The energy market explained
Supplying energy to homes across the UK involves three key elements: making electricity through generation transporting gas and electricity and selling it to the customer. Energy companies can work in any of these different areas, and some operate in all of three of them The electricity and gas markets in the UK are privatised. This means that private companies make sure we have the energy that we need. It also means that customers can choose which companies supply their energy.
Most electricity is generated at large power stations connected to the national transmission network. However, electricity can also be generated in smaller scale power stations which are connected to the regional distribution networks. The number and type of power station built is the decision of each individual company based on market signals and government policy on issues such as the environment. There are many companies in the electricity generation sector, from large multinationals to small, family-owned businesses running a single site.
Transmission and distribution networks
There are two types of electricity network: transmission and distribution. Transmission networks carry electricity long distances around the country at high voltages. Distribution networks run at lower voltages and take electricity from the transmission system into homes and businesses.
The transmission system is run by National Grid, which is responsible for balancing the system and making sure that the supply of electricity meets the demand on a second-by-second basis. Similar infrastructure exists for the transmission and distribution of gas.
Suppliers buy energy in the wholesale market and sell it on to customers. Suppliers work in a competitive market and customers can choose any supplier to provide them with gas and electricity.
The electricity and gas markets are regulated by the Gas and Electricity Markets Authority, operating through the Office of Gas and Electricity Markets (Ofgem). Ofgem's role is to protect the interest of consumers by promoting competition where appropriate. Ofgem issues companies with licences to carry out activities in the electricity and gas sectors, sets the levels of return which the monopoly networks companies can make, and decides on changes to market rules.