changes in the process of liberalizing the UK gas and electricity sectors providing links between liberal policies and regulations and opening up of the sectors to competition. The most evident aspect of liberalisation that promoted competition was the privatization of government monopolies in the production of electricity and gas in the country. Specifically, it was evident that the process of liberalisation of gas and electricity sectors is affected by the types of commodities that are handled by the players in the two industries. Furthermore, the fact that UK produces most of its gas and electricity locally makes it an interesting participant in downstream liberalisation. However, the uniqueness of the properties of electricity and gas require infrastructural systems that are managed by the government to ensure a level playing field for the downstream segments in the gas and electricity industries in the UK.ReferencesPrimary sources internationalist Decisions OECD. 2005. The Benefits of Liberalising Product Markets and Reducing Barriers to International Trade and Investment the Case of the United States and the European Union. 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