What is Energy Deregulation?
The deregulation of the energy market by the UK Government was put in place in the 1980s to open up the energy market to private businesses. This included the production, distribution and pricing of both gas and electricity supplies to businesses and domestic customers…
Why was the energy market deregulated in the UK?
For many decades, the British Government controlled the energy market which included both gas and electricity supplies to homes and businesses. By the 1980s, it was decided that privatising the energy market would allow for greater investment and competition between energy suppliers leading to lower prices for consumers.
However, by the 2010s, competition in the energy markets increased with a large increase in the number of smaller licenced suppliers entering the market. They began to take market share from many of the larger more established energy suppliers. However, the boom days in the energy market weren’t to last as many of the smaller, independent energy suppliers went bust by the end of the decade.
The largest and most known of these energy companies to go bust was of course Bulb Energy, which led to the Government having no choice but to prop up the business and take over day-to-day operations until a solution could be found. Ultimately, another of the new energy companies that had started in the 2000s, Octopus Energy stepped in and took over the business and its customers.
The history of UK energy deregulation
The UK government began to introduce economic liberalisation, which included looking into the privatisation of government-owned industries such as water, energy and transport.
The UK Government decided to deregulate its electricity sector in 1989 by passing the Electricity Act.
The idea of deregulating the energy market was considered a bold move, with the government wanting to introduce more competition to drive down prices for consumers.
The electricity industry is privatised. The Central Electricity Generating Board (CEGB) is split into two companies, National Power and PowerGen, which are then both privatised.
A computerised trading system is introduced which allows electricity generators to sell their electricity back to their suppliers.
The Gas Act of 1994 was passed, which deregulates the UK gas industry.
This act created a new regulatory body known as The Office of Gas and Electricity Markets (OFGEM); this body is responsible for regulating the electricity and gas markets.
The Competition Act of 1998 was passed which strengthens the powers of competition authorities.
The regulatory body OFGEM uses its new powers to remove any price controls from the electricity market. This means that electricity suppliers can set their own prices.
The New Electricity Trading Arrangements (NETA) are introduced. This is a new system for trading within England and Wales.
NETA is designed to make the market more efficient and transparent.
The Energy Act of 2004 is passed, introducing many reforms to the energy market.
The Act included measures to promote competition, protect consumers and encourage investment in new energy technologies.
The Electricity Market Reform (EMR) is introduced. This is a package of reforms designed to make the electricity market more secure and affordable.
The Smart Energy Plan is published, which sets out the government’s vision for a future energy system that is clean, affordable and secure.
The plan includes measures to promote energy efficiency, invest in new energy technologies and develop a smarter energy grid.
The government launches a review of the electricity market. The review is considering how to ensure that the market is fit for the future and deliver on the government’s net zero ambitions.
What were the benefits of energy deregulation?
Before we touch on what the benefits of deregulating the energy market were, we’re going to look at what the UK Government believed the benefit would be before deregulating the market.
The UK Government believed that deregulation would:
✔ Increase competition and choice for consumers
✔ Encourage investment in new energy infrastructure
✔ Lead to lower prices for consumers
1. Reduce the overall cost for business customers
Energy deregulation can lead to lower energy costs for businesses, as energy companies compete with each other to offer the best prices. Although this is a massive plus for consumers, it can also mean that smaller energy companies that cannot compete with bigger providers are forced to close. This allows bigger energy providers to charge more for the energy costs, and customers foot the bill.
2. Gives energy customers more choices when choosing suppliers
Energy deregulation gives businesses more choices when it comes to their energy suppliers. Businesses can choose the supplier that offers the best price, terms, and conditions for their needs. Of course, the big six energy companies are the most popular choice for businesses customers, but there are others to choose from, and more choice means all the UK energy providers must continue to improve their service in order to remain competitive.
3. Encourages suppliers to improve customer experience and costs
Energy deregulation encourages energy companies to innovate and develop new products and services, benefiting businesses by providing them with more efficient and cost-effective ways to use energy. As we’ve said, the continued improvement of customer experience allows customers to switch suppliers knowing they’re going to a trusted company. It gives customers peace of mind and gives energy suppliers a reason to provide a reliable service.
What are the disadvantages of energy deregulation?
As we mentioned above there are disadvantages to the deregulation of the energy market as businesses and homeowners of the UK have grown to understand. But what disadvantages are there to the deregulation of the energy market?
1. Makes the energy market confusing for businesses
Energy deregulation can make the energy market more complex for businesses to navigate. Businesses may need to invest time and resources to understand the market and choose the best energy supplier for their needs. But that is where the experience of an energy broker like ourselves can help you, to ensure that you’re not overwhelmed with the amount of choices and information available.
2. More volatility in the energy market
Energy deregulation can lead to more price volatility in the energy market, which sadly for households and businesses tends to mean we end up paying more than we bargained for.
3. Reduced consumer protection
Energy deregulation may lead to reduced consumer protections. Businesses should carefully review their energy contracts before signing them to ensure that they understand the terms and conditions and that they are getting a fair deal.
What’s the difference between deregulation and privatisation?
There is a big difference between deregulation and privatisation. Deregulation gives the go-ahead to private companies to compete within an industry, whereas privatisation tends to be used by companies to hike prices. The privatisation of industries can however lead to improvements within the industry including better service and investment opportunities.
What are the benefits of privatisation?
1. Improved efficiency
Private energy suppliers need to cut costs within their businesses to ensure that they are in profit by the end of the year. Improving the efficiency of their product offerings, whether that be gas, electric or water, will increase profitability.
2. Pressure from shareholders
Shareholders within the industry want to ensure that the companies in which they have invested will be both profitable and offer excellent customer service. After all, they’re investing in a company and they’ll want to make a profit, and the best way of doing that is ensuring your products and services are as good as they can be.
3. Improvement in competition
Privatisation within the energy market goes hand-in-hand with the deregulation of the energy market. The privatisation of the energy market will increase competition which helps boost the efficiency within an industry. The increase in competition within the gas and electricity industries means more choices for consumers, allowing them to find the best option for their business.
What are the disadvantages of privatisation?
1. Disillusioned with consumer needs
Companies within the energy market can become disillusioned with what customers expect from them. With profit being the biggest motivator for energy companies, price hikes, and cost-cutting can become prevalent, to try to increase profit margins. Sadly, these cost-cutting techniques can revolve around job cuts.
2. More focus on keeping shareholders happy
As shareholders expect to see a profit on their investment a lot of energy companies will put their shareholders before their customers. Doing this means that the energy sector will increase the cost of usage, which will provide a profit to their shareholders.
3. Difficult to regulate
Without Government regulation, private energy companies could change policies and costs at will. This is why governments retain a modicum of control, meaning that they can step in to prevent price hikes for businesses and other customers.
Tips on business energy deregulation
Here are some tips for businesses that are searching for new business energy suppliers:
✔ Businesses should shop around and compare prices from different energy suppliers before choosing a supplier. Using an energy broker like ourselves will give you peace of mind as we have years of experience within the energy market and can quickly compare rates from across the energy market.
✔ Understand your current energy usage prior to switching energy suppliers – even the time of day that you use most of your energy can have an impact on the prices you pay
✔ Businesses should monitor their energy consumption and identify areas where they can save energy
By following these tips, businesses can benefit from energy deregulation by reducing their energy costs, improving their energy efficiency, and choosing a renewable energy supplier.
Energy deregulation is a complex process with both benefits and drawbacks for businesses. Businesses should carefully consider their needs and goals before making decisions about their energy contract.
Considering switching to a new business energy supplier?
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