Energy retail strategy: A sector wishlist

In last year’s energy white paper, the Department for Business, Energy and Industrial Strategy (BEIS) outlined some of its plans for the energy retail sector over the next few years. Included in this were proposals to introduce opt-in/opt-out switching as a way of tackling the loyalty penalty.

The forthcoming retail strategy, believed to be imminent, will set out the government’s vision for the market and how it can take customers on their net zero journey. When approached by Utility Week, a spokesperson for BEIS said it will be published “in due course”.

Utility Week speaks to three industry experts and asks for their views on what they would like to see in the retail strategy, as well as their thoughts on a separate consultation on the proposed switching arrangements.

Rachel Fletcher, director of regulation and economics, Octopus Energy

For Fletcher, a mix of the right technologies and lighter-touch regulation is key to enabling net zero.

The former Ofwat chief executive also wants to see enhanced customer protections to give consumers the confidence to take up the tariffs and services that will be central to the transition.

She says: “It’d be great to see government use the retail strategy document to set out a really clear vision of a zero-carbon future with smart-enabled customers sitting at the heart of the energy system, providing and being rewarded for demand side response.

“All the research shows that we will achieve net zero much more cheaply – allowing everyone to benefit – if we use technology to help customers use green power when it is plentiful and cheap and to enable them to turn down or provide stored power to the grid when there are network constraints or  when renewable output is low.

“Look at how EVs are beginning to take off and we are not far off getting electric heating rolled out at an increased pace. The scope for shiftable demand is only growing and it would be great to see government taking bold steps to tap into the potential this provides to avoid investment in network reinforcement and peak generation in our transition to net zero.”

Fletcher recognises that it will not just be energy retailers that will play a key role in the transition, but also those providing various services. As such, the regulatory landscape must allow innovation and not be too restrictive.

She continues: “I’d like to see the BEIS retail strategy explore the key enablers to achieve that vision of a smart demand future. That might involve removing regulations that are getting in the way of innovation and challenger businesses, shifting the regulatory focus away from today’s retail agenda and on to building the conditions we need for a smart future.

“We will need customer protections to give people confidence to take up smart tariffs and energy services. What does that suite of protection look like and who does it apply to? Clearly it’s not just energy retailers but aggregators and those selling services and equipment as well, for example.

“We need enablers so that the smart future is fair, and not the preserve of the middle classes. The strategy needs to consider the structure of subsidies so more households can afford smart low carbon technologies and to tackle blockers, like the broadband infrastructure needed to reduce the number of digitally excluded and the position of people in private rented accommodation.

“Critically, I’d like to see a retail strategy for a smart future making up one part of a coherent whole system reform.  As well as enablers and protections at the retail end we need the removal of barriers to flexibility in terms of how the balancing market works, how policy costs are recovered and how network charges are structured.”

Ultimately, Fletcher’s dream strategy would signal that the goal of a smart, flexible, green future is going to drive wider priorities for overall energy system reform.

“Overall, I’d like to see the strategy document start us on a pathway so energy retailers and others can compete vigorously with each other, putting the tools in customers’ hands to be part of that cheap green future with demand side flexibility at the centre of it,” she adds.

Opt-in/out switching

Lastly, the energy white paper made much of potential opt-in/opt-out switching arrangements as part of the government’s bid to tackle the loyalty penalty.

Fletcher believes there may be better ways of helping customers in this area and looks to the recent decision by the Financial Conduct Authority (FCA) to ensure insurance customers are quoted prices that are no more than they would be offered as a new customer through the same channel as a good example.

“It’s really important government continues to restrict the scope for loyalty penalty tactics by companies. But there are light touch ways of doing that, certainly lighter touch ways than an opt out collective switch regime. There should be a serious look, for example, at the new arrangements the FCA is introducing to address the loyalty penalty in the car and home insurance markets.

“It might also be worth removing energy contract cancellation fees to encourage customer engagement. I think there are some things for today’s market that could help boost customer confidence, help deliver cheaper energy to more customers right now, but we are concerned that particularly an opt out collective switch idea could put customers to sleep at the very point at which many can start being more active in providing demand side flexibility for an affordable green energy transition.”

Alex Meagher, head of regulation and sustainability, Bulb

Like Fletcher, Meagher also sees the benefits of looking to the car and home insurance sector as a good example of clamping down on the loyalty penalty.

She says: “We’re hoping to see proposals in the energy retail strategy that end the loyalty tax in the energy industry for good.

“The FCA recently banned the loyalty tax in the insurance industry. It’s time to stamp it out in energy too. We’ve called for changes to stop energy companies penalising loyal customers, with millions of people paying over the odds every year.

“You’d be shocked if your local coffee shop started charging you more because you’re a regular – it should be no different with energy companies. Now there’s a strong precedent to end the loyalty tax and make energy simpler and fairer for everyone.

“We think the government should look to the FCA’s intervention and bring in measures to stop new customers paying less than loyal customers.

“Everyone will need to play their part in getting to net zero and so it’s important to give consumers a choice beyond price, looking at green tariffs, customer service and technology to help customers manage and reduce their energy use.

“Suppliers shouldn’t be allowed to ‘tease and squeeze’ or have a loyalty tax – energy tariffs should be clear and simple to help people make choices, and suppliers shouldn’t be allowed to offer cheap, unsustainable teaser deals.”

 Daniel Alchin, deputy director, Energy UK

Alchin tells Utility Week that retail was “one of the least developed areas” of the white paper. As such, he welcomes the prospect of the retail strategy being published.

“There are five big questions I’d most like the strategy to address. First, what are the outcomes that BEIS and the government are driving for and what are the trade-offs between those different outcomes, how are we clear about those?

“The long-term financeability of the sector is another big question in my mind. How do we get the investment needed to innovate and drive the transition to net zero? Do we, for example, have the right incentives and charging arrangements to encourage innovation.

“Third, what is the correct regulatory framework? Is the current framework fit for that purpose? BEIS touched briefly on this in the white paper around things like TPI (Third Party Intermediaries) regulation, but what is the regulatory framework that is going to allow us to innovate and deliver the services and products customers will want and need in the future?

“The final two for me are the role of customers in achieving net zero, what is the messaging, what are the plans, what is the engagement strategy and then what are the responsibilities and where do they lie in supporting vulnerable customers?”

Alchin also gave his views on the government’s proposals to introduce opt-in/opt-out switching in a bid to tackle the loyalty penalty. He says the suggestion has not been popular with the sector.

“It’s fair to say that it’s not a popular policy proposal. When they set them out, BEIS said they were looking to try and achieve three main goals; address concerns around the loyalty penalty, drive increased competition and deliver net zero.

“Our concern is that we’re not necessarily convinced the proposal is the right means or will be effective in meeting those three goals, and may not be in best interest of the market. First thing to note is for opt-in switching we are talking about it being 2024 before anything happens and for the opt-out trialling it will potentially be in 2028.

“Our overarching concern is it’s predicated on the idea that the success or the robustness of the retail market or engagement with it is measured by switching and by switching alone. I think there’s a concern that today, let alone in 2028, that’s an outmoded way of looking at these questions and may be an unhelpful way of looking at it when you think about the net-zero journey we are going to have to go on with customers.”