The Energy Market In Layman’s Terms

This document is designed to give you a concise overview of the Energy Market in the UK and how it goes from being created to reaching your home. It is not an in-depth review; rather this piece is intended to give a brief outline in layman’s terms for those who wish to give themselves a brief but cogent picture of how things stand in the energy sector.

When considering the UK energy market there are three key components in the chain, generation of  energy, distribution of energy and supply of energy. As the UK energy market is privatised there is also a fourth layer which oversees the whole process and acts as a governing body called OFGEM.

Energy Generation

Electricity must be generated at national power stations for example by the means of burning fossil fuels or thermo-nuclear reaction. There are many bodies in the generation sector, from huge multinationals to tiny family run enterprises running just one solitary site.

Transmission and Distribution

Transmission networks carry electricity over great distances across the country at large voltages. Distribution networks run at small voltages and take electricity from transmission systems to end users whether that be for corporate or residential purposes.

Energy Supply

Energy suppliers don’t actually produce any product themselves rather they buy energy in the wholesale market and then re-sell it on to consumers. Suppliers work in an open market and end users are able to choose any supplier to provide them with gas and electricity. This is intended to ensure that no single generator or distributor can form a true monopoly and thus control the market.

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Ofgem’s function is to protect the interest of customers by promoting competition when suitable and fitting. Ofgem issues businesses with licences to perform activities in the electricity and gas sectors. Ofgem also sets the levels of return which the generation, distribution or supply networks are able to make, and regulates the market up to and including creating rules of guidance for customer satisfaction as well as quality and safety of product and supply.

Together these components make up a creation and distribution network that should theoretically provide the customer with the best levels of customer service at the most competitive rates. One criticism of the UK system is that due to a lack of competition the ‘big six’ energy supply companies are monopolising the market, however in recent times smaller companies such as First Utility have began to grow large enough to rival the larger firm’s supply chains but at a still comparatively discounted tariff.

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