Energy Prices, Profits and Poverty - Energy and Climate Change Contents


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 market prices.

Distribution charges: 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 market.

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, billing etc.

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

Transmission charges: 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.

Vertical integration: 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 distribution assets.

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 own energy.

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© Parliamentary copyright 2013
Prepared 29 July 2013