Electricity Industry in the United Kingdom

Introduction

This paper is about the electricity industry in the United Kingdom (UK). It is divided into two parts, namely part one (I) and part two (II). Part I explores the topic by looking at the UK’s electricity industry structure and how the industry may be structured in the future. It also discusses the contribution of the industry to the economy of the UK. In addition, it provides a critical appraisal of National Grid’s business plan.

It is argued that the UK’s electricity industry is divided into four major segments, namely generation, distribution, transmission, and supply. These segments have different structures. For instance, generation and transmission are competitive markets, while supply and distribution are regulated monopolies. The paper uses various economic theories and models such as economies of scope and Porter’s five competitive forces.

Part II is a personal reflection on the extent to which I have addressed the learning outcomes through this coursework. In this section, I have demonstrated the business skills and ideas which I have acquired throughout the coursework. Examples of business skills and ideas include competitiveness, strategic planning, and stakeholder analysis. The paper uses various academic sources and incorporates some data to support the arguments.

Industry Report

Part 1: Analysis of the Structure of the Industry

The foundation of the current electricity industry in the UK can be traced to 1881 when the first supply of electricity to the public was made. Before then, electricity was only supplied to government and private firms and institutions and was only used for lighting. In 1900, the UK government took control of the electricity industry and started licensing suppliers to generate and supply electricity to the public. In 1921, there were over 400 licensed suppliers in Wales and England (“RWE.com: History of the UK Electricity Industry” par 2).

Due to the growing demand for electricity at that time, the UK government took full control of the electricity industry. For instance, it established the electricity Act in 1926. This Act established a central authority to regulate the industry and set up a national electricity transmission system (“RWE.com: History of the UK Electricity Industry” par 3).

In 1947, the government established another electricity Act, which set up 12 regional boards. These boards were responsible for regulating all the electricity generation and supply organisations. The main objective of the Act was to put all organisations in the electricity industry under one regulator so as to enhance efficiency and address the issue of sustainability of the industry. The UK government allocated resources to the boards to ensure they functioned optimally (“RWE.com: History of the UK Electricity Industry” par 3). In 1957, another electricity Act was established. This Act created two statutory bodies, namely the Central Electricity Generating Board (CEGB) and the Electricity Council (“RWE.com: History of the UK Electricity Industry” par 4).

In 1989, there was established another electricity Act, which restructured the industry and established four companies, namely National Power, PowerGen, Nuclear electric, and the National Grid company. In the same year, all the assets which belonged to the CEGB were transferred to these four companies. The same Act also created 12 Regional Electricity Companies (RECs), which replaced the area boards (“RWE.com: History of the UK Electricity Industry” par 5).

In 1991, the UK government took the first initiative to privatise the electricity supply industry to enable many companies to venture into the business, which had been under control of the government for many decades. However, the government allocated itself many shares in those private companies (“RWE.com: History of the UK Electricity Industry” par 6).

In 2001, England and Wales introduced the New Electricity Trading Arrangement (NETA). The main of the NETA was to establish a sustainable electricity system. It was to achieve its objective by ensuring that there was harmony between generators, traders, suppliers, and customers in the electricity industry (“RWE.com: History of the UK Electricity Industry” par 7).

From 2001 to 2005, Northern Ireland, England, Wales, and Scotland had independent electricity grids. However, in April 2005, the electricity grids of England and Wales were integrated under the provisions of the British Electricity Trading and Transmission Arrangements (BETTA), contained in the Energy Act of 2004 (“RWE.com: History of the UK Electricity Industry” par 8).

Identification and Description of the Structure of the Industry

The electricity industry in the UK is dominated by six firms, which are popularly referred by the media as ‘the big six’. They include British gas, SSE, RWEnpower, E.ON.UK, EDF Energy, and Scottish Power. These firms control over 90% of the electricity market in the UK. As mentioned in the introduction, the electricity industry in the UK is divided into four major segments. The structure of the industry is shown in figure 1 in the appendix.

The generation segment deals with the production of electricity from various sources. In the UK, electricity is generated from natural gas, coal, nuclear energy, and renewable sources such as water, wind, and waste energy. The transmission segment deals with bulk transportation of electricity through high voltage power lines (“RWE.com: History of the UK Electricity Industry” par 2). The electricity is transported from the power generation points to the national grid for supply.

The supply segment deals with buying and selling of electricity. In the UK, many suppliers purchase electricity in bulk and supply to the customers at a fee. However, they do not have their own means of carrying the electricity and as a result; they pay for their electricity to be carried to their customers. The distribution segment deals with transportation of electricity in reduced voltages from the national grid to various regions (“RWE.com: History of the UK Electricity Industry” par 2).

As mentioned earlier, the generation and transmission of electricity in the UK have regulated monopolies. It means that only one company is mandated to undertake generation and transmission of electricity in the UK. The name of that company is National Grid PLC, which is owned and controlled by the UK government. Monopoly refers to a situation in which a particular market is dominated by a single firm. The firm with a monopoly usually dictates the price of goods and services by manipulating their supply (Vashisht 73). In many cases, monopolies are associated with the exploitation of consumers due to the lack of alternatives for consumers. However, monopolies may not always exploit the consumers because governments may intervene and compel them to reduce the prices of goods and services (McEachern 18).

The pricing strategy in a monopoly is not depended on business rivals. The firm which dominates the market sets the price indiscriminately and is usually at liberty to charge different prices for the same good or service to different customers, depending on their ability and willingness to pay (McEachern 18).

In an industry with a monopolistic structure, other small businesses are referred to as price takers. The reason is that they are not able to influence the price of goods and services because of the dominant player. As a result, they set their prices depending on the price set by the dominant player in the market. Those who deviate from the price set by the dominant player are forced to quit their businesses.

Many monopolies are characterised by barriers to entry (Blythe, 26). Such barriers include things like pricing, marketing, and branding. It, therefore, means for new entrants to enter a monopolistic industry, they must have huge capital. They also need to invest immensely in marketing their businesses so as to gain a portion of the customers. The reason is that the firms which enjoy monopoly usually invest immensely in branding, which makes it difficult for new entrants to get customers for their goods and services (McEachern 19).

The distribution and supply of electricity are competitive markets in the UK (“RWE.com: History of the UK Electricity Industry” par 2). As mentioned earlier, there are six leading firms which deal with the distribution and supply of electricity in the UK. The nature of the distribution and supply of electricity is, therefore, an oligopoly. It is important also to mention that all six firms generate electricity from more than one source. This type of production is referred to as multiproduct production and is based on the economic theory of economies of scope. The theory is based on the economic principle, which states that the cost of production varies inversely with the varieties of products produced. In other words, when a firm produces more than one product, the cost of production is lower than when it produces only one product (“The Economist: Economies of Scale and Scope” par 5).

In economics, the multiproduct production is synonymous to oligopoly. Oligopoly is a market structure in which a particular market is dominated by a few large firms (“Amosweb.com” par 2). The firms usually know each other well, and they share the market by percentages. Another characteristic of oligopoly is a cut-throat competition. It means that the firms in an oligopoly industry usually compete for the customers in unique ways. One way in which the firms compete is through what is referred to as differentiation and positioning (McLoughlin and Aaker 19).

In the field of strategic management, the concept of differentiation refers to the process of making a product or a service popular among customers. It is achieved through a description of the unique characteristics of the product or service is differentiated. The whole idea behind differentiation is to create a market niche for that particular product or service. When customers are made to understand the unique characteristics of different products and services, they are able to make informed decisions regarding different products and services. If done well, differentiation enables customers to purchase specific products or services in a market flooded with many varieties of products and services (Thompson and Martin 2010).

Positioning entails using various strategies like promotion, distribution of products or services, and production of unique products with low prices to build an identity of a particular Company in the minds of consumers (Armstrong and Kotler 64). Positioning seeks to stabilise and retain the positions of the differentiated products for a particular Company so as to retain the competitive advantage of the Company in regard to those products.

In some cases, oligopoly leads to the formation of business cartels. The cartels are formed when the firms agree to increase the prices of their products beyond the reach of many consumers. The firms may also decide to reduce the supply of some products so that the demand of those products may go up, which consequently makes the prices to go up (Vives 47).

The structure of the electricity industry is likely to change from an oligopoly to a perfect competition in the future. The reason is that the industry has attracted many investors in recent years due to a friendly business environment in the UK. When many investors would invest in the industry, the issue of ‘the big six’ would be a thing of the past. Consequently, the consumers would benefit from the perfect competition.

Reasons for the Oligopoly Structure

All competitive markets are depended on three major components namely price, demand, and supply. In an oligopoly, the three components usually have a direct variation; meaning that a change in one component triggers significant changes in the others. When for example the demand of a product is high and the supply is constant, the price is usually high. When the supply of a product goes up, the demand goes down and leads to a reduction of the price. When the supply is high and the demand is low, the price is usually low. All managers therefore need to be aware of these relationships to ensure that their businesses remain on course.

In any given market, there are products and services of different qualities and quantities. There are also different types of customers; some prefer low quality and cheap products and services while others prefer high quality products and services. The sale of common products is usually affected by the forces of demand and supply. However, there are other products which are resistant to the forces of demand and supply; that is, their price is not affected by the market forces. In most cases, these products have unique attributes, or they are rare to find in the market and that is why their price does not affect their demand (Whittington 89).

In economic terms, a product is said to be inelastic if a 1% increase or decrease in price leads to less than 1% increase or decrease in the supply and demand of the product. It is therefore impossible to have a product which is 100% inelastic because there are usually substitute products. It means that irrespective of the uniqueness of a product, customers can still be discouraged by the price and opt for substitute products. For a product to be inelastic therefore, it must be highly differentiated Rowley and Schneider 93).

How the Structure Affects Strategy Decisions

The oligopoly structure of the electricity industry in the UK affects the strategic decisions of the firms by compelling them to come up with strategies of remaining competitive. The business strategy which is best applicable for the firms in the industry is Porter’s model of five competitive forces which shape strategy. These forces are discussed below.

Threat of new entrants

In all major industries, there are competitors who exercise dominance. These competitors are known as the ‘incumbents’. Market analysts have however argued that the domination by the incumbents does not guarantee them a permanent stay in an industry since new entrants may express interest in the same industry (Mankiw 98). Before they enter an industry, new entrants usually invest a lot in developing entry strategies and coming up with unique approaches to gain a portion of the market and build trust with the customers. In most cases, new entrants rely on pricing, where they offer prices which are lower than those offered by the incumbents (Henry 91). Other new entrants use the strategy of improving the quality of their products or services to attract customers (Norman, Thisse and Philips 67).

New entrants increase competition in an industry. As a result, some incumbents are forced to quit a particular industry, especially if the new entrants have a strong capital base. Other incumbents react by erecting barriers to entry in the industry. For instance, they may design very sophisticated and expensive technologies which are not easily available. They may also erect barriers to the access of the distribution channels so that the new entrants do not get access to supplies.

Bargaining power of suppliers

In some industries, there are monopolies in terms of supply of goods and services. In such industries, the powerful suppliers are able to manipulate the prices of the goods and services. Suppliers are regarded as powerful if, for instance, they do not depend on one industry for their revenues. Suppliers are also considered as powerful if they supply goods and services which are unique. Powerful suppliers are also those who supply goods and services which cannot be substituted (Surhone, Timpledon and Marseken 82).

Bargaining power of buyers

In some industries, there are few buyers who purchase certain goods or services in bulk. Such buyers usually have a bargaining power to lower the price of the goods or services. Buyers usually have bargaining power when the cost of switching suppliers is low as well as when the goods or services in question are not differentiated or are standardised.

Threat of substitute products

In business competition, a substitute refers to a product or service which serves the same purpose as the original product or service (Porter 65). An example of a substitute in the electricity industry is electricity generated from renewable sources. Substitutes usually act as a threat to some industries, especially when the substitutes are cheaper than the original products or services. They also act as a threat when the cost of switching vendors is low. Companies can guard themselves from the threat of substitutes by differentiating their products or by teaming up to influence government policy on the introduction of substitute products and services in the market (Van-Weele 33).

Rivalry among existing competitors

In any market where there are many players, it is normal for there to be rivalry among them. The reason is that every player wishes to take control of the whole market at the expense of the others. The rivalry leads to stiff competition for the customers and in many cases, the players use various strategies to attract customers. Examples of the strategies include reduced prices, improved quality of products and services, after sales services, and promotion campaigns on various marketing platforms.

Part 2: Contribution of the Industry to the Economy of the UK

The electricity industry plays a significant role in the economy of any country. The reason is that electricity provides the energy to power factories and other economic activities. Electricity also enables some countries to have a 24-hour economy, where some employees work during the day and others during the night (Rivoli 14).

The UK is among the leading economies in the world. Before the liberalisation of the electricity industry in the UK, the cost of production for UK-based firms was high. As a result, many UK-based firms and other multinational corporations used to operate integrated supply chains to cut the cost of production. Even though the cost of electricity has gone down since the liberalisation of the electricity industry in the UK, many firms still operate integrated supply chains (Davies and Snyder 64).

The reason is that such supply chains have the advantage of reducing the cost of production by big margins using what economists refer to as economies of scale. If for example a multinational corporation has operations in four countries which are close to each other, that multinational corporation may reduce the cost of production by pooling the production of the four countries in one country. By so doing, the multinational corporation is able to cut huge costs of setting up production plants in the four countries (Flynn, Morita and Machuca 18). If the cost of production goes up in one country, the multinational corporation may easily shift the production activities in the neighboring country where the cost of production is low. By so doing, the multinational corporation is able to achieve flexibility in its production, which in turn increases its efficiency and effectiveness (Scholte 25).

Using integrated supply chains also has the benefit of enabling multinational corporations to exploit cheap factors of production such as raw materials, capital, land, and labour. It happens because the supply and demand of the factors of production mentioned above vary from one country to another (Lan and Unhelkar 98). As a result, multinational corporations prefer doing their production in countries where the cost of the factors of production is low (Johnson, Scholes and Whittington 82).

Since the liberalisation of electricity distribution and supply, the economy of the UK has witnessed an exponential growth. For instance, the electricity industry contributed to over £33,000 million to the economy of the UK in 2011 (“Utility week.com” par 4). This figure has been growing by about 5% every year. It is expected that by 2020, the electricity industry would boost the economy of the UK than any other industry in the country. The reason is that more players are entering the industry and as a result, the cost of electricity is on the decline. The decline in the cost of electricity would enable UK-based firms to lower the cost of production. As a result, they would be able to increase their exports. The electricity industry is also expected to enable the UK to reduce its trade deficit due to increased exports. The industry would also increase the number of investments by multinational corporations, which would in turn boost the economy of the UK.

Part 3: Critical Appraisal of National Grid’s Business Plan

As mentioned earlier, National Grid PLC is one of the oldest firms in the electricity industry in the UK. Since it is a public company, it is listed on the London stock exchange. Its key shareholder is the UK government while the public owns few shares in it. The firm deals with the transmission, generation, and distribution of electricity in the UK. It also generates and sales electricity in other countries such as the United States (“National Grid: Our Electricity Transmission Business Plan” par 2).

The organisation’s current business plan covers the period between 2010 and 2021. According to the executive director of the organisation Mr. Nick Winser, the business plan was developed in collaboration with the organisation’s key stakeholders. The reason for including the stakeholders was to ensure that the plan was a true reflection of the situation on the ground, with a special focus on the customer (“National Grid: Our Electricity Transmission Business Plan” par 4).

The business plan is coined around the new regulatory framework introduced by Ofgem. This new framework, known as the RIIO-TI focuses on providing consumers with sustainable and affordable electricity, both at the present and in the future. It also aims at bringing down the cost of electricity and improving efficiency in distribution and supply of electricity so that consumers may get the value of their money (“National Grid: Our Electricity Transmission Business Plan” par 5).

The sustainability target of the organisation is to ensure that it does its business in a manner which is sustainable. It also aims at coming up with initiatives which would enable it to grow and increase its presence in the international market without hurting the shareholders and consumers. The business plan is based on five key targets namely safe, sustainable, affordable, financeable, and reliable electricity. As mentioned earlier, the customer is the focus of the business plan. As a result, the organisation intents to invest heavily in innovation to meet the five targets by 2021 (“National Grid: Our Electricity Transmission Business Plan” par 6). The business plan considers collaboration with key stakeholders as a crucial asset. As a result, it intents to remain in consultations with its key stakeholders to enable it achieve its anticipated goals within the stipulated time.

The business plan is also based on the issue of global warming. The reason is that the UK is among the largest consumers of world’s energy. Most of the energy consumed in the UK is usually imported from other countries, especially Saudi Arabia. There is therefore an imbalance between production and consumption of energy in the UK.This imbalance has attracted criticism from economic analysts, who have argued that since the UK is among the leading consumers of world’s energy, it should play a leading role in the management of greenhouse gases which lead to global warming.

This criticism has made international law to be widened in scope to include environmental protection. Consequently, several treaties have been signed to address the issue of climate change. Examples of such treaties include the United Nations Convention on Biological Diversity (CBD), the Kyoto protocol on climate change, the United Nations convention to combat desertification, and the Copenhagen treaty (Deke 57).

However, critics of the UK have argued that there are double standards in honouring the agreements in the treaties on climate change. The reason is that the UK has refused to cut its emission of greenhouse gases as agreed in the treaties. It has also refused to increase its contribution towards climate change mitigation measures (Deke 57). Due to this criticism, National Grid PLC has included climate change mitigation measures in its business plan. It plans to undertake various environmental conservation programs as part of its corporate social responsibility. Examples of such programs include planting trees, sponsoring media campaigns against deforestation, generation of energy in a manner which does not harm the environment among other programs.

Individual Reflection

At this stage of learning, I have learned several key concepts which are important in the field of management and business administration. In this section, I have reflected on the concepts of competitiveness, management and sustainability of organisations, strategic planning, and stakeholder analysis. The reason is that these concepts are related to the discussion in part I.

Competitiveness

This concept refers to the ability of a business enterprise to supply or sale its goods or services in a given market within a given period of time, and under certain rules and regulations governing the supply of such goods or services. The nature of this definition implies that competitiveness is occasioned by the presence of few or many suppliers of certain goods or services in a given market. Since all businesses are established with an overriding objective of making profits, each business tries as much as possible to overcome all barriers which prevent it from selling or supplying its goods and services in a given market.

Management and Sustainability of Organisations

The management functions include planning, organising, staffing, directing, controlling, recruitment, budgeting, and reporting. For the managers, planning means the determination of human resource programs that may contribute to the attainment of the goals established by organisations. The managers must focus on the economic, social, and political environments in which their organisations operate. They must also set aside the resources needed to make their plans work.

The organising function of management entails implementing organisational changes which may be occasioned by internal or external forces to organisations. In organising, a manager decides on a position to be filled and the duties and responsibilities attached to the position. The manager also makes decisions about how work is done on a day-to-day basis. The directing aspect of management entails looking for appropriate ways of motivating employees to work willingly and effectively. The manager must give directives to employees for them to know what is expected of them. After directing, the manager should evaluate how jobs are done and what progress is made towards attaining organisational goals. The manager is also supposed to plan how to meet current objectives of the organisation and come up with ways of meeting future organisational goals and objectives.

Strategic Planning

One of the factors to consider when formulating a strategic plan is engagement of all stakeholders. In organisational context, employees are important stakeholders because they are the ones who make things to work or not to work depending on their levels of commitment, understanding, motivation, and loyalty to their organisations. When employees are involved during the development of a strategic plan, they not only embrace the strategic plan but they also own it and as a result, it is implemented without any resistance.

The other factor to consider is effective communication which has to do with using friendly and correct language during communication between employers and their employees. Managers should desist from treating their employees with contempt or ridicule. The managers should also ensure that organisations have in place very clear communication strategies so that there is no misunderstanding and confusion in the organisations. For effective communication to be realised, managers should avoid discrimination of employees based on employees’ positions, age, gender, level of education, race, and religion. Organisations must therefore put up an elaborate communication infrastructure to ensure that there is smooth flow of information at all levels of organisations for the strategic plan to be successful.

Also to be considered when formulating a strategic plan is the culture of innovation in organisations. Organisations must ensure that they have a culture which stimulates employees to be innovative. Without an innovative culture, a strategic plan is hard to implement because it is usually flexible and sometimes requires creativity for it to be successful.

Organisational culture is also another factor to consider when formulating a strategic plan. Organisations must strive to have a cohesive organisational culture where all members have similar beliefs and values. The sharing of beliefs and values by employees renders the structures of organisations irrelevant because what is of interest to the employees is their commitment to those beliefs and values.

Organisations which have a cohesive culture have the ability to motivate their employees, which in turn renders supervision irrelevant. When employees do their work without supervision, their productivity is enhanced because to them, what matters most is the welfare of the organisations but not their personal welfare. Cohesive organisational culture also enables organisations to align their procedures, functions, and policies with their objectives, mission, and vision without challenges. The alignment is made possible by the internalisation of the aspirations of the organisations by the employees.

The Ansoff’s matrix helps organisations to manage their strategic decisions by providing insights on market penetration, product design and development, market development, and diversification of their products. These help the organisations to remain competitive in their respective industries. For instance, through the use of Ansoff’s matrix, many organisations have been able start operations in many countries across the globe.

Effectiveness of Strategic Planning Techniques

When developing a strategic business plan, organisations apply two main techniques namely the development of a business strategy model and development of a business transformation plan. The business strategy model helps organisations to identify their desired future while the business transformation plan helps them to come up with the key activities which must be implemented to attain the desired future results. These techniques are effective to the extent which the organisations are committed to ensuring that everything is done on time. If there is no commitment to comply with the timelines, then the techniques are only good in writing.

Stakeholder Analysis

Stakeholder analysis refers to the critical evaluation of all stakeholders of an organisation and their relationships with the organisation. It plays a crucial role in helping an organisation to identify partners who are essential for its success. Once an organisation identifies such partners, it invests in building good rapport and creates a symbiotic relationship which enables both the organisation and the partners to gain from the relationship.

Appedix

The structure of the electricity industry in the UK.
Figure 1: the structure of the electricity industry in the UK.

The table below shows the leading companies in the electricity industry in the UK and their customers in the UK market.

Name of company Country of origin Estimated number of customers in the UK
British gas UK 20 Million
Scottish power Spain 5 million
EDF energy France 5 million
SSE UK 9 million
npower Germany 6 million
E, ON UK Germany 5 million

The business plan for National Grid can be summarised as shown below

Target Explanation
Safe Generate energy which is safe to the users and the environment
Reliable Ensure that there is adequate supply of energy to customers at all times. Avoid disruptions at any cost
Sustainable Generate energy in a manner which is sustainable, that is, meet the current demand as well as future demand for energy in the UK
Affordable Generate and supply energy which is affordable by everybody.
Financeable Engage in projects which can be financed without borrowing
The customer is expected to benefit from these targets. Innovation is an essential component of the business plan

Other targets of the business plan are as shown below

Target
Explanation
Superior stakeholder satisfaction To meet the needs of customers by providing them with quality energy at affordable prices
Strategic soothsaying Carbon free atmosphere
Positioning for speed Quick procurement of business decisions
Positioning for surprise Creation of a conducive environment for innovation
Shifting the rules of competition Strengthening the barriers to entry
Signaling strategic intent Preparing customers for the ‘next big thing’
Simultaneous and sequential strategic thrusts Regular review and change of business strategy

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