Higher prices in a more competitive market: The paradox in the retail electricity market in the United Kingdom

Abstract

The UK retail electricity market experienced a decline in market concentration as new suppliers (retailers) competed with traditional incumbents. Concurrently, consumer-funded schemes were implemented to support low-carbon electricity generation. To disentangle the effects of these two developments on the retail price, an autoregressive distributed lag (ARDL) cointegration model was applied to monthly data from 2010 to 2019. Results indicate that, while the costs of consumer-funded schemes contributed to the rising retail price, the declining market concentration unexpectedly pushed the retail price upward. Analysis of the six large suppliers shows that incumbents struggled to lower indirect costs as sales volumes fell, passing higher indirect costs per megawatt-hour to consumers. However, due to competitive pressure from new suppliers, incumbents were constrained from raising retail prices to fully cover these higher costs, resulting in lower profit margins. Thus, competition was evident not through lower retail prices but through its effect on incumbents' profitability.