Ofgem has invited stakeholders to give their views on whether the “supplier hub” model for the energy market should be reformed.
The regulator believes the current arrangements are reinforcing the dominance of large suppliers, holding back innovation and stifling competition.
Writing in a blog, Ofgem chief executive Dermot Nolan said: “Since privatisation in the 1990s the energy market has revolved around suppliers. They buy energy in wholesale markets and sell it to customers. They own the relationship with customers through billing, metering and managing complaints.
“This supplier hub model has reinforced the dominance enjoyed by large suppliers and we think that it has stifled competition in the retail market. This is one of the reasons why so many households remain on poor value deals.”
Nolan said alternative business models such as peer-to-peer trading could make the role of suppliers as middlemen “less relevant – or even redundant”.
“However, the current regulatory framework is designed for energy to be traded with transactions settled centrally, and not for decentralised, local or peer-to-peer energy markets,” he added.
Nolan gave the example of the balancing and settlement code which requires suppliers to match supply with demand and make payments to the system operator when they are in imbalance.
To manage this on behalf of customers, new entrants must either obtain a supply license and sign up to the code or enter into a contract with an existing supplier: “This creates a barrier for new entrants wishing to offer consumers peer-to-peer trading opportunities.”
He suggested the current rules preventing customers from having more than one supplier may also need to be revised as “in the future, customers may be buying energy from a variety of sources and selling back what they do not need to various companies.”
“If we need to make major changes to regulation to have a more competitive market in the future then we will,” Nolan concluded. “We may be able to make some changes more quickly, however fundamental reforms will take time to deliver.”
Ofgem plans to set out the next steps for reforms in spring. In the meantime, Nolan urged suppliers to “embrace change” and get on board with the government’s proposals for a price cap.