Electricity is a tradable commodity with numerous uses and markets; therefore the supply and demand aspects will have significant influences on the electricity price structure. The supply of Electricity is largely dependent on the number of markets for which it is used i.e. the number of consumers or households who want and need it and the number of existing users of Electricity. It can be estimated that in the UK there are about fourteen million consumers or households who use Electricity and there are about fourteen billion kilowatt-hours of utilized electricity produced annually, making it one of the most important sources of energy and its use has a significant influence on the market structure.
the supply side of the Electricity Price Structure
The main suppliers are the ‘dominant suppliers’ of Electricity in the UK i.e. the gas and electricity companies in England, Scotland, and Wales, and the main supplier in Northern Ireland are Eircom. In terms of the demand side of the Electricity Price Structure, there are four categories: on-demand, off-peak hours, inter-connection, and wholesale electricity. The on-demand side of the Electricity Price Structure is supplied by the Gas and Electricity inter-connecting network (GECN), off-peak hours are supplied by the Gas and Electricity retailer, inter-connection deals are generally made between Gas and Electricity providers, and wholesale electricity is supplied by the large power generators like Scottish Power, British Gas, E.ON and Npower.
the on-demand and off-peak hours are the two main ‘price sectors
These prices are affected by the fluctuating renewable energies and capital charges and the interconnection between the Electricity Market players can also have a great effect on this. These tend to be the main prices that are affected by the supply and demand factors, especially the demand from the commercial sector. This has a direct effect on the Electricity suppliers and if a market player decides to sell some of its surpluses to the commercial sector then it will increase the share of his equity, increasing its revenues and profits. If there is too much surplus then there will be a higher fixed cost for the electricity and gas supplier, higher dividends for the shareholders and they will use this extra capital to invest in the sector or other utility businesses. The main losers under this condition are the customers who pay more for their monthly bills. If the cost of energy increases even more, then it will affect the ability of the Gas and Electricity Providers to recover their debts and the Government may have to step in with subsidies to protect the public.
the climate change sector
On the other hand, there is one sector of the market that gets unbalanced by the presence of the interconnection grid demand and one that has no relationship with the wholesale sector of the market. This sector, known as the climate change sector, is actually affected by climate change, with increased temperatures and droughts. This makes it difficult for the grid to predict how much power to supply to meet the increasing demand, as well as the interconnection grid demand. If climate change becomes unmanageable, then it will be affecting the wholesale electricity market.
Some electricity providers still use the traditional grid system but they have implemented time-of-use pricing to make it more competitive. They have put up their wholesale electricity prices according to the amount of usage during different hours of the day. For example, during the peak period, which occurs during the evening, they charge more because they have a higher demand and they buy wholesale electricity at higher rates than during the daytime when there is no demand. However, with time-of-use pricing, they can offer competitive prices and still keep their margins down because during the peak period they can recover part of their investment.
Forecasting the Future of Electricity
Changes in the weather and the economy could dampen the growth of the electricity market for a while, but this should not be considered a deterrent for the expansion of the market. According to Oliver Turner in his book “Forecasting the Future of Electricity”, “The first decade after the Second World War saw a huge boom in electricity prices that was matched only by the growth of communications technology and the improvement of factories that made electricity much more affordable. Over time these increases appeared to plateau or even disappear.” As such, the electricity market appears to be in a healthy state. The government continues to look at ways to encourage growth and employment and encourage people to spend money on electricity rather than on other necessities. They also look at ways to lower the costs of electricity to lessen the revenue losses from the changes that may result