Should we rethink the energy retail market?

Nesta, the UK’s innovation charity, has recently launched a report which looks at the role of energy suppliers in delivering net zero. The report questions whether we need to reform the market to get us to net zero at the pace and scale that’s required.

How does the current energy retail market work?

At the moment, energy retailers provide the interface for almost all consumer interaction with the energy market.

A successful net zero transition will mean much more interaction – for example, we may see a greater role for consumers to use batteries and storage to smooth out electricity supply and demand, or we may see more households opting to dial their electricity usage up or down in response to price changes so they can save money on their bills. 

The problem with the current market structure 

There’s a big question as to whether energy suppliers can successfully support the transition to net zero. 

Although it’s hard for most people to believe  with bills still historically high – selling energy isn’t a high margin business. The problem with low margins is that they create low incentives for investment, and therefore low incentives for innovation – something we think will be key during the net zero transition.

Despite these low margins, and heavy market regulation, many consumers still don’t have access to affordable energy because the rules make it difficult for new innovative companies to enter the market and offer alternatives.

In addition, there are limited incentives for retailers to help customers reduce their energy demand, insulate their homes or adopt low-carbon technologies. Pricing structures, and the way that government green levies are weighted towards electricity bills, means there’s little financial reward for consumers to opt for low-carbon electric options either. 

The value of reform

Any fundamental restructure to a market that affects every British household comes with significant cost and risks (and would require a hefty amount of political capital to push through). But seriously engaging with the question of how the market could look – and if a different structure would better serve households as well as getting us to net zero more quickly and efficiently – is surely worthwhile. 

What are the solutions?

There are broadly three different directions you could go:

  • The easiest and least risky option would be to stick with the status quo. This would mean retaining the current supplier hub model and delivering on reforms which are already in progress. Retailers argue that while innovation in the sector has been a long time coming, it’s now taking root, driven by challengers like Octopus (now the UK’s largest electricity provider), with legacy suppliers starting to follow suit.

The risk of this approach is that it won’t get us to net zero fast enough since the incentives for suppliers to support energy efficiency and install low-carbon technologies will remain weak.

  • Alternatively, we could focus on reforming the competitive market so it better supports innovation. In practice, this could mean loosening regulation to encourage new market entrants, sharpening incentives to increase competition, or opening up the market up to new types of business models.
  • Finally, you could argue for more radical changes that flip the current market model on its head. Instead of relying on innovation, could you deliver decarbonisation through area-based approaches – for example, giving responsibility to regional bodies to supply energy but also decarbonise households.

Read Nesta’s report The future of energy retail to explore these solutions in much more detail and think about what your preferred option might be.

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