Drivers of gross margins in UK retail electricity

This report is aimed at describing why the UK residential electricity (retail) market enjoys higher gross margins when compared to Vattenfall’s markets in for example Sweden. Gross margin is the difference between selling price and purchase costs, in this situation the wholesale electricity price. The wholesale market basically impacts all retailers in the same way and can be evaluated individually, it is therefore appealing to review how there might be such a vast gap between the end-user electricity price and the wholesale price. Because the UK electricity market is viewed as a forerunner to other markets, being an early adopter of liberalisation of a previously state-controlled industry and viewed as one of the most competitive market on the planet, it appears a bit odd that retail electricity prices are not pushed down to a margin cost level as is anticipated on a perfectly competitive market….

Contents

1 BACKGROUND
1.1 PRESENTATION OF THE PROBLEM
1.2 OUTLINE OF THE THESIS
1.3 THE POWER INDUSTRY
1.3.1 The electricity market
1.3.2 Market architecture
1.3.3 European markets are under development
1.3.4 Supplying to the retail segment
1.4 PRE-STUDY FINDINGS
1.4.1 Market structure
1.4.2 The market players
1.4.3 Entry barriers
1.4.4 UK retail prices sunk after deregulation
1.4.5 Purchase costs are wholesale prices
1.4.6 Gross margins
1.4.7 Characteristics of UK electricity consumption
1.4.8 Comparing UK to the Swedish retail market
1.4.9 Current trends on the UK electricity market
1.5 EXISTING HYPOTHESES
1.6 PURPOSE
1.6.1 Definitions of concepts
1.7 APPROACHING THE PROBLEM
1.7.1 Defining the term factors
1.7.2 Embryo analysis model
2 DESCRIBING THE FACTORS
2.1 DEMAND SIDE – THE LINKAGE BETWEEN PRICE AND VALUE
2.1.1 Customer value is driven by a number of criteria
2.1.2 Customer value is created along several dimensions
2.2 MARKET LEVEL – DIFFERENTIATION AND CONSOLIDATION
2.2.1 The value of being unique
2.2.2 Segmentation can be combined with other strategies
2.2.3 Few competitors leads to higher prices
2.2.4 The impact of an oligopoly situation
2.3 INDUSTRY LEVEL
2.3.1 The components of the industry
2.3.2 Rivalry between retailers
2.3.3 Suppliers
2.3.4 Customers are weak
2.3.5 No substitutes
2.3.6 Complementors as service providers
2.3.7 Entry barriers limit market competition
2.3.8 Two strategic groups on the UK market
2.4 MACRO ENVIRONMENT
2.4.1 Economic Forces
2.4.2 Environmental Forces
2.4.3 Political Forces
2.4.4 Social/Cultural Forces
2.4.5 Industry impact on the macro environment
2.5 SUMMARY OF THE CHAPTER
3 THE ANALYSIS MODEL
3.1 FOCUSED RESEARCH QUESTIONS
4 METHODOLOGY
4.1 METHODOLOGICAL APPROACH
4.1.1 This thesis is a system analysis
4.2 APPROACH OF THE STUDY
4.2.1 This study aims to explain a phenomenon
4.2.2 Research methods
4.2.3 Chosen research method
4.2.4 Case selections
4.3 RESEARCH DESIGN AND SEQUENCE OF WORK
4.3.1 Research design
4.3.2 Background and decision problem
4.3.3 Theory and focused research questions
4.3.4 Data collection
4.3.5 Analysis and conclusions
4.4 QUALITY OF THE STUDY
4.4.1 Reliability
4.4.2 Triangulation improves quality and reliability
4.4.3 The interviews
4.4.4 Validity
4.4.5 Quality of the case
4.4.6 Generalization
5 EMPIRICS
5.1 THE RESPONDENTS
5.2 SUMMARY OF THE EMPIRICS
5.3 INDUSTRY LEVEL – COMPETITIVE BUT HARD TO ENTER
5.3.1 Customers
5.3.2 Intensity of rivalry
5.3.3 New entrants
5.3.4 Supply
5.3.5 (Substitutes and) complementors
5.4 MACRO ENVIRONMENT
5.4.1 Economic
5.4.2 Environmental
5.4.3 Political
5.4.4 Public opinion
5.5 OFGEM’S REPORT OFFER NEW INSIGHTS
5.6 PRICING BEHAVIOUR – REPORT BY PROFESSOR WATERSON
6 ANALYSIS
6.1 PERCEIVED CUSTOMER VALUE – MORE THAN JUST PRICE
6.1.1 Price sensitivity has been low
6.1.2 Customers’ switching behaviour is reactive
6.1.3 Use criteria in addition to price
6.1.4 Signalling criteria
6.1.5 Strategies – differentiating the same offering
6.2 DEGREE OF COMPETITION IS HIGH IF BASED ON CHURN RATE
6.3 INDUSTRY LEVEL – HARD TO CHANGE THE GAME
6.3.1 Rivalry – preserving the status quo
6.3.2 Supply – financial stability is required
6.3.3 Entry and survival barriers a plenty
6.3.4 Substitutes & Complementors…

Source: Linköping University

Download URL 2: Visit Now

Leave a Comment