UK Energy Markets: Fuel Price Rises Hindering Competition

Rising prices for fuel are driving up wholesale prices for electricity in the UK. Rather than encouraging competition in electricity supply, the fluctuations in the market are making it increasingly difficult for new players to enter the sector. While companies with upstream assets are able to generate the bulk of their profit there, supply only businesses are finding it more difficult to prosper.

Prior to the 1990s, the UK’s electricity market was a state-owned collection of regional monopolies that controlled generation, distribution and supply. However, the liberalization of the market led to the fragmentation of these monopoly companies and also introduced elements of competition. Regional companies began to merge or were taken over, and foreign energy companies that were still in monopoly conditions but had money to invest with few areas to expand looked toward the UK as a prime opportunity.

This reorganization led to the eventual emergence of the present electricity market, which is dominated by six major electricity suppliers, five of which evolved from the regional electricity boards and the other from the gas market. Most of these companies are vertically integrated once more, controlling aspects of generation and distribution, as well as the supply of energy to consumers. Nevertheless, stringent regulation applies to the revenue that is made from distribution businesses, which are still regional monopolies.

While entering the UK’s electricity market may be easier than it was, thriving in it is likely to become more difficult, at least in the short term. Indeed, supply companies without upstream capacity are facing uncertain times due to fluctuations in wholesale prices. Furthermore, although fixed-term contracts with customers may aid sales, they may also make it harder to anticipate and pass through these wholesale price changes.

Hedging has become essential in order to avoid risking great exposure to the fickleness of the market, and smaller suppliers may face insolvency as they have less capacity to absorb the highs and lows of wholesale prices, and are financially less likely to be able to protect their position going forward.

Electricity companies’ recovery of green investment funding on behalf of the UK Treasury has been rumored for a while, adding mounting pressures to suppliers in the face of increasing disquiet from their customers due to the cost of energy.

Although the UK regulator has reported that the electricity market in the UK is competitive, rising wholesale fuel prices and increased legislation are certain to impact on this, and at a time when the consumer focus on energy has never been more urgent and competition more welcome.