Supplier concerns raised over new ‘sandbox’ to test regulatory changes

Energy UK has raised several concerns in relation to Ofgem’s proposed Future Regulation Sandbox (FRS) designed to test and trial changes to energy regulations ahead of full adoption.

While stating that it is “broadly supportive” of the FRS, the trade body’s consultation response raises concerns about the impact on customers and suppliers.

The proposed scheme builds upon, and would be in to addition to, the Energy Regulation Sandbox (ERS) previously introduced by Ofgem to allow innovators to apply for regulatory derogations to trial new products and services or launch them into the market.

When it launched the consultation on the FRS in November 2023, Ofgem said the ERS in its current form is “not a means to change regulation on a permanent basis”. It said the FRS would be different in that its “explicit aim” would be to inform regulatory decisions and the initiation and design of trials would be led by Ofgem itself.

Similar to the ERS, the FRS would operate in the live market while providing a “contained environment to controlled testing of potential future regulation”.

Energy UK’s concerns largely centre around the impact that live trials will have on customers and suppliers themselves.

It urges “careful consideration” is given to “how customers who may be subject to a trial would understand the impacts of that trial on them and their ability to engage with normal market processes, such as switching suppliers”.

It adds: “As an example, Ofgem outlines the environmental conditions of the FRS, which could involve limiting trials to a limited number of customers or a geographical area. However, customers would still have the ability to switch suppliers, which means they would potentially no longer be within the trial.

“This aspect may have knock-on impacts on the wider market, or result in a trial being ineffective.”

Energy UK also raises concerns about potential costs incurred during the trial process.

Ofgem said it does not initially plan to make any funding available to innovators as part of the sandbox, but they could seek funding through existing Ofgem mechanisms such as the Network Innovation Allowance or the Strategic Innovation Fund. The regulator said it is also open to aligning the FRS with schemes by other funders such as the government and Innovate UK.

Energy UK’s submission adds: “With there being no funding for suppliers to partake in this, there is a risk that certain businesses would be more restricted to partaking in certain trials or that trialling regulatory changes with costs attached would be unviable and certain business models being better suited to a trial environment.

“Whilst networks do have funding available for innovation (via the Network Innovation Allowance or the Strategic Innovation Fund), suppliers are best placed to innovate for positive customer, and net zero, outcomes seeing as they are customer-facing.

“We would therefore encourage Ofgem to provide more clarity on where the costs of trials would sit, and how to ensure that those suppliers who are not involved in a trial would not incur costs as a result of parties that are.”

The trade association also warns that the formation of the sandbox may unintentionally hinder ongoing innovations within the market.

The submission adds: “Many suppliers and other market players are already innovating and have been for some time.

“Whilst Ofgem highlight that there is scope for industry to suggest trials for the FRS, there is a concern that this does not leave enough scope for industry innovation via this FRS and that this could interfere with innovations that our members are already carrying out.”