The energy market is changing. Over the past couple of years, we’ve seen more interest in new and distinctive business offerings that have the potential to shake up the energy market.

Ofgem wants to see an energy industry that is flexible and open to innovation. For this to happen, it will pose opportunities and challenges, not only to the energy companies but also to us as regulator, and to the consumers we’re here to protect. How do we strike the right balance between removing barriers to innovation, ensuring customers are treated fairly, and keeping costs down?

One of the most recent trends is many newcomers to the energy market using non-traditional business models (NTBMs). Examples include community energy projects, bundled service offers (for example, energy, broadband and entertainment in one package) and peer-to-peer energy.

In February, we put out a discussion paper on NTBMs, and recently published the responses. We wanted to better understand what is driving them, their benefits to consumers, their risks, how regulation might affect them now and in the future, and how they might one day transform the energy market. We were delighted with the number of responses and especially pleased that the subject had such broad appeal – across the energy supply chain and beyond.  

The day after we published the discussion paper, I was on a train to Manchester to speak about NTBMs at a community energy conference. I was wondering whether there would be any interest and how people would respond to the paper. Eight hours and umpteen conversations later, I was in no doubt that people were really enthusiastic about it.

Fast-forward seven months, and what have we learnt about benefits and risks to the growth and development of NTBMs?

We have learnt that NTBMs could transform the energy system. They could increase competitive pressure, unlock value for consumers, get more consumers engaged and make the system more resilient. This could eventually help to lower bills, reduce the environmental impact and improve services.

NTBMs could help consumers and communities engage with the changing energy system. They could unlock the benefits of embedded generation, demand-side response and storage.

But under current regulation, NTBMs wishing to provide flexibility services seem to be unable to reach their full potential.  More flexibility is needed for an energy system in flux. Many NTBMs also told us that the regulatory system should be reviewed so it can better accommodate local energy, particularly local supply.

Two cross-cutting themes emerged from the consultation. Enabling diversity and innovation was the first. Most respondents said regulation needs to respond to, and enable, energy system change. Regulatory changes – including relying more on principles and less on burden­some regulation – could help NTBMs and consumers.

We were also told that the current regulatory framework does not offer the flexibility to develop and trial innovative business models, and so cannot fully demonstrate the impact of NTBM approaches. There was a call for an “innovation space” within the regulatory framework to trial business models.

Consumer protection was the other key cross-cutting issue. Although NTBMs may benefit consumers, there are potential consumer risks, such as misusing data, new local monopolies emerging, a more complex market and an unstable system.

Some mentioned that consumers might want a bigger say in the kind of protections available. Others cautioned against establishing a potentially multi-tiered regulatory framework. Respondents made it clear: we should consider these risks and opportunities when developing regulatory options.

So what is Ofgem doing with all this information?

We’ve learnt a lot about how NTBMs could transform the energy market, deliver significant benefits for consumers and challenge the way we regulate.

We’re now looking at how we best support and encourage the innovators, while promoting fairness and protection for consumers. Where regulation poses barriers, Ofgem may need to step out of the way where the benefits are clear.

We’re examining these issues in the context of our wider work on regulation and future energy system, so that we can target our efforts in the right areas. We will publish our proposed course of action by the end of the year. Exciting times lie ahead.

Jeffrey Hardy, head of future consumers and sustainability, Ofgem

 

Key points from initial engagement on NTBMs

Ofgem’s initial engagement with the sector on the potential impact of non-traditional business models (NTBMs) resulted in points in favour of the change, and cautions about how regulation should adapt.

New models of flexibility in a changing energy system. NTBMs could unlock benefits of embedded generation, demand-side response and storage, the industry said.

Greater emergence of local energy. Localised energy solutions could emerge in response to the low-carbon transition, consumers’ desire for better services, and to reap the social and economic benefits of energy for communities.

Enabling diversity and innovation. Regulation needs to become more flexible and agile to accommodate, respond to and enable energy system change. A greater reliance on principles, less burdensome regulation and bespoke regulation could improve the situation.

Consumer protection and service. Enabling the growth of NTBMs will have implications for consumers, both positive and negative. Ofgem should consider these risks and opportunities when developing options for regulatory change.