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The energy regulator, Ofgem, drew on research from the University of Birmingham when it instructed the electricity industry to re-design transmission charges that recover £1.6 billion per year. This instruction, issued in May 2012, was the culmination of Project TransmiT which Ofgem launched in September 2010. As part of TransmiT, Ofgem commissioned three teams of academics to consider whether changes to transmission prices were desirable and, if so, to recommend changes. One of these teams was from the Universities of Birmingham and Strathclyde. The changes introduced by Ofgem — which aimed to send more accurate signals of the cost of dealing with low-carbon electricity — were those recommended by the Birmingham and Strathclyde team. As a consequence, the research has fundamentally shaped a significant change to the future of electricity pricing in Great Britain, affecting the costs incurred by the industry and the payments made by every consumer in the country.
Geman's research has made contributions to exotic option pricing, insurance and catastrophic risk, high frequency trading, and the whole spectrum of commodities, from crude oil and electricity to metals and agricultural commodities. Her research identified complex options and derivatives for commodities, and their applications for risk management and the valuation of physical assets for energy and mining companies, as a relatively under-researched and neglected field, and has made several scientific contributions to it (detailed in section 2).
There are four impacts detailed in this case study:
Derek Bunn has led a research programme on understanding competition, market evolution, and prices in electricity markets. He and other researchers in the LBS Energy Markets Group have modelled production facilities in detail, their explicit ownerships, and the price-formation process. Their use of computational learning provides subtle insights which have eluded conventional approaches. The LBS group was the first to do this, and the approach is now widely applied. Relevance of the work is recognised via funding from major energy companies and research organisations. In terms of external impact, this work has informed extensive advice to several government inquiries, stimulated further research, and is actively used by commericial businesses.
From the 1990s UCL Economics invested in the capacity to conduct fundamental and applied research in behavioural and experimental economics. This was the basis for the research which provided the evidence base for the Office of Fair Trading to identify and act upon misleading pricing practices, particularly `drip pricing', in 2010. As a result, 12 major airlines announced that they would include debit card charges in their headline prices, and government announced that the EU-wide Consumer Rights Directive would be implemented a year earlier than it was due to go into effect.
Research led by Stephen Taylor has resulted in the development of forecasting methods for financial market prices and [text removed for publication] analytical tool at the Macro-Financial Analysis Division of the Bank of England. These methods have been cited in papers by employees of the European Central Bank, the Central Banks of Brazil, Norway and Mexico and the Italian Securities and Exchange Commission. The ability to manage risk by making more accurate predictions about financial market prices has been particularly important since the onset of the economic and financial crisis in 2008. Taylor has developed forecasting methods to make the best use of information recorded about recent asset and derivative prices, providing more precise expectations about future stock index levels, exchange rates and interest rates. Taylor's 2005 text on `Asset Price Dynamics, Volatility and Prediction' has also had significant and far-reaching impact on students learning about Finance and Economics worldwide.
The Coalition government's manifesto commitments to remove compulsion in the annuity market necessitated a decision about a Minimum Income Requirement (MIR). Cannon's contribution to the government consultation played a significant role in setting the MIR. Previous research by Cannon had shown that the UK compulsory-purchase annuity market was efficient because compulsion expanded market size (more than half of all annuities are sold in the UK) and reduced selection effects. This research enabled the government to justify retaining an element of compulsion. The precise level of the MIR used in the 2011 Finance Bill was based upon the methodology proposed by Cannon.
The methodological and applied work on micro-econometric demand analysis outlined here has been repeatedly used by the UK Competition Commission (since 2002) and the Co-operation & Competition Panel (now Monitor) of the UK Department of Health (since 2009) in their respective competition analyses, and by the Hong Kong Consumer Council in its Public Estate Supermarket Study (since 2011). It contributed to the European Commission White Paper on the quantification of antitrust damages (2010), underpinning some of the econometric methodology proposed there to assess cartel damages in EU Courts. Beckert's work in the area of micro-econometric demand analysis connects micro-economic demand theory with various econometric methodologies to assess demand-side substitution in the presence of taste heterogeneity. His research is disseminated through articles in peer-reviewed academic journals, policy articles, and through consultation by antitrust authorities, think tanks and economic consultancies.
Professor Michael Waterson demonstrated how two consumer activities — search and switching — are necessary if competition is to benefit consumers. He showed how search and switching costs inhibit the competitive process; highlighted how firms increase these costs in retail, banking, insurance and energy markets, and recommended government measures to empower consumers. Regulators around the world have used Waterson's research to enhance the consumer benefits from competition. Professor Gregory Crawford also analysed switching costs, estimating the costs of automatically renewable contracts in the UK telephone market. Based on this analysis, Ofcom banned rollover contracts for all residential and small business customers of voice telephone and broadband services, reducing households' and small businesses' switching costs by at least £340 million/year.
Research by Oxford econometricians provided the basis for innovative new methods for predicting periods of potential financial stress and providing protection for investors against extreme events. During periods of financial stress, equity funds tend to sharply lose value while volatility tends to increase. Adding some long volatility exposure to a standard equity portfolio can significantly improve the tail behaviour of a portfolio. However, it is expensive to continually hold volatility contracts due to the volatility risk premium. Researchers at Man Group have applied the Oxford research to create new strategies to protect against tail risk and these are incorporated in their Tail Protect fund launched in October 2009.
Professor David Leece's research on household decision making, risk and mortgage design had a significant influence on a fundamental review of the United Kingdom's mortgage market carried out in 2003-4, and consequently has had a major continuing impact on: (i) understanding the role of mortgage market economics in the financial crisis of 2007-8; and (ii) the ability of a global investment bank (and the banking sector more widely) to understand, value and hedge risk in securitised mortgage debt.