Changing actor dynamics and emerging value propositions in the UK electricity retail market
Published: January 2019
Recognising the pace and scale of change in consumer offerings in the energy sector the IGov project have updated the review of non-traditional business models (NTBMs) which Ofgem undertook in 2015. This involved mapping the current energy system actors based on a review and classification of domestic and non-domestic business models, particularly in relation to electricity supply (undertaken by Jeffrey Hardy). We then analysed these developments in relation to domestic supply and reviewed potential governance implications (undertaken by Jess Britton). Both reports and the accompanying data file are available to download.
The key findings of the analysis are that there has been increased competition in the UK domestic electricity retail market in recent years, both in terms of the number of suppliers and tariff diversification. Despite this barriers to market entry and expansion continue to exist with simplified routes to market entry proving to be very significant. There was a particularly high level of supplier exits in 2018, mainly due to high levels of competition, cost volatility and policy uncertainty. This has driven increased regulatory focus on Supplier of Last Resort (SoLR) arrangements and licensing.
The emerging value propositions of domestic electricity suppliers map well onto the three themes outlined in the Ofgem NTBM discussion paper – local services, bundled services and customer participation. Additionally segmentation analysis of the emerging business models revealed seven sub-clusters of value propositions – local energy; EV enablers; electrifiers; flexibility unlockers; bundlers; ESCOs; and segmenters. While the range and number of value propositions has increased since 2015, particularly in relation to local energy and electric vehicles, progress in relation to flexibility value propositions is slow. There is however increased activity related to partnerships between (medium and large) suppliers and providers of ‘behind-the-meter’ devices such as home energy management systems and electric vehicle charging.
The key argument of IGov is that governance (policies, institutions, regulations, market design, network rules and incentives, retail policy) enables, undermines or channels innovation. This report provides a snapshot of recent changes in market offerings and analyses the evolution of value propositions. Whilst a range of new value propositions, aligned with higher levels of consumer participation, more localised energy systems and bundled energy services, are starting to emerge the core business model of the domestic retail market continues to be based on a volume commodity basis. Current and imminent reforms will be critical in shaping the ability of emerging value propositions to establish and the coordination of these reforms is required across supply, flexibility and networks.