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Hey guys,
So, one of Ofgem’s latest consultations, titled “Innovation in the Energy Retail Market“, aims to spur new developments and address future energy needs in light of the transition to net zero. However, given the historical context where regulatory changes often lead to increased consumer costs or fail to deliver the promised efficiencies, I remain as sceptical as ever of Ofgem’s ability to deliver on their promises. Will this document’s proposals genuinely lead to innovation that benefits all consumers, or are we on the verge of seeing another round of regulatory adjustments that primarily serve the market’s incumbents?
Recent years have seen a ridiculously tumultuous energy market, with the crisis that led to over 30 energy supplier failures and skyrocketing bills peaking at £4,500 per year. Ofgem’s response has been mixed, with interventions that have sometimes stabilized the market but at the cost of customer choice and hugely dampening competitive forces. As the consultation promises to bring innovative energy products and services to the fore, I must question the incentives driving these changes, whether these innovations will truly benefit those grappling with the highest energy bills, and whether or not we’re going to see further price increases over the next five year to accommodate these changes.
This article outlines the current landscape of energy innovation in the UK, Ofgem’s proposed changes, potential consumer impacts, existing barriers, and the opportunities for stakeholders.
Current State of Energy Market Innovation
The energy sector is a confusing place to be in at the moment, it is particularly difficult to see what the future is likely to be. Five years ago energy was simple, you had electric and probably gas coming into your home, it was supplied by your energy supplier and you paid your bill regularly. It was simple. Now, we have a world of electric vehicles on the rise, solar panels, heat pumps, battery storage, electric boilers, smart meters and IHDs, and thats just the hardware side, nowadays you can store your own generated electric, you can sell excess electric back to the grid, you can even sell electric that your car has generated throughout the day back to the grid. It’s a very different world, it’s changed quickly and it’s continuing to change rapidly. There are already new technologies being worked on that may make current solar panels extinct.
Yet, the market’s response post-energy crisis has been largely conservative, focusing on stabilizing rather than driving innovation forward. Standard variable tariffs still dominate, reflecting a market where consumers either lack options or choose not to engage with more complex, potentially beneficial tariffs like time-of-use and feed-in-tariffs. And I don’t know that I blame consumers for not wanting to engage. The way the market is changing, you’ll have to be an energy expert to be able to manage your own bills going forward.
The handful of innovations we’ve seen, such as “zero-bill homes” or EV-specific tariffs, are niches rather than norms, suggesting a market more concerned with short-term stability than long-term evolutionary change. Even with the push for net zero targets, the uptake of innovative services remains fractional.
What Ofgem has failed to realise is a basic universal truth: we want simple, cheap energy. That’s it. Nothing more, nothing less. Sort out the crisis, get us back to £800-£1,000 per year bills and you’ll have a country of primarily happy consumers. The majority of us do not care for more complications in our bills, it’s a bloody bill, we work so we can afford to pay them, we don’t want to come home and do more work just so we can understand them! Keep energy simple, get it back to being cheap, that’s all we’re asking for.
Five Proposed Changes by Ofgem to Facilitate Energy Market Innovation
Right, lets look at what this document is talking about. Ofgem are looking at trying to increase innovation in the market by offering other entries to the market. They are seeking opinions on five key proposals:
1. Reform Derogations Regime: The expansion of this regime is suggested to provide temporary relief from certain licensing obligations, allowing new business models to test and launch. It could be argued that this could lead to a patchwork of regulations where consumer protections are selectively applied, potentially undermining trust and creating an uneven playing field.
Derogations could expedite the trial of new energy services by relieving suppliers of unnecessary obligations. However, without robust oversight, this could also mean that the most agile or politically connected suppliers gain an undue advantage, bypassing regulations meant to safeguard vulnerable consumers or levels of service.
2. Restricted Supply Licenses: This proposal aims to license suppliers for specific areas or types of consumers, potentially ushering in localised or tailored services. While it could theoretically foster a more bespoke energy market, there’s a risk of monopolistic practices in certain districts or customer segments, reducing competition where it’s most needed.
The idea is noble in theory; however, if not managed correctly, such restriction can lead to areas being underserved and consumers trapped with monopolistic suppliers, with little choice or recourse if service quality or prices are substandard. Does this not contradict the essence of a competitive market?
3. Reform ‘Licence Lite’: Enhancing this existing framework could lower the barriers for new entrants by allowing them to partner with established suppliers for aspects like code compliance. This might sound promising for innovation, but the success hinges critically on the willingness of existing suppliers to partner, which has historically been limited, making this less of a gateway for innovation and more of an entry challenge.
The complexity involved in these partnerships could deter newcomers, who might fear becoming too dependent on partners whose commercial interests might diverge from their innovative visions. Furthermore, this could potentially shield incumbents from true competition by allowing them to ‘cherry-pick’ partners or territories, stifling broader market innovation.
4. Individually modified licence: Ofgem could grant licences with modifications to the standard licence conditions. Whilst Ofgem have done very little of this historically, they are proposing increasing the number of modified licences to facilitate more innovation. They’re suggesting modifications such as amending licence application guidance to improve awareness, provide more guidance on the information required from applicants and clarify how they would assess applications.
The proposed modifications do not appear to offer much more than additional support through applications, I feel Ofgem may have actual licence modifications in mind but there is little information in this document expressing what they are. Ofgem’s own warnings on this point is that we ma y end up in a market where each supplier has different regulatory requirements, which means we’ll be in a world where we can’t accurately tell if our suppliers are actually breaking rules or not!
5. Enable licence exempt supply: This can only actually be done by government, but Ofgem are proposing working with government to review the regulatory framework and codes that might be barriers to licence exempt supply. This could lead to cheaper energy from suppliers that are non-licenced, but it also means that customers with those suppliers won’t benefit from the same regulatory protections that other customers do.
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Is Your Energy Bill Set to Benefit from Ofgem’s New Policies?
While the introduction to innovative tariffs and service models sounds promising, the reality might be different for many consumers. Innovative pricing models, especially those linked to smart technologies, could lead to increased complexity in choosing tariffs or could penalize those who cannot afford or access the necessary tech. On top of that, any additional regulations always comes with an increase in regulatory costs, which ultimately end up on your energy bill.
The concept of dynamic pricing, while potentially reducing system costs by billions as Ofgem claims, requires significant consumer engagement. Consumers need to be able to adapt their usage or understand complex billing structures, which might not be feasible for everyone, particularly for the digitally less literate or those unable to invest in energy-efficient technologies due to financial constraints.
The consultation lacks clarity on how these new models will directly translate into lower or fairer bills for the average consumer. Instead, it might favour those with the means and understanding to navigate the new offerings, leaving others behind.
Navigating the Barriers: What’s Holding Back Energy Innovation?
Ofgem identifies smart meter rollout, unclear price signals for net zero, and a restrictive regulatory framework as the main hurdles. However, these enablers and barriers might not be the full story.
Smart meters, while critical for data-driven innovations, have faced their rollout challenges including consumer reticence and technical issues leading to some meters being inoperative or not “smart” at all. Without an efficient and comprehensive rollout, the foundational data needed for innovation is stunted.
One of the other key barriers for innovation is the ongoing crisis. No one wants to hear about more expensive ways to make energy bills cheaper in 10-30 years. We want our bills reduced now, it’s hard to get struggling families on board with having even higher bills today for a wish and prayer of a better future.
What’s even more frustrating is the lack of clear timeline for reduced bills. Ofgem have consistently said that we won’t see bill reduce to pre-crisis levels for years, or possibly ever. They’ve also consistently stated that green energy is cheaper, but they do not say WHO it is cheaper for. As we have a single-price electricity market, consumers will not benefit from the cheap production of green energy until 100% of our electricity is produced through green measures. That means that we’re talking about the wrong goal, net-zero does not mean 100% green electricity, it means we take as much carbon out of the air as we put into it, so we are still predicted to be using gas-fired power stations until at least 2050. So, we won’t be seeing energy bills drop because of green-energy for another 25 years at least.
Moreover, the consultation does not fully address the cultural resistance within companies, where established business models and consumer expectation might resist disruptive innovations.
The Regulator Guy’s final thoughts and engagement on this consultation
My honest opinion is that this will prove to be a waste of time. Ofgem are going to get resistance from both sides of the coin. Suppliers aren’t looking to offer innovative tariffs that reduce bills, because reduced bills means reduced profits for them. Similarly, consumers aren’t looking to become energy experts just so that they can understand their energy bills and reduce their monthly outgoings by £20-£30.
From what I understand, customers just want the opportunity to reduce their bills in a simple way. Complexity in our responsibilities isn’t desirable!
Existing energy suppliers do not want to lose their profit margins, their living in a time of record profit levels, their all rolling in the cash right now and they will ride this gravy train as long as they can.
The idea of reducing barriers to entry and bringing new energy companies back into the market is great, but it needs to be done in a simple way. Personally, I think that every new energy supplier should be given top-of-the-table position for 6 months on price comparison websites (PCWs). This will give them a short period of time to attract new customers and start to build a business, without forcing PCWs to show all cheap tariffs all the time for everyone. We can’t return to Ofgem’s forced Whole Of Market view, that was disastrous for PCWs, but it did give us a diverse market, so this half-measure could improve the current situation.
Anyway, that’s just my opinion. To finalise this consultation, Ofgem have asked a dozen questions. I will return with a Part 2 to this article with my responses to Ofgem’s specific questions and instructions for how you can get involved in the consultation. That’ll be ready tomorrow, so keep an eye out for the next consultation update.
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