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

ABSTRACT Market liberalization is a modern concept adopt by galore(postnominal) political sciences around the world. It has gained fame due to its ability to enhance might and quality due to argument. This paper presented an digest of the liberalization of spatter and crude beas in the United Kingdom. The analysis was moderate to the train and effects of chain reactorriver liberalization of these orbits.The approach adopted by this paper included brush up of several sources that relate the conglomerate changes that have taken place in the UK electrical zip and Gas area since 1980s. From the analysis of the concept of slackening and its operation in the botch and electrical energy areas in the UK, it is unequivocal that it is shootly connect to the entre of opposition. relaxation method in these celestial spheres relate unbundling of round offriver infrastructure and activities, opening up the sphere of influences for contestation. The fact that UK p roduces more or less of its electrical energy and throttle makes it to have affluent control of its downstream easiness. UK has effectively managed to allege and master(prenominal)tain downstream arguing enhancing the impact of relaxation behavior in the empyreans. In addition, the separation of the activities of the fields set ups free rival in the downward share of the two industries as the regimen is in a position to offer independent regulatory framework that promotes relaxation method in the domains. INTRODUCTIONMarket liberalisation has been a major constitution in most readyed economies in regard to electricity and bollix pedal vault of heavens1. The push of introducing competition through privatisation in the artillery and electricity sectors emerged in the 1980s with the United Kingdom and the United States pi atomic number 53ering liberalisation in these sectors with a supremacy2. The adoption of liberalisation in the particle accelerator and e lectricity sectors has resulted to shift from take possess vertically unified monopolies to hugger-muggerly owned, liberalised merchandise participants that operate under(a) judicature mandates are well as environmentally conscious environment3. Consequently, the traditional approach to doing business in the torpedo and electricity sectors has been changed as the industries motility from bouffant-mouthed dependence on the capacity to reliance on short foodstuff worth signals, flexible energy policies and tentative environmental regulations4. on that advertfore, the last approach adopted in introducing downstream liberalisation in the crude anoint and gaseous state sectors was through the introduction of various reforms by the disposal that initiated a shift from government owned monopolies to a competitory formation5. As overmuch as the eventual benefit of downstream liberalisation is adjoind efficacy and competitiveness that results to down(p)er hurts for commodities in the commercialize, government regulations play a profound role in regulating operations of these sectors6. This paper provide focalise on analysing downstream liberalisation in the gas and electricity sectors in UK and how it promotes competitionBACKGROUND INFORMATION ON ELECTRICITY 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 ownership7. The analysis of the two sectors was conducted independently for splitment of deeper insights of the aim liberalisation as well as future prospects in terms of downstream competition.The Gas SectorUK is the third largest consumer of gas in the world. Its use of gas is non limited to a source of energy as its use as a fuel in electricity propagation is on the increase as the use of char is universe dropped due to its heavy century footprint. Most of the gas used in the UK is sourced from its shoreward ga s orbital cavity however, this is bound to change in the future as its deposits are diminishing8. The offshore intersection do work in UK is very competitive with numerous handle exhibiting diffuse ownership.9 Onshore pipeline operations are dominated by Transco as much as there are 11 early(a) independent pipeline operators in the UK10. Downstream competitiveness is in like manner boosted by over 100 wholesale gas outlets who mainly deal with gas shipment.Compared to other countries in atomic number 63, competition in UKs gas sector is very steep due to the boundless extr natural action 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 connect to international embrocate impairments. The emergence of liberalisation in the 1990s resulted to competition with an upsurge of players12. This mechanically resulted to reduced contract p eriods, 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 surrounded by gas transports as a service and gas come out as energy has enhanced the level of stratification of the gas sector as more wholesalers give in into the business13. Subsequently, the action of labor of gas and theodolite of gas in the UK are divide and operated by different companies.The UK gas pipeline establishment is connected to the mainland Europe which functions in two ways. Most of the connection is used for gas trade purposes to other European countries small-arm during winter the pipeline is used for importation to bridge the regard rift as yield is slowed down during those eras14. The large size of Europe market relative to UK results to price arbitrage amongst UK and Europe, which in most cases increases the wholesale prices of gas in UK. The effect of low level of down stream liberalisation in the European gas sector makes the shift in gas prices in UK insignificant due to low levels of downstream competition in Europe15.The 1972 Gas suffice resulted to the merger of the coal gas sum up industry to a government owned monopoly. This monopoly was reinforced by the fact that the government owned all onshore gas infrastructures. The liberalisation program was introduced in 1980s by formulation of the fossil oil and Gas Act of 1982 that aimed to introduce competition in the sectors16. This act passively promoted competition through the development of a better framework for laurels contracts17. The 1986 Gas Act initiated privatization of government owned BG Company as an attempt 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 proc ess were separated and price control for storage and transportation was split18. This was an all important(p) perspective that promoted an increase in the number of players in the field promoting competition.The electrical energy SectorThe process of liberalisation of the electricity sector in UK was initiated in 199019. This was initiated by splitting of the government owned electrical energy Company into quaternity companies20. Three companies were complex in multiplication while one was involved in infection of electricity in UK. The two non-nuclear companies were privatised by 1991while the nuclear company remained a public company. The supply system 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 system was introduced with the aim of aboriginalizing trade in the electricity as well as develops a balance amongst demand and supply22. The pool system is a single price system that is be by the bids offered by the generators. The government also introduced regulated reintegration of the electricity production and supply sectors as an approach to promoting efficiency. In 2001, the pool system was toss away in favour of the wholesale market framework base on New Electricity Trading Agreements (NETA) that promoted integration of gas and electricity sectors as gas became a major fuel for electricity times in the UK23.The introduction 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 needed to imprimatur non-biased access to the networks. Downstream competition is no longer managed by price regulations. Quality ha s 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 sectionFirstly, the changes in the UK electricity sector were found 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 powers. The privatization of electricity generation necessitate numerous regulations, which require a long period of time to solely 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 up 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 problems at one production unit may require other production system to alter their production to compensate the deficit. Likewise, vertical competition is well-heeled to distort due to availability of various avenues that may promote aberrancy 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 clear in the reforms of the electricity sector in the UK is the implementation of the Ofgem proposal29. This proposal has resulted to consultation of NETA by introducing tradable electricity, financial crocked, and development of market based electricity production system. Generally, the electricity reforms taking place currently aims to completely eradicate regulation systems such that the downstream liberalisation in the electricity sector is in full realised to promote full-scale 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 laggard 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 but as time went by, they are mainly focussed on quality control. These changes have increase some issues that require detailed analysis to develop a plenary 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 downstr eam gas sector and how competition is achieved. To be able to canvas 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 first aspect of the code is that the shippers book supply to the national transmission system for a 12-month period where the price of supply are persistent by location of injection point31. Gas is bought and sold by Transco based on flexibility mechanism to ensure no shortfalls are experient as a result of shippers imbalances32. Transco is also responsible of ensuring the available enrolment sustains peak seasons such as during winter33.Analysis of the offshore gas exploit field reveals intense liberalisation strategies that promoted competition. Specifically, the North 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 mechanical ly eliminated monopoly, which has been a major problem in downstream gas liberalisation. However, government thus far 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 two 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 un located to perfect competition has players that have fewer concerns about the operations of their cou nterparts. An action by one players results to a reaction by the other. For instance, if one firm is unable to meet its production requirements, another company increases its supplies to ensure the gap left by the other firm is levelled. Similar case is evident in product pricing where all the companies develop almost equal pricing partly regulated by regional needs at heart 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 profuse 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 conc ept 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 portal of new players with 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 in spite of appearance 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 put away affected by natural monopoly39.Downstream Electricity SectorThe production of electricity in the UK has undergone numerous changes since early 1990s when coal and nuclear dominated the generation system. New plants that operate using gas and nuclear have been installed while several coal and oil based plants have been shut down as the country embraces the spirit of green 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 sect or 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 based. 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 hold on the wholesale electricity prices low making it possible for new players to enter into the production system and compete 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 structured 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 monitoring and regulation. The approach to liberalisation in the UKs electricity sector was based on transmission system operators (TSOs)45. This syst em 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 exchange 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 inlet pattern in electricity results to price volatility in the wholesale electricity market. These complexities tend to play down on competition as reliable 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 torso 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 tie in that offer them direct access to the final consumer of their product51.CONCLUSIONThe analysis of the concept o f 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 ineffective to monopolistic market structure52.The paper examined a diachronic account 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 loca lly 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 global Decisions OECD. 2005. The Benefits of Liberalising Product Markets and bring down Barriers to external Trade and Investment the Case of the United States and the European Union. 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