Not that one wants a crisis, but these last weeks have provided an unwelcome smouldering platform that I do hope accelerates a fundamental, root and branch review of the retail market. So, I really welcome Ofgem and the Department for Business, Energy & Industrial Strategy (BEIS)’s statements around revisiting the retail market and conducting a review of what the future of retail needs to look like and deliver to consumers.
To be frank any market design that was shaped in the 1990s must by now be very out of date. To compound this, we have the necessity to deploy millions of decarbonised assets in people’s homes significantly changing the “energy” sector from one of just a commodity to one of equipment too.
The principle that we have been guided by throughout our work at ReCosting Energy has been that the whole system needs to be “re-engineered” from the plug (as such) not the power station. Consumers front and centre.
The current system is regulated and managed in silos, not as a normal supply chain. However, if we get the right incentives at the consumer end, the rest should and must be driven by user outcomes not supplier inputs. Look at the food sector which went through a similar transformation, the mobile sector which is now dominated by exciting phones and fewer networks, and the world of logistics which is driven by the “last mile”.
Today just consider what the consumer takes on in terms of risk.
We need to focus on outcomes:
- Deliver millions of decarbonised assets in people’s homes who cannot afford the up front costs – moving from commodities to services
- Less is more – we should be driving business models that optimise the utility of the commodity, reducing the amount and cost to consumers, and rewarding quality of outcome, not quantity of input
- Risk appropriately allocated – it is a crazy system where consumers take on so much badly managed risk that they have no agency to mitigate or avoid
- Cost and value appropriately allocated. Some consumers are using a lot more of the system’s capacity while poorer families without snazzy assets have to pay for their rich neighbour’s costs. In addition consumers are being short changed for their actions as we don’t account for the whole system value of their “work”.
- Redefine fairness by being much clearer about what is the “essential” energy service. This is a smouldering platform as inequalities will grow with the greater divergence of different level of consumption by users of the system
This is why the system needs a total rethink and by learning from other sectors there are some key opportunities for reform.
Service propositions are desperately needed in the sector, offering tailored products and outcomes to consumers, with risk sitting with the retailer, enabling deployment of decarbonisation assets and efficiencies without the prohibitive upfront costs.
Where the motivation of the retailer is to optimise a customer’s energy use – more is most certainly not more for the service provider. We need to move to a system where risk sits with the service provider to manage costs; where the service provider is motivated to come and fix a heat pump not just leave the customer to fend for themselves; and where differentiated propositions can be tailored to the customer.
While it is technically possible to provide these under the current regime it is neither easy nor cost effective with lots of barriers that must be swept away.
Currently consumers are being short changed and not rewarded for their whole system value. This is bad for consumers but also for the whole system costs by not providing any incentives for optimising the utility and capacity of the system. Through a digital energy system these values can and should flow across the supply chain always rewarding those who are reducing the cost for all.
The essential service obligation has been a universal provision to date, as there has been a very marginal differential between customers in their required capacity (unless you are running a cannabis farm!). However, with very variable loads on the system and the significant investment required to deliver to high electricity users, we cannot smear the investment cost across those consumers who are using less capacity.
This requires decoupling the provision of an essential service and a premium service, driving down the price significantly on the essential service by capturing the fixed price of renewables, while opening up and allowing for significant innovation across the premium services.
This mirrors the broadband market or even the TV licence – getting an average but ok service – that can be topped up with much more exciting propositions.
There is always a big concern that if we put in any more requirements of suppliers we won’t get new entrants. Well, we should not have learner drivers providing an essential service in my view but there again we do make the system impenetrable too – by design or mistake, I am not sure. Digitalisation should be able to provide platforms for new businesses to tailor and shape new propositions to a wide and varied range of customer needs, access markets and value, with many more plug-and-play options rather than expensive, clunky navigation around an overly complex market place.
In this new world we will need to take a new approach to regulation. Driven by risk not process, drawing on existing regulatory frameworks from the financial services sector, mobile phone regulation, car leasing experiences and not least digital. This is the start of a merging and blurring of regulatory environments. While this will require change that is starting at Ofgem, there will need to be some vigilance over regulatory “gaps” that sit between the financial services and energy regulation. It is the buck passing between regulation that will potential be where the problems lie.
Imagine an energy system that unlocked the capital costs of all these decarbonisation assets we are going to have to invest in through affordable leasing, service or higher purchase agreements with the energy embedded into the contract. That the whole supply chain was designed for and shaped by consumers actions and needs, anticipating and adapting to their changing preferences, served by frictionless retailers rewarded for outcomes not inputs. That low energy users who didn’t have all the gizmos would not have to pay for the richest highest energy users, and where consumers could have a whole system carbon account revealing their carbon consumption.
I will continue dreaming…