De-regulation
A Northern Electric + Gas case study

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Page 3: Market share

Northern Electric Gas 6 Image 6Market share refers to the proportion of a market that a particular firm holds. It may be measured by value (percentage share of total annual sales) or by volume (percentage share of total quantity sold).

The electricity industry is complex. It consists of four main markets.

  1. Electricity generation. Power stations generate electricity. Seven generating companies sell electricity in bulk (wholesale) to large-scale buyers, which include the supply companies from which many firms and the general public buy electricity (in the retail market). Ofgem monitors generating companies. It checks that they do not force up wholesale electricity prices e.g. by price fixing or by cutting back generating capacity. Ofgem is looking to strengthen the position of buyers in this market.
  2. Electricity transmission. This is through a national network of high voltage cables - the national grid. The grid is maintained by the National Grid Company (NGC), which charges electricity distributors for using the grid. NGC cannot use its monopoly position to force up prices because Ofgem has control over prices. Ofgem sets performance targets for NGC. If these are met, NGC is allowed to raise its prices by more than if the targets are not met. This gives NGC a financial incentive to be efficient.
  3. Electricity distribution. This is done by distribution companies (‘distributors’). Each has a monopoly in a particular geographical area. Distributors convert high voltage electricity from the grid into forms suitable for final consumers and deliver the electricity through their own cable networks. Distributors charge electricity suppliers for using the distribution networks. Ofgem can limit these prices, and sets performance targets for each distribution company e.g. time taken to repair faults.
  4. Electricity supply. This is done by supply companies (‘suppliers’), who sell electricity to final consumers (firms and households). Ofgem sets performance targets for suppliers and also places limits on the prices that each can charge. Firms that fail to meet the targets set for them can be fined. This market has become highly competitive.

The four sectors are not entirely separate. A distributor may also be a final supplier. A company that is both a distributor and a supplier must operate the two businesses as separate entities, under separate trading names. This separation prevents a company from possibly adopting business practices that would be seen as unfair e.g. using profits from the distribution business to subsidise the supply business with a view to setting low supply prices that would drive out competing suppliers.

 

Northern Electric + Gas | De-regulation
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