Do 'supplier hub' market rules need reform?

Dermot Nolan

Ofgem CEO
14th November 2017
Areas covered:
Corporate
light bulbs
If you follow the energy sector closely you will know that price caps have dominated the headlines recently. Last month I warned suppliers not to resist changes to make the market work better for all consumers. My theme was ‘change is coming’. This relates just as much to the price caps as it does to new entrants and new technologies that threaten the dominant position that large suppliers still enjoy.
 

Since privatisation in the 1990s the energy market has revolved around suppliers. They buy energy in wholesale markets and sell it to customers. They ‘own’ the relationship with customers through billing, metering and managing complaints. This ‘supplier hub’ model has reinforced the dominance enjoyed by large suppliers and we think that it has stifled competition in the retail market. This is one of the reasons why so many households remain on poor value deals.

A smarter system

However, as the energy system becomes smarter and more flexible, there is now an alternative to this approach. We are starting to see more companies with new business models wanting to enter the market. This is not to say that businesses like Paypal are about to start selling energy deals, but there are some exciting new developments.

These include peer-to-peer trading of energy. Just as Paypal offers payment platforms without users going through a bank, energy trading platforms could allow consumers to buy power directly from local generators or even their neighbours without going through a supplier. Or in the future, as consumers adopt electric vehicles, the energy bought and sold could be stored in the batteries of these vehicles.

These sorts of schemes and other business models could make the role of conventional suppliers as the ‘middleman’ between customers and the energy system less relevant - or even redundant. However, the current regulatory framework is designed for energy to be traded with transactions settled centrally, and not for decentralised, local or peer-to-peer energy markets.

Today’s energy market arrangements are geared towards licensed energy suppliers being the sole supplier of energy to customers and complying with a complex set of rules which underpin the energy system.

For example, the balancing and settlement code of practice obliges suppliers and generators to match supply with demand and to settle energy transactions. Only a licensed supplier can manage this on behalf of their customers. New entrants must either obtain a supply licence and agree to meet such requirements or enter into a contract with a licensed supplier to manage the requirements on their behalf. This creates a barrier for new entrants wishing to offer consumers peer-to-peer trading opportunities.

The future market

The energy market rules also do not permit customers to have more than one supplier. However, in the future, customers may be buying energy from a variety of sources and selling back what they do not need to various companies. Through our Innovation Link service we have been helping a range of businesses with advice on regulation over the past 10 months. They include those that want to offer peer-to-peer trading, and there is already evidence that barriers such as these have forced them to scale back their plans.

If we want to see a more competitive market with innovative businesses offering customers more choice, then we need to determine whether the current regulatory framework could be preventing them from entering the market.

We want your views

Today we are asking for views on this and we will set out next steps in the spring. If we need to make major changes to regulation to have a more competitive market in the future then we will. We may be able to make some changes more quickly, however fundamental reforms will take time to deliver. Therefore, for now the pressure remains on suppliers to embrace change, support the plans for price caps, and help us improve the market for today’s customers.