Citizens Advice response to Ofgem’s ‘Innovation in the Energy Retail Market’

Citizens Advice response to Ofgem’s ‘Innovation in the Energy Retail Market’ 227 KB

Citizens Advice welcomes Ofgem’s consultation on Innovation in the Energy Retail Market. 

The consultation paints a picture of the market at present, which is delivering some innovation (predominantly in the domestic market) around the ways in which consumers are billed for their usage - and providing a means for energy flexibility - through new tariff structures. 

Tariffs will continue to evolve with the introduction of the Market-wide Half Hourly Settlement (MHHS), as will the prevalence of low-carbon technologies. We’re particularly keen to see innovation which helps people overcome financial and other barriers to adopting new technologies and energy efficiency measures, such as energy subscription models, subject to these offering good value and high standards of service. We also support changes that enable innovation supporting people in vulnerable circumstances more broadly.

Ofgem’s consultation proposes reforms to five routes to market: restricted licences; derogations scheme; individually modified licences; Licence Lite; licence exempt supply. Out of all routes proposed, we feel that reforms targeted at increasing take up of Licence Lite are an appropriate enduring option for boosting innovation without compromising consumer protections - or the level playing field for competition - but faces some significant commercial challenges to being used more widely. 

The other routes under consideration by Ofgem could be useful mechanisms to enable innovative products and services to operate at a slightly larger scale and for a limited time period. However, as enduring or widely adopted options, we think they risk undermining competition by enabling some firms to avoid a fair share of certain costs, and increasing the risk of a less inclusive market developing over time. Enabling a broader range of firms in the energy market without adequately updating regulation to address new risks was one of the factors that led to almost 30 domestic energy suppliers failing in 2021/22.

These options are therefore better suited as transitional arrangements ahead of wider market reforms which address these risks in a more coherent manner. Their use should be subject to careful assessment of consumer benefits and close monitoring in the first instance, with the addition of increased standards and other measures. 

In general we are concerned that the proposed reforms are not radical enough to match the pace of change needed in the market. The National Energy System Operator’s (NESO) Clean Power 2030 advice referred to ‘transformative innovation’, including in relation to tariffs and energy services to ‘increase participation in smart technologies and demand side flexibility’.

Without a clear vision from the Government and Ofgem for how the retail market can support this outcome, we’re concerned that innovators will be less keen to invest and make use of the limited new routes to market. The routes to market under consideration leave significant power with Ofgem to determine how innovation proceeds, rather than ensuring the retail market more generally can act as a platform for innovation, driven by consumer choice. 

Ofgem should now go further and faster, and consider the extent to which the wider supply licence (particularly the USO) may hinder innovation and design reforms around those learnings. This process will also require upfront consideration of key issues in relation to consumer protection in a more innovative and diverse market, as well as the treatment of consumers in debt and in vulnerable circumstances. A more ambitious approach is also likely to better align with Ofgem’s new duty to consider the impacts of its regulation on economic growth. 

All reforms should ultimately be complemented by a Consumer Duty, which we feel is the most significant enabler for innovation, and has already been shown to be effective in the much more diverse and innovative financial services market. This approach would limit the need for prescriptive rules to govern emerging products and services, while providing the regulator with a means to tackle poor practice, and consumers with confidence that firms offering innovative services will act to ensure good outcomes and that complex products will offer fair value.

It’s also important that Ofgem considers energy consumer propositions as a whole, and not just those that act as ‘suppliers’. Government is developing plans to regulate flexibility services and third party intermediaries (TPIs), and it’s important that any changes to enable innovation align with these changes, with common consumer outcomes and safeguards targeted across these services.