Reinventing Retail Energy: Making the energy retail market fit for the next generation
Energy | 28/09/2023

Reinventing Retail Energy: Making the energy retail market fit for the next generation


Former Prime Minister Margaret Thatcher’s vision for privatisation was to ensure: “the state’s power is reduced, and the power of the people enhanced”. While some market-based reforms from her premiership have given customers greater flexibility, control, and choice, it is hard to see how privatisation of retail energy has resulted in anything other than a broken and illusory market.

The energy crisis in 2021 brutally exposed an industry unable to safeguard itself or its customers from the impacts of Russia’s invasion of Ukraine and the subsequent surge in global wholesale gas prices. In the UK, 31 suppliers went bankrupt, and the Government was forced to intervene with a state-sponsored rescue package. The cost of the £37bn Energy Price Guarantee, introduced in September 2022, will ultimately fall on taxpayers. A levy has already been imposed on our bills to claw back the £2.7bn cost of mass market exit. This crisis revealed a market in urgent need of reform.

A market designed to encourage consumer switching and new market entry has ended with mass market exits, fewer customers switching suppliers than ever before and trust between consumers and the industry at an all-time low. We believe that structural issues in the system have in large part contributed to its current malaise and that these cannot be allowed to continue into emerging retail energy markets.

Currently, suppliers are limited to competing only on costs: creating a system where the only incentive is to offer tariffs as low as possible. This has led to neither clarity nor transparency in pricing while incentivising some suppliers to take financial risks that left consumers dangerously exposed in the energy crisis. At the same time, the Ofgem-regulated licence system for suppliers creates a rigid system which stifles innovation and does little for customer service, choice, or quality.

Consumer energy bills set to shift heavily towards electricity over the next 20 years

Over the next 20 years, consumer energy bills will shift from 60% gas and 40% electricity to being heavily biased towards electricity. The future household bill will be made up of today’s load – including lighting and appliances like kettles and cookers – as well as all home heating and electric cars. This is a once in a generation shift in household consumption. It provides an opportunity for change: change that could restore power to the consumer, drive innovation, improve customer service and help cut bills.

We need new market models for this change, not to build on the crumbling foundations of the old. This would not be a one-size fits all approach – protections can and must remain in place for vulnerable homeowners and Ofgem has much work to do to make the existing system fit for purpose. But Ofgem and the Government need to accept that the attempts to make the energy retail market work over the last two decades - by judging it purely on the basis of how many consumers switch suppliers - has failed. Competition is not just a process of switching but a process of rivalry between companies. Innovation must be in the driving seat and companies must be rewarded for delivering what consumers want.

The ongoing roll out of smart meters and Ofgem’s commitment to open access data creates new possibilities for any consumer who wants to regain real control over their bills. We propose five reforms necessary to create new business models for this emerging new market.

These are the five reforms on which the new assets market should be built. A market where consumers have the knowledge and flexibility to understand and manage their own energy use, to cut bills and shop around for the best deals on offer. In the same way as mobile phone contracts are built around the individual needs of the user, new asset bills can be created to reflect the lifestyles, work patterns and values of consumers.

The current market is little more than an illusion, where consumers pick up the bill for market failure but enjoy few rewards, and where customers face a household monopoly on their bills and a blizzard of ever-changing tariffs. A new assets energy sector, able to function free from the volatile fossil fuel market, could ensure current suppliers and new firms can deliver high-quality, innovative products to consumers keen to shop around while maintaining necessary protections for the most vulnerable.

We cannot build a new market on the failures of the old – it is time to restore power to where it really belongs: with the people.

Download the full report, here.

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