Supporting retail market innovation for net zero | Ofgem

Ofgem recently published its Decarbonisation Action Plan. This set out our priorities and the steps we will take as a regulator to help achieve ‘net zero’ at lowest cost. One of those priorities is to accelerate innovation to create products and services that help consumers use energy in ways that supports decarbonisation.

Empowered consumers will be central to fair and effective decarbonisation. Ultimately, a diverse range of products and services need to be made available to consumers, empowering them to change the way they use energy in order to meet and benefit from the net zero challenge.

We’ve been speaking to innovators and investors to understand their experiences and realise we need to continue to adapt our approach to regulation to better enable innovative consumer offerings. This means Ofgem being more proactive and using our existing powers to provide the flexibility innovators need to bring new products and services to market. 

So, what can you expect over the coming months? Our plans centre around: 

Enabling innovators to test and trial

Testing new ideas allows us and businesses to understand how consumers actually react and respond to new products and services. Yet there are times when it is not always clear whether an idea is possible or not under existing rules and regulations. 

Our Sandbox service was launched in 2017 to experiment with ways of mitigating barriers when innovative plans didn’t readily fit with the rulebook. This includes the BP and Tonik trial of a new platform for trading customers’ small scale exports with other consumers. We now have a much better handle on what kinds of support innovators are looking for, and are expanding our Innovation Sandbox Service. 

As part of this, we are widening the scope of rules that can be relaxed for innovative trials beyond the Ofgem rulebook to cover some of the main industry codes. This includes the rules for electricity balancing and settlement (BSC), rules around the connection to, and use of, the electricity distribution networks (DCUSA), and code requirements relating to retail energy activities (REC).

We also want to better use derogations from the rulebook so that experimentation, trialling and testing can flourish. This means taking a more permissive approach and we will consult shortly on expanding the number of rules that we can provide relief from. 

Bringing innovative ideas to market

Many innovators have told us that they want to specialise in the products and services they bring to market, focusing on offerings within their expertise. This could include local or regional suppliers, social enterprises focused on vulnerable customers, or those delivering flexibility solutions. To help with this, we’ll be providing greater clarity on when we might grant restricted supply licences – that enable a business to focus on particular geographies or types of premises. We’ll say more on restricted licences and the potential for greater use of derogations to deliver innovative ideas shortly.

Innovators often approach us with ideas that blur the boundaries of the traditional definitions of generation, distribution and supply. These activities typically aren’t prescribed for in law which can undermine the confidence of innovators, investors, and consumers. Many of you think that we should be able to confirm whether a type of activity is permissible (as well as what isn’t), and we agree. This means we’ll confirm to innovators that what they’re trying to do is allowable within today’s regulatory framework, without going as far as endorsing particular business models.

Helping navigate complexity

We’re regularly reminded of just how complex the energy sector can be and we want to help the industry and new entrants navigate this complexity effectively.

Today, we’re outlining our view of how Ofgem and government reforms will help improve the environment for innovation and competition in the retail energy market by 2024. This is accompanied by refreshed guidance on what you need to know, and what you need to do, if you want to sell electricity to consumers. 

We’ll provide more guidance in other areas as we go forward – including on how longer-term contracts fit with the current rules. And we stand ready to amend or remove rules where these are getting in the way of good outcomes for consumers. We want to work with innovators and industry to help drive innovation so welcome your views and input. 

Get in touch

If you want to know more or register your interest in the Innovation Sandbox Service, contact the team at [email protected].