5 Pages, Grade: 2:1
In the context of Energy markets (Gas and Electricity generation, distribution and supply). Outline, Discuss and Compare the three questions.
Firstly, before being able to outline, discuss and compare liberalisation in regards to the Energy markets, it is important to define liberalisation. “The opening up of an industry to more competition, often involving the relaxing of government restrictions.” (Horner et al.) The energy markets were monopolies in many EU countries and held dominant power in the energy market which is considered inefficient. The EU claim that Liberalisation of the energy markets will benefit consumers through; raising employment levels, increasing business efficiency and increasing a country's potential economic development and GDP growth. We therefore need to focus on the impact of Liberalisation on these key areas to assess how advantageous this increase in competition has on the energy market.
According to the (European Commission) “Opening up these markets to competition has also allowed consumers to benefit from lower prices and new services...more efficient and consumer-friendly than before.” The European Commission therefore argue that consumers benefit because a breaking up of a monopoly and introducing competition will help give consumers savings in price but also choice of what service they demand.
Through liberalisation it is likely that employment will increase in the long-run as new companies form up to compete who hire employees. As the price is likely to decrease, this will mean consumers have more disposable income which will be spent in the economy causing economic growth. Neoliberals would argue that this would increase employment.
Business efficiency is beneficial through liberalisation of the energy markets “...lower prices and new services which are usually more efficient...” (European Commission). This is because new competition in a market will mean firms have to cut the price initially so they will need to reduce costs to maintain a profit unlike a monopoly where a firm will have very high profit margins.
Potential economic development and GDP growth is likely to occur as shown by the benefits to consumers, employment and efficiency. This would occur because of increased employment which will cause more people spending disposable income. An increase in companies also increases employment but also the reduction in market prices will result in consumers have more disposable income to be spent on other goods and services, this will lead to economic development in other industries and businesses and is likely to increase GDP.
Liberalisation of UK energy markets in the 1980s through privatisation under Thatcher, consumers mainly benefited because of lower prices due to increased competition between rival energy firms, this is because instead of a single monopoly, competitive markets try and compete through price wars. “The British programme of privatisation in the electricity wholesale market avoided the creation of “national champions” This allowed entry into the British market of a number of foreign generators with important market shares”(Domanico). This shows that the UK will benefit as other countries were competing to try and make the energy firms more competitive with shareholders providing extra finance. Price is the major way energy firms can compete on, this will lower the price of energy and consumers will benefit through not having to pay as much for energy, this will increase consumers disposable income to purchase other goods and services. Customers could also benefit in better customer service as energy firms may try and gain customer loyalty. In the current UK energy market, there is little benefit to consumers with price rises occurring providers offering similar prices. This could be down to collusion as energy firms don’t want to lose out through price wars. It could be partly down to the price rise of producing energy.
Increased competition in the energy markets will mean energy firms may hire more staff to help in marketing their energy products to stand out from competitors. They may also hire new teams to innovate to make their company more efficient and new firms require staff. Another effect on employment is that consumers of electricity and gas will have more disposable income through lower prices, whether its homes or businesses, they are more likely to use this extra income on goods and services which will help businesses increase sales and have higher incomes to increase staff, this will cause the multiplier effect.
Liberalisation of the UK energy market will mean firms have to be more competitive in the market to gain customers and keep profits. This could mean dropping the price to attract customers to purchase energy through them. This will cause their profit margin to drop as less revenue. To try and prevent this, the business will need to be more efficient. For example they may try and cut costs such as purchasing innovative technology to reduce wastage and increase staff training thereby increasing efficiency.
Through liberalisation of the energy markets, a country’s potential economic development is likely to increase, for example if an energy firm innovates into new technology, then according to the production possibility frontier “an increase in factor resources, or an increase in the efficiency (or productivity)” the curve is likely to shift to the right according to (Riley). As consumption increases, the energy savings will give customers more disposable income to spend in the economy raising economic growth according to the Keynesian economists.
In other EU member states liberalisation hasn’t been as successful. “For example, in France the starting point is a powerful and well regarded state owned company, while in Germany the starting point involved economically powerful private companies.” (Pollitt) These points back reasons that France and Germany, both have very powerful and well thought of companies which would make liberalisation of their energy markets very difficult and maybe not a popular move, especially as they would need to be broken up. These may not benefit consumers as they may prefer the national companies such as EDF and GDF in France. French minister-delegate for industry Francois Loos is recorded as saying that the price of electricity had “more than doubled between 2004 and end 2006”.(Loos) Because of this, consumers haven’t benefited like the UK has through liberalisation of the energy markets.
The Energy Community, consisting of many eastern European countries said that: “Commercialization will require labor restructuring given current levels of overstaffing with countries such as Serbia “need to reduce labor by 23%...” (Busc). This may mean that employment is likely to initially fall similar to that of the UK, however it is difficult to understand whether there is long-run employment growth. The effect of the 2008 recession is unlikely to do any figures justice.
Business efficiency may not have been as successful compared to the UK through liberalisation of the energy markets. This is because the rise of energy pricing from suppliers meant that the gap between costs and revenue was growing to narrow so prices had to be raised to maintain efficiency. The other affect of this is an oligopolistic market “increasing monopolisation - or oligopolisation - of the market on the European scene” (Simpson). This greatly affects the way in which a market operates.
Economic development and Growth from liberalisation has been less successful which could be because the UK privatised many industries when the economy was in very poor shape. The EU liberalised energy markets from the early 2000s when the EU was considered as being very successful with many new states joining. The issue is that the price of energy was increasing significantly at the time for the EU while the UK in the 1980s had found North Sea Oil and had an abundance in energy sources. (Piebalgs) argued that “even if prices rose, they would do so by less than would otherwise have been the case, he argued.” This may be true, however consumers may not see it this way and less can afford energy which could cause economic growth to drop. The potential economic development has great potential compared to monopoly controlled energy markets.
The weight of the evidence indicates that the advantages of Liberalisation do outweigh the disadvantages through the benefit to consumers of lower prices but also with the ability to choose their supplier, as long as there is clear methods on switching, consumers benefit greatly. Employment and business efficiency is also likely to increase in the long-run while there is likely to be increased potential economic development and long-term GDP growth. The UK markets, however, were the main beneficiaries of Liberalisation of the energy markets as they privatised the energy firms at just the right time to gain medium and long-term success from the policy. The rest of the EU did not show initial gains from Liberalisation of the energy markets, but this is most likely due to the 2008 recession and the rising price of energy. The long-term future of the energy market in the EU is likely to benefit similar to that of the UK.
Busz, H. (October 11-12, 2004). ECSEE Energy Sector: Restructuring and its Impacts. Available: http://www.stabilitypact.org/energy/041011-bucharest/busz1.ppt. Last accessed 3rd Dec 2012.
Domanico, F (2007). World Energy Book Issue 3. Europe: World Energy. Liberalisation of the European Electricity Industry: Internal Market or National Champions? p.22.
European Commission. What are the advantages of liberalisation? Available: http://ec.europa.eu/competition/liberalisation/overview_en.html. Last accessed 20th Nov 2012.
Horner, L et al.. Glossary. Available: http://www.freedomofexpression.org.uk/glossary. Last accessed 20th Nov 2012.
Loos, F. (2012). Britain and France face energy-liberalisation clash. Available: http://www.euractiv.com/energy/britain-france-face-energy-liber-news-217562. Last accessed 16th November 2012.
Piebalgs, A. (2012). Brussels braced for energy liberalisation backlash. Available: http://www.euractiv.com/specialreport-access-energy/europe-takes-stock-energy-libera-news-513460. Last accessed 15th November 2012.
Politt, M, G. (October 2007). Liberalisation and Regulation in Electricity Systems. How can we get the balance right?. 1 (1), Page 3.
Riley, G. (). Aggregate Demand. Available: http://www.tutor2u.net/economics/revision-notes/as-macro-aggregate-demand.html. Last accessed 5th Dec 2012.
Riley, G. (). Production Possibility Frontier ("PPF"). Available: http://www.tutor2u.net/economics/revision-notes/as-markets-production-possibility-frontier.html. Last accessed 5th Dec 2012.
Simpson, R. (2012). Brussels braced for energy liberalisation backlash. Available: http://www.euractiv.com/specialreport-access-energy/europe-takes-stock-energy-libera-news-513460. Last accessed 15th November 2012.
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