Decentralised generation, smart metering, demand side response and electric vehicles all are expected to have large impacts on how energy will be used and distributed in the future. In the wake of these developments, Ofgem issued a call for consultation in November last year (LGE’s response can be found here) to seek opinions on if the current “supplier hub” model is fit for the future. After 6 months of reading through responses from stakeholders across the industry they published their response last week.
In the supplier hub model, the supplier acts as the central link for a large number of processes and for the transfer of vast amounts of information, including acting as the intermediary between generator and user, recharging of third party charges, metering and a whole host of other tasks. Suppliers operate under a licence which dictates their responsibilities and defines what they can and cannot do. As new technologies and innovations have been introduced suppliers have accommodated these within their current scope, though Ofgem has questioned whether this is and will continue to be the most fair and competitive approach.
In their call for consultation Ofgem asked four questions that can be summarised to the below:
- What are views on consumer access, competitiveness and engagement with energy services, how well are they protected and what barriers prevent them from engaging?
- What are the most significant barriers to disruptive new business models operating in the retail market
- What other supply market arrangements would provide a better default for disengaged consumers, whereby they are protected adequately and are able to access the benefits of competition?
- How big an issue is it that Ofgem do not currently regulate intermediaries in the energy market? Is there a case for doing so?
In their response Ofgem concluded that given the changes occurring, the supplier model may not be fit for purpose for consumers in the long term and that simply adapting it is unlikely to be sufficient for future developments.
In their consultation response, the regulator highlighted a number of issues with the current model that they believe need attention. The first was concerned with the centrality of the supplier in all processes and the fact that new entrants with innovative ideas are forced to partner with suppliers in order to access the market. Ofgem also reported that responses to the consultation expressed concern that any alternative entities fulfilling the supplier roles would still face the same responsibilities, and therefore by definition the supply licence will need revisiting if the blocking innovative business models was to be avoided. This is something LGE commented on in its response to the consultation. It was also noted, that in a similar vein, that firms offering energy services but not engaging with customers under the supplier-hub model cannot easily access the mechanisms that allow them to pass through underlying costs to consumers and that this could be preventing higher levels of innovation and competition that benefits consumers.
If services are decentralised from suppliers Ofgem have agreed with many responses, including LGE, that this will have to correspond to an increased regulation for TPI’s and other intermediaries who might assume some of these roles. As a first step Ofgem have said they are proposing to extend current government work to extend the policing powers of the regulators, including the ability to impose fines, in this Ofgem will continue to utilise a mechanism of principals rather than strict regulations. Also worth of note is that Ofgem are proposing an activity-based approach to regulation, rather than defining specific entities which would result in these entities carrying out tasks which they were authorised to do rather than what “label” was attributed to them.
The key to a number of developing technologies is access to data in their response Ofgem have committed to developing methods for consumers, their authorised parties and stakeholders to increase access to their data, reducing the complexities of code and allow new entrants into the market to innovate. Including in the consultation response letter were Ofgem’s plans to provide more detail in this area over the next few months on the near-term actions.
Ofgem’s response, while at this stage understandably high level and suitably vague is encouraging. The regulator appears to agree with LGE and the vast majority of other responders that new developments will render the current model out dated, and that replacement, not adaptation is necessary. However, Ofgem also acknowledge that this will be the largest restructure of the sector since privatisation and as such will take a significant amount of time to decide on the best course of action and to implement. What is also reassuring is Ofgem’s acknowledgement that more regulation, particularly of intermediaries will be required, and that they are open to principals rather than strict regulations. Overall, the response sounds positive at this early stage and developments will be interesting to see how much progress is made – and how fast.