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Energy Market Structures

In electricity there are five activities which require a licence from Ofgem before a business can participate in the sector. They are:

• generation
• supply
• distribution
• transmission
• operation of an interconnector

Generation and Supply are now seen as fully competitive. Distribution and Transmission are monopoly networks which are subject to price regulation by Ofgem. Licence conditions are still being developed for interconnectors. An important change to the framework was made in the Utilities Act 2000 which made it illegal for the same person to own a distribution and supply business. This ensures non-discriminatory third part access to the networks to allow full competition in supply.

In gas, licences are required if a business wishes to participate in the following activities: shipping, transportation and supply. Shipping and supply are competitive activities. Transportation is a natural monopoly subject to a regulated price control.

Market consolidation over recent years has seen the rise of vertical integration with a small number of companies dominating the gas and electricity sectors. There is still considerable consumer choice with an average consumer able to choose from about six major suppliers as well as a number of smaller suppliers. Ofgem has concurrent competition powers with the Office of Fair Trading (OFT) to ensure there is no market abuse should a business begin to assume market dominance.

The GB market is fully liberalised. EU Directives on gas and electricity expect other Member States to open their markets to competition. The UK Government is pushing for this believing that protectionism is not the best way to deliver liberalised markets for the benefit of consumers.