Ofgem says there is a “strong case” to explore fundamental reforms to the regulatory arrangements for the retail energy market as too many consumers are not seeing the “full benefits of competition”.
In its response to a call for evidence exploring future supply market arrangements, Ofgem said it needs to make sure any future market design can unlock the “full potential” for innovation and competition.
The regulator considers the current “supplier hub” model, which positions suppliers as the primary intermediary between consumers and the energy system, may not be “fit for purpose” over the longer term.
It is “not confident” the existing model will enable consumers to benefit fully from the greater levels of innovation, digitalisation and competition made possible by the energy system transition, it said.
Ofgem highlights the introduction of the price cap will help consumers see the benefits of competition and suggests programmes such as smart metering and faster switching are helping to modernise the market.
But it said stakeholders agree a review of the model is “timely” as “fundamental issues” exist. Respondents to the consultation called for a reform to be considered, however they emphasised significant changes cannot be “made lightly”.
Neil Barnes, Ofgem’s deputy director of consumers and markets, said: “Our ambition is a retail market that works for all consumers, both today and tomorrow.
“It is a market that helps drive the full benefits of the energy transition, with greater system efficiency helping to lower overall costs.
“It is a market where competition constrains prices, drives efficiency and delivers the range of services and products that consumers need. And it is a market where disengaged consumers are also able to share in the benefits of competition.”
The response provides a summary of the evidence and sets out conclusions on what changes need to be considered further.
The consultation asked for views on whether regulatory arrangements need to change considering the significant technological changes impacting the sector.
Questions were also asked regarding barriers to innovation, default supply arrangements for consumers that do not engage in the market, and how to protect consumers regardless of how they access their energy supply.
The regulator suggests barriers to innovation including access to data, the complexity of industry codes and the entrenched role of traditional suppliers within the energy system are making it difficult for market players to bring “beneficial and potentially disruptive, propositions to market”.
Stakeholders highlighted change was needed in the regulatory sector due to several issues including aspects of the supplier hub which are hampering the realisation of the benefits of innovation in technology and business models.
For example, data was highlighted as being likely to be a “key enabler” of innovation in the future market, as it could enable new products and services that not only challenge the primary relationship suppliers currently have with consumers, but also allow system costs to be better managed.
Yet the data currently available to suppliers can be fragmented and is of poor quality making it hard for innovators to develop proposals that could driver greater competition and reduce inefficiency.
As well as significant innovation opportunities materialising in the electricity supply market, the regulator says it is likely that “fundamental reforms would also need to be considered for gas supply”.
Stakeholders will be given more details on how Ofgem will develop its conclusions over the summer and autumn.
The regulator added it will be engaging with the government to link in with other policy initiatives where appropriate.