Providers of electricity for electric vehicles (EVs) and heating should not be required to hold a supply licence, a new report has suggested.
In the report, published by consultancy Stonehaven, a radical new look for the energy retail market is outlined which would see it become similar to that already operating in the telecommunications industry where mobile phone customers have contracts direct with suppliers and tariffs are based on their individual use and needs.
Outlining its thinking, the paper bemoans two structural issues within the existing energy retail market – the fact that competition is solely based on costs, and that its regulation constrains suppliers’ behaviour.
These issues, it adds, have led to major consequences including suppliers’ inability to differentiate, an incentive to take financial risks which hinders the resilience of the system and under-investment in customer services.
The report presents a number of solutions as to how to combat the market’s structural issues.
It states: “By viewing the energy retail market as a spectrum between energy as a commodity and a full energy-as-a-service (EaaS) model, we break the dichotomy of energy either being a commodity or a service.
“As such, consumers have the flexibility of adopting EaaS for some of their assets, whilst keeping energy as a commodity for their background consumption.
“This also creates a new space in the market in which new flexible players can compete. Moreover, as this is a spectrum, there is room for new business models that do not already exist to be implemented at any point on the axis.”
It outlines several “foundational reforms needed to open-up the possibilities within all of these models” and that Ofgem could implement most of the changes within the next decade.
These include removing the requirement for a supplier licence for EV and heating loads, so as “to not stymie innovation”.
It calls for the market to become more like that of the telecommunications sector, where outcomes suppliers are expected to deliver are based on their contract with the customer rather than a licence.
“In this instance, Consumer Protection Law is adequate to protect the customer from any form of abuse or negligence on the part of the supplier. In this sense, the removal of a requirement for a licence moves these parts of the energy sector closer to the regulatory model utilised in telecommunications, where all providers of such services are obliged to comply with some general conditions and some carrier-specific conditions, rather than having a single unitary licence,” it says.
This would provide a “leg-up” for new innovation, as opposed to a “leg-up” for new entrants, as was the case in the past.
“Removing the requirement for a licence will unlock rivalry by facilitating market entry for new innovations that cannot meet current licensing conditions. Successful innovations will then help drive competitiveness in the market,” it further explains.
Other recommendations include using smart meters to split electricity supply, so customers can receive electricity for their old assets from one supplier and the electricity for their EV and heat pump through another.
“Splitting the meter would remove the monopoly of supply that suppliers have over their customers, forcing them to compete not just on price for the overall consumption but on price and service and innovation for types of supply,” it adds.
Further recommendations include implementing Market Wide Half Hourly Settlement and removing the price cap for EVs and heating.
On the latter point, the report argues that the cap “forces all suppliers into similar business models”.
It adds: “Delivering the benefits of competition as a process of rivalry cannot work if the price cap remains in place and continues to cover the new loads from EVs and heat pumps. Pricing freedom and tariff design freedom is essential for firms to create competitive advantage, deliver innovations for consumers and drive profits from these new loads.”
Commenting on the report Adam Bell, Stonehaven’s director of policy, said: “Privatising the energy market was supposed to encourage new entrants, boost competition, and empower consumers to shift suppliers with ease.
“Over the last 18 months we have seen just how broken this system is. It offers no real protection to consumers or suppliers, it is over-regulated, innovation is stifled, there is no real transparency on tariffs, switching has slumped, and dozens of companies have gone bust.
“The transition away from petrol and diesel cars and gas boilers gives us a unique opportunity to fix our broken energy market, to encourage greater innovation from suppliers, to drive up quality of service and give consumers greater clarity, power and choice.
“We should build a new retail energy market free from the old. Current suppliers and new entrants should be free from the over-regulated licensing system run by Ofgem and encouraged to offer innovative new products and clear tariffs to give consumers greater choice on how they use their energy and who supplies it.”
An Ofgem spokesperson added: “We make no apology for putting tough consumer protection and standards in place and cracking down where suppliers fail to come up to the mark. We’re setting a higher threshold for new entrants to the market – the gas crisis shows the risks of leaving it up to the market to decide with no one to champion consumers’ interest. That’s not overregulating. It’s doing the right thing for households and businesses.
“We’ve been clear the gas crisis made the case for fundamental change – that’s why we’re making an urgent case to reform the price cap and strengthening competition so it works for consumers.
“We’re overhauling retail and wholesale markets and unlocking investment and accelerating the transition to net zero.”