In our previous blog, we explained how today's energy retail market isn’t set up to deliver the transition to net zero and laid out why we think it will struggle to do so in its current design.

Now we want look at the ways the market could be reshaped to help decarbonise the country's home heating more quickly.

At the moment households buy their energy from suppliers. The suppliers, in turn, buy the energy from generators, before paying networks and systems operators to ‘transport’ it to customers’ homes.

This is known as the ‘supplier hub’ because the energy supplier is the main point of contact when households engage with the energy market.

But in our latest research, we explored scenarios that envisioned how the energy market of the future could be restructured along different lines to help us reach net zero.

The easiest and least risky option for the government and regulators would be retaining the current supplier hub model and delivering on reforms which are already in progress. For consumers, this would likely result in sharper differences in price for time-of-use tariffs, and we may continue to see innovation in energy services such as heat pump installations and demand management.

The risk of this approach is that it won’t get us to net zero fast enough since the incentives for suppliers to support energy efficiency and install low carbon technologies will remain weak.

The first alternative would feel similar to what customers are used to, retaining the current supplier hub model but opening it up to new types of suppliers. We might start to see suppliers offering new types of customer relationships. For example, abolishing the Universal Supply obligation (requiring that suppliers serve any domestic consumer who asks) would open the door to specialised or regional suppliers who could provide specific services to a smaller category of customers.

This could increase competition, reduce prices and prompt more decarbonisation services through market-led innovation.

In this scenario, a national supplier would be introduced to offer basic, ‘no frills’ energy, whilst the existing energy providers could concentrate on offering more sophisticated products and services such as bespoke tariffs or ‘Energy as a Service’ business models.

For customers, this presents a meaningful change, where households could remain with the national default supplier, purchase add-ons or choose to sign-up to an entirely new energy supplier that offers them something that better meets their needs.

The national supplier would take over responsibility for universal coverage and activities such as levies, standing charges etc. whilst private providers would be freed up to offer energy flexibility packages, household alterations and low carbon technologies, shifting the competitive market into value added services which could accelerate progress towards net zero.

In addition to a default universal supplier with private add-ons, introducing ‘meter splitting’ would allow suppliers to charge different prices for different uses of electricity. This would allow households, for instance, to go to one supplier for their peak household use, and another for cheap off peak activities such as EV charging.

Though this is currently a speculative idea that would require technical innovations, the seeds of this possibility are already present, for example OVO currently bundle a specific heat pump tariff with heat pump installation, showing that the adoption of low carbon tech can be incentivised through electricity rates. This model has the potential to further increase supplier competition, leading to more innovation.

In this model, regional franchises for energy supply would be offered out to competitive tender. Suppliers, or consortia, would be invited to bid for the responsibility of serving a set of customers for a specific duration of time.

The franchisee would win a monopoly supplying energy to customers and providing additional services that could accelerate household decarbonisation in an area. This presents a fundamental change for customers, as they would no longer get a choice of energy provider.

The certainty provided by a fixed long term contract would give suppliers the security to develop meaningful long term relationships with customers - such as offering financing and other services to consumers as well as delivering community focused solutions such as street by street rollouts of low carbon technologies.

In the final future scenario, a national operator would take on responsibility for managing and growing an efficient, decarbonised electricity network and supplying energy to customers using its increased knowledge to optimise operational performance and target investments. For customers, this would look similar to the previous scenario where they do not get a choice of energy provider.

Having a single national energy provider with control over the distribution network would give a greater oversight of performance, thus maximising decarbonisation and incentivising the installation of energy efficiency measures. The operator could be publicly or privately owned. A nationalised model would provide the most straightforward way of achieving national decarbonisation goals.

All of the options above come with pros and cons, which we detail in full in The Future of Energy Retail report. We don’t have the evidence yet to conclude which is the best way forward, and there is little consensus in the industry.

But what's clear is that without a significant change in our energy markets we are unlikely to deliver the level of decarbonisation needed, at the pace required.

Do you have a preferred option? Do you have a view on what's unlikely to work? We’d love to hear from you, so please get in touch with Tom Leach to share any thoughts and feedback.