Ofgem proposes ‘geographic licences’ to support innovation

Ofgem is proposing to adapt regulatory requirements to enable more “experimentation and innovation” in the energy retail market.

A consultation has been issued on proposed changes to supply licence conditions relating to derogations and to granting supply licences for specific geographic areas and for premises types.

The energy regulator said that while the energy sector rulebook sets high standards, not all rules can be written with foresight of new technologies or business models. It added that where a company wants to try something novel or launch a new business, some rules may act as barriers.

To tackle this, Ofgem proposes to be more flexible in providing relief (derogations) from certain obligations, where this can be demonstrated “to be a way for beneficial new business models, products and services to emerge”.

Elsewhere, the regulator has powers to award supply licences that are restricted to specified geographies and/or specified types of premises. Ofgem argues this could allow licensees to specialise and offer more targeted and potentially innovative products and services.

Both tools may achieve broadly the same policy aims in some cases but Ofgem stresses there are important differences between them.

For example, a gas or electricity supply licence remains in force unless revoked in accordance with its terms, whereas a derogation could be time limited. Furthermore, not meeting the conditions of a derogation would be a breach of licence conditions, which could result in Ofgem enforcement action. Whereas supplying a customer outside of the geographic area specified in a licence would be a breach of licence terms and statutory obligations – a criminal offence.

Under the proposals suppliers would have to demonstrate why they believe they need relief from certain obligations or a restricted licence. Ofgem’s assessment would take into account a range of factors and is likely to include consideration of the extent to which the proposal:

• Would deliver something demonstrably innovative
• Would benefit consumers, for example through lower bills or better quality of service
• Would contribute to decarbonisation
• Would promote inclusivity and better social outcomes
• Demonstrates an appropriate approach to managing any risks to consumer outcomes, particularly for those in vulnerable situations
• Would have a material impact on the effectiveness of competition between market participants, and the general functioning of the energy market
• Would impact on energy system integrity

Ofgem says it expects to fully complete the process by early next year. Due to constraints on the sector caused by Covid, the regulator has given stakeholders until 12 October to respond to the consultation.