Future supply market arrangements call for evidence response—Reforming the ‘supplier hub’ model

Energy analysis: A call for evidence on the regulatory framework for gas and electricity retail has shown that most stakeholders want reform in the sector. Matthew Collinson, Legal and Regulatory Director of Energetics, analyses the responses to the call for evidence on future supply market arrangements.

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In brief, what is the background to this response?

The regulatory framework for gas and electricity retail is built (in part) on the 'supplier hub' principle. This means that gas and electricity suppliers - the entities that end customers contract with for their gas and electricity - are the only point at which end-customers interface with the energy system. Everything else is flowed back to other industry participants through Ofgem licences and industry codes. Industry codes are multilateral agreements that underpin the legal, commercial and operational interactions of industry participants.

Evidence gathered by Ofgem through its 'Innovation Link' suggests that this arrangement may be inhibiting innovation in the sector. The 'Innovation Link' is promoted as a 'one stop shop' offering support on energy regulation to businesses looking to introduce innovative or significantly different propositions to the energy sector.

Ofgem was also no doubt influenced by the conclusions of the Competition and Markets Authority's Energy Market Investigation to the effect that the volume and complexity of retail investigation is a barrier to entry and growth.

Ofgem therefore issued a call for evidence (on 14 November 2017) asking:

  • whether the current supplier hub arrangements are fit for purpose
  • where any regulatory change should be focused and why
  • how any changes to the supplier hub model could best align with and ensure wider market activities continue to be performed efficiently

Ofgem published a response to this call for evidence on 31 July 2018.

What are Ofgem's key initial conclusions?

Most stakeholders agreed that the 'supplier hub' model needs to be reviewed, although Ofgem notes that the feedback it received was 'high-level and pointed to broad issues' rather than specific changes. The themes were that:

  • there is growing potential for innovation in technology and business models to transform the market and improve the consumer experience, but aspects of the supplier hub model are hampering the realisation of benefits
  • the 'supplier hub' results in many roles and responsibilities falling onto Ofgem-licensed suppliers, which means that innovators need a supply licence in order to participate in this space
  • data currently available to licensed suppliers can be difficult for other market participants to access, is often of poor quality, and is fragmented across the sector
  • the consumer-protection framework is designed around the 'suppier hub' meaning that it must evolve to deal with new types of third party intermediaries and services
  • Ofgem's ove towards principles-based regulation, rather than prescriptive rules, should continue

Ofgem agreed that the 'upplier hub'model does need to be reviewed, but that this will likely take place iteratively in a number of phases.

What are the next steps and timings thereof?

Ofgem plans to consult further over the remainder of summer, and autumn, in relation to more detailed next steps and timings.

What are the indications on direction of travel and how in practice would we expect changes to be implemented?

Ofgem intends to review the 'spplier hub'arrangements in iterative phases alongside other market-redesign initiatives, such as faster switching and the introduction of the Retail Energy Code. But beyond a desire to address the concerns raised by Ofgem (and reinforced by stakeholders), there is no clear indication of what reform might look like.

That said, from a practical perspective the parts of the regulatory framework that are in Ofgem' gift (in one way or another) are the supply (and other) licence conditions, and the industry codes that flow from them. This is where the 'supplier hub' principle is implemented in practice, and so any reform can be expected to take place through changes to those documents.

 

 

Filed Under: Energy

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