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    To what extent can the rising cost of domestic electricity and gas in the UK be blamed on consumers being 'ripped off' by the energy companies?

    Not an essay question, just need a few points for tomorrow.

    The question is based on this article:
    http://business.timesonline.co.uk/to...cle3972925.ece
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    And also, what actions could the regulator take to force the power companies to facilitate easier switching by consumers between energy supplies?
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    For the second part, I remember hearing in the news quite recently that OFGEM want energy suppliers to be more transparent about true energy prices to the consumer as currently they are deemed to be too confusing for the average person to understand exactly what their gas/electricity is costing them. Therefore the regulator (OFGEM) could make switching easier by making energy companies lay out their prices more transparently to consumers so consumers know where they stand with regards to the competition in the energy market.

    - Hope that makes sense, my mind has turned to putty over the holidays, not doing anything academic whilst waiting to go to uni!
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    (Original post by Rothers)
    For the second part, I remember hearing in the news quite recently that OFGEM want energy suppliers to be more transparent about true energy prices to the consumer as currently they are deemed to be too confusing for the average person to understand exactly what their gas/electricity is costing them. Therefore the regulator (OFGEM) could make switching easier by making energy companies lay out their prices more transparently to consumers so consumers know where they stand with regards to the competition in the energy market.

    - Hope that makes sense, my mind has turned to putty over the holidays, not doing anything academic whilst waiting to go to uni!
    Cheers for taking the time to reply, I appreciate it.

    Can anyone answer the first question?
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    Bump. Anyone?
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    alright, i'll have a go at the first part but i cba to read the whole article sorry

    I happen to know that energy companies raise their prices of energy to consumers in line with their rise in cost of the raw energy i.e. gas from Russia and cost rises of coal for electrcity production etc... so basically, as raw energy costs (to energy companies) rise, energy prices for consumers rise.

    HOWEVER when costs fall again for energy companies to buy gas and coal etc... they often don't lower their prices again as demand for energy is very price inelastic (if you're on AS don't worry about that) and therefore consumer demand for energy doesn't fall proportionatley lower than the proportion increase in the price of energy, e.g. if prices rise by 10%, the demand from consumers might only fall by 5% hence energy companies increase revenues by 5% and so don't see the need to lower their prices inline with the fall in their costs.

    The energy regulator could be expected to take action against this lack of price lowering as it often seen as taking unfair advantage of consumers, while what energy companies are doing isn't illegal, energy is seen as a commodity and is therefore an essential part of daily life here in the UK e.g. heating, hot water, electrical goods etc.. and so many people believe the government - via regulators i.e. OFGEM in this case, ought to enforce price lowering amonst energy companies for the good of the consumer (since energy is a commodity not a luxury).

    You could relate this to how the price of water is regulated highly by the government as obviously water is essential for life and hygeine etc and so the government keep on top of water companies (which are private businesses) and make sure they don't charge unfair prices for water, so that even the poorest can afford water.
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    Regulators will not do a better job of making prices clearer than the market. Price comparison sites are a great example of the market supplying information and thus reducing asymetry of information
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    To add to what they have said so far, the energy firms are oligopolies, and when they all behave in similar fashion, thus, preventing new competition from entering the market they collectively become a monopoly. Look at kinked curve to understand oligopolies. Hence, government intervention is necessary (however, it may sometimes lead to unintended consequences too, like making it harder for new firms to get started. Hence, it becomes self defeating) to push the market back towards perfect competition.

    http://www.thestudentroom.co.uk/showthread.php?t=521910
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    (Original post by Classical Liberal)
    Regulators will not do a better job of making prices clearer than the market. Price comparison sites are a great example of the market supplying information and thus reducing asymetry of information
    The problem with the energy markets is you have some market failure. There are only a small number of firms, so they have market power, there are high barriers to entry. Also they take advantage of imperfect information to get more market power, the tariffs that they offer are designed to be difficult to understand so consumers cannot easily compare across providers. This is what Rothers was getting at. It is also a problem in the mobile phone tariff industry. Where there are only a few firms in an industry, they will design tariffs that are not easy to compare in order to make it harder for their price rises to be 'competed away' by competitors. A regulator can set the rules for enforcing price transparency.

    Looking for a market solution is fine when you have a perfectly functioning competitive market but energy supply is a long way from the model of perfect competition.
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    (Original post by Millz)
    To add to what they have said so far, the energy firms are oligopolies, and when they all behave in similar fashion, thus, preventing new competition from entering the market they collectively become a monopoly. Look at kinked curve to understand oligopolies. Hence, government intervention is necessary (however, it may sometimes lead to unintended consequences too, like making it harder for new firms to get started. Hence, it becomes self defeating) to push the market back towards perfect competition.

    http://www.thestudentroom.co.uk/showthread.php?t=521910
    The kinked demand curve tends to assume that firms compete on a non price basis. There is little scope for differentiation in the energy market.

    The fact that the firms seem to move prices together suggests to me that market could be quite efficient. If one considers that under perfect competition firms all set the same prices.

    I do not think that collusion is realistic in this market. There are six so called main suppliers. I find it difficult to believe all of them could cooperate. Consider that if they are price fixing one of the firms has a pretty big incentive to undercut the other firms. I am not sure to what extent the different firms can monitor each other though.

    I can completely understand where you are coming from though.
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    The other point to consider here is externalities.

    If there is a pollution externality that is not included in the private cost to the consumer then under perfect competition there would be overconsumption of the good. The fact that there is some market power and prices are higher and output is lower than the otherwise efficient level, may mean that the actual cost to the consumer is more in line with the social cost when considering the externality.
 
 
 
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