Energy Market -gov intervention

Key players

British gas, EDF, E.ON, Scottish power, SSE, OVO energy (retail)

Market concentration

CR6 70% or domestic supply (big 6 legacy)

Octopus market share

25%

Fastest growing now largest seller of gas

Challenger

Octopus energy, bulb (failed), shell energy, small renewable suppliers, local community energy schemes

Supply shocks

Fuel cost (gas, coal) renewable capacity, nuclear availability, storage capacity (gas storage limited in UK)

Demand shocks

Weather, temperature, economic activity, energy efficiency, populations EV adoption (growing demand for charging points)

Barriers to entry

Massive capital for generation, strict regulatory requirements set by ofgem, wholesale market access, brand, smart meter rollout cost

Technical EoS:

larger power stations have lower cost per MW (Hinkley point C: 3.2GW capacity)

Purchasing EoS:

bulk fuel contracts

Managerial EoS:

specialist trading desks, regulatory teams

Financial EoS:

investment grade credit ratings reduce borrowing cost

Network EoS:

customer base spreads fixed billing/IT costs

Fixed cost

Power station construction, grid connection, IT system, customer service infrastructure, regulatory compliance

Variable cost

Wholesale gas, electricity, renewable obligation certificates, metering cost

Profitability

Retail margins: 2-5% (small)

Negative externality

Co2 emission, air pollution, landscape impact of renewables

Positive externalities

Energy security, jobs

Market failure negative externality

Co2 emission cause £100bn+ annual damage not reflected in prices

Market failure -information failure

Complex tariffs confuse consumers -only 30% switch despite potential savings

Market failure -fuel poverty

13% of UK households struggle to heat homes adequately

Gov intervention

Price cap (ofgem), carbon pricing (UK ETS), renewable subsidies (contracts for difference), energy efficiency schemes, windfall tax on energy profits

Behaviour economics -status quo bias

Only 30% switch despite potential £200+ savings

Behavioural economics -complexity aversion

Confusing tariffs reduce engagement

Behavioural economics -default effect

Standard variable tariff stickiness

Behavioural economics -present bias

Upfront cost of efficiency measures vs future savings

Behavioural economics -hyperbolic discounting

Insulation payback too far away

Behavioural economics -salience

Monthly direct debits less noticed than one off payments