Based on the article from BBC News Business, entitled 'Power shortage risks by 2015, Ofgem warns' that written on 5th October, 2012 (http://ec.europa.eu/environment/legal/implementation_en.htm). Regarding to the article, we can see that Britain risks running out of energy generating capacity in he winter of 2015-16, according to the energy regulator Ofgem. Its report predicted that the amount of spare capacity could fall from 14% now to only 4% in three years. Therefore, this would leave Britain relying more on imported gas, which would make price rises more likely.
Besides that, Ofgem also blames the risk on coal-fired power stations being closed sooner than expected and EU environmental legislation. It comes three years after Ofgem's Project Discovery report, which warned that electricity shortages could lead to steep rises in energy bills. And for the unprecedented challenge, the regulator also says that more investment was needed in building fresh generating capacity. By the way, this report highlights that how imperative it is for the government to act now and introduce electricity market reform that ensures the programme of new nuclear build and other vital energy infrastructure projects, such as carbon capture and storage, are attractive enough to secure the long-term investment they require.
Ofgem is the Office of the Gas and Electricity Markets. Protecting consumers is their first priority. They do this by promoting competition, wherever appropriate, and regulating the monopoly companies which run the gas and electricity networks. The interests of gas a which means if the expected future price of the energy rises, current demand for the energy increases and the demand curve will shift rightwards. It causes shortage therefore the price will increase in the future.
Diagram 1.0
Moreover, the electricity is a necessity which peoples need to use it in order to continue their daily life activity. Therefore, electricity is an inelastic good; therefore the demand for electricity will have only little changes if the price rises. It is because no matter what happens, people still need to use it. For the price elasticity of demand, the closeness of substitutes occurs. As for the necessities, it generally has inelastic demand. Because the electricity almost do not have any substitute product that can replace it, so it is an inelastic good.
The next situation in this article shows that when OfGem could not supply enough energy capacity to the people in U.K., they can only rely more on imported gas. They import gases from foreign countries causes the cost of production increase, therefore price of electricity will also increase. This will possibly cause the country money to outflow. The third situation that was mentioned in the article is about the coal-fired power stations expected to be close soon. It is because it against the EU environmental legislation, as the coal-fired power stations is harmful to the environment (European Commissions 2012). In the past 30 years the EU has adopted a substantial and diverse range of environmental measures aimed at improving the quality of the environment for European citizens and providing them with a high quality of life. Thus, the situation above had caused opportunity cost to occur. Opportunity cost is the second best thing that you need to give up in order to produce the best thing. For example, if an asset is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used. For instance, the Government only have RM1million and have two plans to implement which are building a public school and a public hospital. Both two implementations will benefits the people. If the government chose to build the government school, the hospital is the opportunity cost in this case. So, closing the coal-fired power station is the opportunity cost of having good environmental condition in England. Besides that, if the government close the coal-fired station down, the supply of electricity will decline, hence shortage of electricity may happens which will lead to rise in price. When there is shortage, means there is underproduction and the economic is inefficient. By the way, it will cause deadweight loss. Deadweight loss can be equal to the social loss. A deadweight loss equals the decrease in total surplus.
If the market do not achieve at the market equilibrium, hence it is a market failure. ‘The Invisible Hand’ which is a natural forces which will push the market to self-regulate when a competition occurs, and it will also lead to improvement, so market will be efficient automatically.
Lastly, we can see that more investment was needed by the British government in building fresh generating capacity. Also, if the programme of new nuclear was built and other vital energy infrastructure projects, such as carbon capture and storage, are attractive enough to secure the long-term investment they require. Hence, if OfGem got the new investment in building fresh generating capacity, the shortage problem can be solved which means supply increase, the price of the electricity falls. Moreover, if the OfGem able to launch the programme of new nuclear and other vital energy infrastructure projects, long-term investment they require is secure. Thus, the supply of the electricity will increase, the price will remain stable for long-term. These benefits the consumer, OfGem and government as well. Consumers better off, because they can enjoy a stable and lower price because of the enough of energy supply and no need to worry about the electricity shortage which will influence their daily life. OfGem and Government better off too, because they can solve the environmental pollution problem and they have now no problem to supply enough amount of electricity to the people. And they do not need to rely on the imported gas anymore, which will decrease the OfGem cost of production and the cash flow of the money that out to the country can be decreased as well.
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