Arbitrage: The practice
of taking advantage of a price difference between two or more
markets: striking a combination of matching deals that capitalize
upon the imbalance, the profit being the difference between the
The cost of building, maintaining and operating the local gas
pipes and electricity wires, which deliver energy directly to
your home. Suppliers are charged for this, and usually pass on
these costs in the price they charge retail customers for energy.
Exchange: Bring together
brokers and dealers who buy and sell products in an organized
Liquidity: In the case
of a market, a stock or a commodity, the extent to which there
are sufficient buyers and sellers to ensure that a few buy or
sell orders would not move prices very much. Some markets are
highly liquid; some are relatively illiquid.
Margin: Proportion of
profit relative to total revenue.
Merit order: A way of
ranking available sources of energy, especially electrical generation,
in ascending order of their short-run marginal costs of production,
so that those with the lowest marginal costs are the first ones
to be brought online to meet demand, and the plants with the highest
marginal costs are the last to be brought on line. The merit order
was the method used in the electricity market of Great Britain
when electrical power generation was the responsibility of a single
integrated utility (the CEGB). After privatisation of the sector
this was replaced by a more complex bidding system, the electricity
pool, in 1990.
Natural monopoly: A condition
on the cost-technology of an industry whereby it is most efficient
(involving the lowest long-run average cost) for production to
be concentrated in a single company. In some cases, this gives
the largest supplier in an industry, often the first supplier
in a market, an overwhelming cost advantage over other actual
and potential competitors. This tends to be the case in industries
where capital costs predominate, creating economies of scale that
are large in relation to the size of the market, and hence high
barriers to entry; examples include public utilities such as water
services and electricity transmission.
Over-the-counter (OTC) trading:
Trading which occurs between dealers through private bilateral
contracts, as opposed to through an exchange or market. There
is often little publicly available data about OTC trades.
Supply costs: The costs
associated with running a retail sales business, including sales,
System operator: A transmission
or distribution system operator is an entity entrusted with transporting
energy in the form of natural gas or electrical power on a national
or regional level, using fixed infrastructure.
Transfer price: The price
paid by the supply arm of a vertically-integrated energy company
to purchase energy from a generation arm of the business
The cost of building, maintaining and operating the high pressure
gas and high voltage transmission networks. Transmission companies
charge users of these networks and these costs are often passed
on to retail customers.
Value Added Tax (VAT):
Paid directly to HM Revenue and Customs by energy companies.
A business structure whereby different elements of a supply chain
are united under common ownership. In the case of energy companies,
this can refer to the same company owning generation, supply and
Wholesale energy: The
cost of the gas or electricity. Your energy supplier may buy this
on the wholesale market, or have a contract with a generator.
Some suppliers are also part of companies that generate their