Stuck in the Sandbox: Unlocking greater innovation in the energy retail market

Stuck in the Sandbox: Unlocking greater innovation in the energy retail market 1.04 MB

CEPA report: Enabling energy market innovation 1.99 MB

Public First report: Innovation in the energy retail market - qualitative insights 693 KB

With energy resilience becoming increasingly critical to protecting consumers from price shocks, innovation plays a vital role in helping to reduce costs, improve consumer outcomes, and support the growing electrification of the energy system. To realise these benefits, the energy retail market must enable people to benefit from cleaner energy and support the adoption of low-carbon technologies, like EVs and heat pumps. Ofgem and government have considered a range of reforms to the retail market over the last decade, but little change has followed. Energy has not kept pace with consumers or with other sectors, like banking. Work on enabling a wider range of energy supply business models has stalled, and Ofgem’s shift towards more innovation-friendly, outcomes-based regulation is progressing slowly. Over the same period, the market has become both more resilient and more concentrated. Developments such as Market-wide Half-Hourly Settlement (MHHS) and the continued rollout of smart metering provide important foundations for innovation—but under current rules, their full benefits are unlikely to be realised. There are emerging risks that the rules for flexibility services and energy supply are incoherent and increase regulatory friction. More broadly, progress has been constrained by the absence of a long-term vision for the energy retail market. This vision must balance the needs of all consumers. A key finding of our research is that much of the current discourse around innovation fails to reflect the reality for those who don’t want to engage with the market or feel that they can’t. This is evident in relation to flexibility, where consumers often face constraints or lack sufficient incentives to shift their consumption. As such, price protection for default tariffs remains vital to ensure fairness—though there is scope to improve how this is delivered to ensure it keeps pace with a changing market. However, we also identified that consumers are open to innovation, particularly where it is simple to engage with and where benefits are clear and tangible. Cost savings are the primary driver for consumers when using new products, enabled by expectations of fairness and strong protections. Consumers want the confidence that appropriate safeguards are in place, should a service prove unsuitable over time.Supplier views echo some of the sentiment from consumers. They recognise that innovation is rarely a priority for consumers in its own right and that innovation must deliver meaningful savings. Firms report being constrained by prescriptive regulation—and a market that is reactive to changes in regulation and wholesale markets—rather than being able to plan for the longer term. Recognising the urgent need for more fundamental reform, this research explored 6 policy options across 2 key aspects of the retail market: the Universal Service Obligation (USO) and the price cap. Reforms across both areas offers an opportunity to support innovation—whether through enabling greater specialisation in energy supply, supporting the pricing structures needed for MHHS, or the wider adoption of flexibility and low-carbon technologies. Economic modelling showed that all six reform options could reduce retail electricity prices, though their impacts varied considerably. The reforms produced different outcomes in relation to sustainable supplier margins and received varying levels of support from consumers and firms. We also considered the need to reform Ofgem’s regulatory approach and align different areas as new services like flexibility are regulated for the first time. Bringing together the findings from our economic analysis and research with consumers and firms, this report sets out a package of recommendations that drive good consumer outcomes, minimise unnecessary market risks, and create the conditions needed to support a more innovative market.