Ofgem consults on innovation in the energy retail market

On 2 October 2024 Ofgem launched a consultation on innovation in Great Britain’s energy retail market. Ofgem is seeking views from industry stakeholders on how it can unlock further innovation in an evolving retail market, whilst also protecting consumers.

The case for innovation

The consultation document highlights the continued importance of innovation to the energy retail market and Ofgem’s renewed focus on innovation as a central theme of future market design. Ofgem cites innovations in the retail market to date as including the development of 100% renewable energy supply offerings and the use of energy as a service contracts in relation to pieces of equipment, such as boilers, but acknowledges that these offerings are commonplace in today’s market and that fresh ideas are needed. Ofgem’s view is that investment in and innovative products and services has stalled in recent years, in part due to the energy crisis and that there is now a need for a renewed focus.

In the preamble to the consultation document Ofgem recognises the significant opportunity that the deployment of renewables and other green technologies presents for the energy retail sector, as well as the role increased digitalisation could play, including in relation to reduced system costs, increased invoicing visibility for customers and the development of more competitive tariffs. Ofgem is keen to see more of these opportunities flowing into the retail sector – it wants inclusive innovation that enables all consumers to benefit from a decarbonised, digitalised sector, including those consumers in vulnerable situations.

The focus of this consultation

The consultation applies to both gas and electricity and to both domestic and non-domestic supply arrangements. Ofgem has highlighted that it is specifically focused on how to improve routes to market for parties undertaking the supply of gas or electricity as part of their offering.

Enablers and barriers to innovation

The consultation document notes that, at present, there is a risk that Ofgem’s rules unintentionally prevent innovators from developing products or services that could deliver benefits to consumers, particularly where innovators are looking to develop novel offerings.

Ofgem has, through the consultation, identified a range of “enablers” that it considers are required to facilitate innovation in the energy retail market. Ofgem welcomes feedback on these key enablers, together with a view from the industry as to the key barriers to innovation in the energy retail market. Ofgem will use this feedback to assess whether it could amend its rules to improve the market for innovators, for example by adopting a more flexible approach to licensing.

Ofgem has highlighted that its key enablers are interdependent, meaning it may need to collaborate with the industry and government to deliver them. The key enablers identified are:

• Data and technological enablers – data and technology serve as the building blocks for the products and services that meet consumers’ needs and deliver net zero at the lowest costs. They include smart meters, smart, low carbon technology and increased access to data.
  
  
• Commercial enablers – these are commercial incentives, which drive the development of innovative products and services, including market forces which create commercial value for parties to develop innovative new products and services, and price signals that are designed to achieve net zero opportunities.
  
  
• Market and regulatory structural enablers – market structures that facilitate innovative products and services that meet consumer needs, including pathways to test innovation, appropriate routes to market, financial resilience, access to capital, regulatory certainty and the development of investor confidence.
  
  
• Engaged, informed consumers – who trust, track and willingly participate in the market.

Improving route to markets for products or services that involve selling energy

Ofgem recognises in the consultation document the impact its regulations can have on an innovator’s route to market. The breadth of Ofgem’s jurisdiction, to some extent, spans the entirety of the supply structures we are used to seeing in the energy retail market, including supply licence conditions, licence lite requirements, white label supply arrangements, sleeving and exempt supply structures.

Ofgem has noted the following key options to help improve innovation within the route to market, on which it welcomes feedback from stakeholders:

• Reform of the licence derogations regime – at present, this has not been focused on facilitating innovation. Ofgem is considering an expansion of its ability to grant derogations and repurpose the regime, so it is more focused on supporting innovation.
  
  
• Restricted licence – Ofgem has powers to grant restricted licences (for example, in respect of specified geographical areas or premises). It is considering using these to facilitate innovative products and services, for example by enabling specific customers.
  
  
• Granting licences with modified licence conditions on an individual customer basis – Ofgem has the power to do this but has done so on a very limited basis to date. Ofgem could broaden its use of this tool to enable new entrants to enter the supply market. However, Ofgem has highlighted that it would only modify licences where there were clear consumer benefits and therefore it would not be willing to modify certain licence obligations.
  
  
• Reform the Licence Lite scheme – Ofgem considers there is an argument that improving how Licence Lite works could improve routes to market and help facilitate the development of new products. That said, as Licence Lite has not been widely used to date, it is unclear whether its reform would meet the needs of innovators.
  
  
• Enabling licence exempt supply – The classes of supply licence exemption, as currently set out in the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001, cannot be changed by Ofgem, but rather will require government involvement. The government issued a call for evidence on the licence exemptions in 2021 and whilst it was thought at the time a consultation document may follow, nothing further has, to date, been forthcoming. Whilst Ofgem cannot change the definition of licence exemptions, which Ofgem recognises would take some time, it did highlight in the consultation document that it can review the regulatory framework and codes which may be barriers to licence exempt supply and consider these under the existing regime in parallel.  

What are the next steps?

Ofgem considers innovation forms a part of its future work on the retail energy market but is yet to form a view on the appropriate approach and this consultation is intended to help shape that. Alongside the consultation, Ofgem is undertaking in-depth bilateral conversations with suppliers and innovations to better understand the barriers to innovation in the current market. Interested participants can contact Ofgem by email to FutureConsumers@ofgem.gov.uk.

Ofgem has, alongside this consultation, kicked off its Consumer Confidence programme, which focuses on defining the outcomes Ofgem wants the energy retail sector to deliver, designing the regulations to deliver those outcomes and ensuring Ofgem has the necessary powers to achieve this.

The deadline for responses to this consultation is 27 November 2024.