Chowdhury Hasanath Radi
Introduction:Hydraulic fracturing or Fracking is the new term for energy source which has been used by United States of America (USA) and China to produce energy. Now the United Kingdom (UK) government has been planning to introduce fracking within UK. But this has raised so many controversies and the energy firms have huge increment in prices. This essay will look into what is fracking and why is it controversial? How the energy giants have used it to raise the prices and how does it affects the stakeholders of energy sector and the demand of energy for the customers? At the end it will suggest how ethical energy firms have been using Carroll’s model. What is Fracking: Fracking or hydraulic fracturing is the process of extracting natural gas from shale rock layers deep within the earth. Fracking makes it possible to produce natural gas extraction in shale plays that were once unreachable with conventional technologies. Horizontal drilling (along with traditional vertical drilling) allows for the injection of highly pressurized fracking fluids into the shale area. This creates new channels within the rock from which natural gas is extracted at higher than traditional rates. This drilling process can take up to a month, while the drilling teams delve more than a mile into the Earth’s surface. After which, the well is cased with cement to ensure groundwater protection and the shale is hydraulically fractured with water and other fracking fluids. (What is fracking, 2013) Controversies:Fracking has many advantages and one of them is that it will provide with cheap energy. For instance, it has helped to bring down the gas prices. The estimation is that it has secured the gas to the US and Canada for about 100 years and has presented an opportunity to generate electricity at half the CO2 emission of coal. (BBC, 2013) But there has been controversies in UK as energy and climate change committee have mentioned in their report that it might secure the future of gas in UK but it won’t bring down the prices. All the stakeholders of energy sector has different opinions about this development. Stakeholder theory: A stakeholder refers to a person or group who has interest in the business and its operation. Johnson and Scholes (1999) states that “Individuals or groups who depend on the organisation to fulfil their own goals and on whom, in turn, the organisation depends.” If we look at energy sector, for instance, Npower, one of the six energy giants in UK,some of the stakeholders are obvious:-
Stakeholders of Npower
1. Government:Government has biggest interest in fracking development within energy sector. It has announced big tax breaks for the fracking industry tostart a shale gas development, called as green taxes which share 112 £ of the energy bill. Green taxes are one of the reasons for increasing the prices. But the main interest showed by government is to secure energy resources for UK for long time and reduce the carbon emission. Hiscott, G (2013) wrote in his article in Mirror that the treasury could be set to rake in an 80 £ billion windfall from new controversial gas field. This is the most powerful stakeholder in energy sector as it can easily influence how to produce energy or to change in prices.
2. Investors: Investors have only one interest, which is profit. They want to make money by any mean. So they are totally agreed with government. Some of the energy companies already started buying stakes for fracking project. For example British gas owner Centrica confirmed to buy 25 % stake in the Bowland project in the North West. By looking at the prices now, it means the field will be worth more than £100bn over 30 years.
3. Suppliers: There are 6 energy firms ruling on UK, called as energy giants. Their main interest is to invest and double the profit as well. In UK that’s the only things which they seems to care about. According to the figures, Npower has increased the prices by 9.3 % and has received the more complaints from consumers. Rest of the five have plans to increase the prices as well.
4. Community: The most affected stakeholder by fracking development is community. According to the news from USA and China, First it will use huge amounts of water at significant environmental cost. Second, there are also threats of small earthquakes as two small tremors of 1.5 and 2.2 magnitude followed fracking in Blackpool. BBC news (2013) mentioned in an article that Friends of the Earth energy campaigner Tony Bosworth said “We need a 21st century energy revolution based on efficiency and renewable. Not more fossil fuels that will add to climate change.” So the only interest that community has is a polluted free environment. That is why there are a lot of controversies because there are many campaigns going against it.
5. Customers: Customers are the weakest stakeholder in Energy sector because they are just affected by the decisions but they cannot impose anything on energy firms. The fracking development has affected the consumers the most. As the energy firms have increased the prices and government has increment in taxes, consumers are only facing poverty. This winter they will have to choose between heat and food.
Stakeholder Map
High
Low
Against For There have been a lot of conflicts between stakeholders but the most powerful of them are government and suppliers and it is most obvious that fracking development will take place in UK despite of all the threats to community and environment. Demand and Supply: This price increase is going to affect the demand of energy across UK. As people have low income so they will be careful with the consumption of energy. Supply and Demand are the terms use by the economist to define market. Energy sector has competitive market but on some places it has signs of Oligopoly because there are six energy firms known as energy giants who have control on prices and supply. Demand:Price determines demand and supply of any goods or services. Demand is the quantity of goods or services that buyers can purchase to fulfil their needs and wants. McEachern,W(2008) argues that “Demand indicates the quantity consumers are both willing and able to buy at each price during a given time period, other things constant. Because demand pertains to specific period – a day, a week or a month, Plus it also emphasis on willing and able.” For example you can afford a Honda motorcycle but ma y be u don’t have interest in motorcycles at all. The law of demand says that quantity of demand and price has inverse relationship. If price increases, the demand decrease and with the decrease of price, demand increases.
Demand Curve This chart shows that with the decrease of price, the demand increases. But energy is a necessity so consumers have to rely upon it whether they can afford it or not. But people with low income will definitely have to choose between necessity and leisure for instance heat and food. This will still affect the curve of demand. Supply:Supply of product is a relationship between price and quantity supplied.McEachern, W (2008) states that “Supply indicates that how much producers are willing and able to offer for sale per period at each possible price, other things constant.” It has a direct relationship as when the price increases, the more produced are produced and supplied and with the decrease in price, fewer products are supplied.
Supply curve This chart shows that price and supply has a direct relationship. Is energy elastic or inelastic: Energy is a necessity of life? People need to use electricity and gas to follow normal routine of life. As the weather is cold in UK, so people use more energy to keep themselves warm. So even the prices increases there will be a little slope or decrease in demand. Supply will not be affected because Npower has increased prices by 10.4 % which is enough for them for fracking development and produce more energy and save their profit as well. Following is the assumption of how the demand and supply curve will look like:
Demand and Supply According to this chart, the price increase in energy does increase the supply but it affects demand less. As this is necessity of life so people do use it less but at very minimal change. There is a point at price of 15 demands and supply curve meets which is called Equilibrium. And if there is more supply but less demands that is called surplus. But when demand increases despite supply stays the same, this is called shortage. Demand can decrease when people will look for substitute and substitute of energy is nothing else. But the consumers in UK have an advantage of using a website called “Uswitch” where they can compare prices and deals and choose one according to their budget. Carroll’s model:In 1983, Carroll stated that business conduct involves economic profitability, law abidance, social and ethical support. He argued that an organisation has social responsibilities which includes ethical, legal and economic. This is known as Corporate Social Responsibilities (CSR). Some other authors such as Wartick and Cochran (1985), Wood (1991) also supported the theory. There have been studies that businesses have roles in society, the factors that affect and motivate organisations to act for society. But the question with Carroll model was that whom should the business be responsible and how much? Wood *(1991) has discussed it with more details. She has mentioned that business have responsibilities towards their stakeholders which includes employees, customers, community, government etc. Carroll defined them in four categories: Legal
Desired
Expected
Required
Required
1. Economical:The first responsibility which a firm has is to make profit. Any business comes in existence just to make profit. As stated by Friedman, M (1971), “The only social responsibility of business is to maximize the wealth of equity investors, i.e. maximize profit within the bounds of law.” If we look at the fracking development within energy sector, investors and suppliers only look to increase the profit. Npower has announced to increase the prices to 10.4 % by December, 2013. According to BBC News (2013) Npower respond to the complaints that prices are the result of cost increases in delivering energy to homes. Fulfilling government schemes and raw materials. But they are not ready to minimize their profit. 2. Ethical: Secondresponsibility which is expected by businesses is being ethical to their stakeholders. Npower has introduced this document in which they have mentioned how they are reaching the target. They have a board-level CR committee which ensures that they act as responsible company and take responsibility for our actions. Npower has contributed to the society through warmth schemes, Macmillan cancer support. They take care of their employees, engaging them with environmental and social issues such as climate change. 3. Legal: Every business has to abide with law and rules of the country they are living in. Schwartz, M (2011) has mentioned that “Legality may be viewed in terms of three general categories: Compliance, avoidance of civil litigation and anticipation of law.” Npower has a code of conduct mentioning ten principles of the United Nations Global Compact, for example Labour rights and to support the elimination of corruption. 4. Philanthropic: The fourth responsibility following ethical is being a good corporate citizen. Sometimes it is difficult to differentiate between ethical and philanthropic on theoretical and practical level. Second these activities could be based on the economic interests. Npower does participate in philanthropic activities. For instance, in 2011, RWE npower charity committee donated over £250,000 to more than 40 charities and communities across the UK. Their donations supported a range of projects, including medical equipment for children born with heart disease and mature tree planting in and around Birmingham. (Npower, 2013) Conclusion: This essay looked onto the interest of stakeholders in the fracking development within energy sector and how ethical are these firms have been. As there are two main theories of stakeholders in business world: one is Friedman (1971) which states that business firms have only one responsibility which is to maximize their profit by any mean possible. Second theory is presented by Freeman (1984), an organization has responsibilities towards its stakeholders by being social and ethical and not only its profit. By looking into the interest and activities of energy giants of UK into fracking development, it can be concluded that these firms care only about their profit. Because they have increased the energy prices despite the fact that most of the UK population cannot afford. Daniel, B (2013) wrote an article in Metro with the headlines “switch off the lights until 2030, get rid of the bath too as you face 17 years of bills outstripping inflation.” According to BBC news most of the UK population will have to choose between heating and food because theycannot afford both. The sic energy giants, British gas, Npower, SSE, Scottish power, E.on, EDF has decided to increase prices together between 6% and 10% (BBC, 2013). The only thing government cares about is green taxes which share 9% of the cost or £112. This is to support the Government climate change policies. If we look at the energy bill, it distributes as follows:
So in all this fracking development and climate change policies, the only part which has been ignored is the customers. No matter what the government and energy giants comes up with, they have to pay the price and most of the low income consumers will have to live without heat or food.
References
BBC News. 2013. Q&A: Green taxes. [online] Available at: http://www.bbc.co.uk/news/uk-politics-24646527 [Accessed: 09 Dec 2013].
BBC News. 2013. Npower to raise prices by 10.4%. [online] Available at: http://www.bbc.co.uk/news/business-24607242 [Accessed: 01 Dec 2013].
Kirkup, J. 2013. Energy bosses face 'criminal sanctions' for fixing prices - Telegraph. [online] Available at: http://www.telegraph.co.uk/finance/personalfinance/consumertips/household-bills/10417417/Energy-bosses-face-criminal-sanctions-for-fixing-prices.html [Accessed: 15 Dec 2013].
Klimes, M. 2013. Npower Expected to Confirm Axe to Fall on 1,400 Jobs. [online] Available at: http://m.ibtimes.co.uk/npower-energy-giants-profits-job-losses-rwe-525645 [Accessed: 19 Dec 2013].
Mceachern, W. n.d.Macroeconomics.
Npower.com. 2013.Charitable Giving - RWE npower Corporate Responsibility Report. [online] Available at: http://www.npower.com/rwenpowercr/5_community_investment_and_employee_engagement/5_4_our_community/5_4_4_charity/ [Accessed: 29 Nov 2013].
Ofgem.gov.uk. 2013.Ofgem. [online] Available at: https://www.ofgem.gov.uk/ [Accessed: 19 Dec 2013].
Schwartz, M. 2011. Corporate Social Responsibility: An ethical approach. Australia: New south books.
What-is-fracking.com. 2013.What Is Fracking. [online] Available at: http://www.what-is-fracking.com/ [Accessed: 19 Dec 2013].
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