Practise tracing intervention effects on prices, profits and efficiency through energy price-cap diagrams and privatisation evidence for firms and consumers.
Sources for use with Section B
The UK energy market
Figure 1 The UK wholesale price of natural gas, pence per therm*, 1 April 2021 to 1 April 2022
Figure 2 Market share of companies supplying natural gas, Q4 2020 and Q4 2021 (%)
Extract A The UK energy market In 2021 the global wholesale price of natural gas increased significantly. This caused a large increase in the costs for UK companies supplying gas because they have to purchase gas at world market prices. Purchasing natural gas accounts for approximately 35% of the total costs for large gas suppliers. This increase in the wholesale price made 5 it impossible for 31 smaller suppliers to cover their costs and resulted in them shutting down. With the closure of many small suppliers, there was an increase in the concentration ratio in the market. The six largest suppliers controlled 82.3% of the market for gas by the end of 2021. These larger suppliers increased their market shares by acquiring new 10 consumers from those firms that had left the market. For example, British Gas acquired 729 000 new consumers, EDF UK 580 000 new consumers and E.ON Energy UK 239 000 new consumers. This change in the market enabled these large suppliers to increase their output and achieve greater economies of scale. It is expected that the energy regulator, Ofgem, will seek to increase barriers to entry in 15 this market by strengthening regulations, to prevent similar disruptions happening again. In addition, Ofgem, announced plans to increase the energy price cap (the maximum price that a supplier can charge for energy to a consumer) from £1 277 per year to £1 971 in April 2022. This should help the surviving suppliers to remain in the industry and secure energy supply for consumers. 20
Extract B UK Government support for consumers The cost of living for consumers is set to rise significantly after the increase in the price cap. In response, the UK Government announced help for approximately 28 million households by providing a discount on energy bills worth £200 in 2022. Consumers would be required to pay this back to the Government over 5 years. There would also be 5 a £150 cash payment to some households that will not need to be repaid.
With reference to Extract A and Extract B, discuss the likely effects of the increase in the energy price cap on both energy suppliers and consumers.
Illustrate your answer with an appropriate cost and revenue diagram.