I rarely get a good feeling when reading OFGEM consultations in relation to energy retail markets- but their latest is an exception. The usual- SMART metering, price caps, faster switching, half hourly settlement, all represent cost and aggravation for those operating in the market, and ultimately contribute to the delay and ability to focus on untapped innovation when value is leaching from business models. I won’t deny that SMART metering and half hourly settlement are essential enablers to real transformation, but putting all the burden of delivery on suppliers’ stifles their abilities to innovate.
Anyway, back to my good feeling. OFGEM’s consultation launched last week on ‘supporting retail innovation’ is trying to do the right thing in unlocking new business models and customer benefits. Without ripping up the market rule book, there appears to be definite intent to lower some of the barriers that makes innovation in the market so hard. The three big levers are:
1) Removing the obligation, on a case by case basis, to provide a universal offer. Licensed suppliers today have always had this obligation, which means that they need to be able to provide a contract for any customer, in any location.
2) Allowing for suppliers to focus on specific types of premise or geography.
3) Permitting an offer which does not support ‘all payment types’
There are some defined, but not unreasonable, hurdles proposed in order for suppliers to obtain the necessary license derogations. And the proof will be in the pudding- Agreeing to non standard models will be a big cultural step for OFGEM. However, what this means for the market, is that there is finally some latitude to create something really different from the traditional model.
If a derogation is obtained, the first benefit is that the time and costs associated with market entry will be materially lower than to date. The universal offer and payment obligations add significant time and cost to any start up.
Secondly, and probably most importantly, a supplier can legitimately start a business by focusing on the end game. To date, given the complexity of market entry, new entrants typically build the supply arm first with the objective of building the innovative products and market differentiation once core supply has been launched. As has been proven time and again, many suppliers never get past the first bit. In new world, suppliers should be able to launch into the market with a non supply centric focus. Supply will be able to be included as an add on to a smart home, electric vehicle, energy efficient or local community proposition, to name but a few. In a world where supply margins have been battered, and additional revenue streams are essential for sustainability, there is finally real scope for differentiation.
The ability to focus business models and efforts on a differentiated core proposition will also give new (and existing) suppliers a real chance of succeeding. In today’s market, the complexities imposed by the License, whilst well intended, drives complex and costly operations and compliance obligations. For leadership and management there is often not the bandwidth to really drive innovation at scale, whilst managing high risk, complex (and often cash strapped) businesses. Much of this complexity is not going away, but at least limiting its scope will give some headroom for business development.
What does it mean for consumers? OFGEM is clearly (and rightly) worried for the vulnerable and fuel poor. However, I have a suspicion that some of the best innovations will benefit these customers most. For others, real choice will be put on the table to enable consumer behaviour to change in favour of a zero carbon home. And for the majority of consumers there will continue to be no change. They will still take their energy from their traditional supplier.
After a period of supplier failure, consolidation and low/no profitability in the energy retail sector- this change has the potential to unlock new investment and innovation. Good for consumers and good for the market.
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