Retail Market Reform: Is the Current Model Fit for Purpose?

Introduction

The GB retail energy market has undergone dramatic change since liberalisation, with competition, innovation, and consumer choice at its heart. Yet, the events of 2021–2022—marked by unprecedented supplier failures, price volatility, and regulatory intervention—have exposed deep flaws in the current model. Policymakers, Ofgem, and industry participants are now asking: is the retail market fit for purpose, or is fundamental reform required? In this article, I’ll examine the evolution of the retail market, the challenges it faces, and the options for reform being debated in 2022.

The Evolution of the Retail Market

From Monopoly to Competition

• Pre-1990s: Regional electricity boards and British Gas held local monopolies, with regulated tariffs and universal service.
• Liberalisation: The 1990s and 2000s saw the introduction of competition, supplier choice, and the unbundling of supply from networks.
• The “Big Six” Era: Six large, vertically integrated suppliers dominated, but new entrants gradually eroded their market share.

The Proliferation of Suppliers

By 2018, over 70 suppliers were active, offering a wide range of tariffs, green products, and digital services. Switching rates rose, and price competition intensified (Ofgem: State of the Energy Market 2018).

The Current Model: Strengths and Weaknesses

Strengths

• Consumer Choice: Multiple suppliers and tariffs, including green and innovative options.
• Price Competition: Intense competition drove down prices for active switchers.
• Innovation: New entrants pioneered digital platforms, time-of-use tariffs, and customer-centric services.

Weaknesses

• Supplier Fragility: Many new entrants operated with thin capitalisation and limited risk management, leaving them vulnerable to market shocks.
• Price Cap Distortions: The default tariff cap, while protecting consumers, limited suppliers’ ability to reflect wholesale costs, contributing to failures.
• Complexity and Confusion: The proliferation of tariffs and suppliers sometimes confused consumers, with many defaulting to expensive standard variable tariffs.
• Socialisation of Failure Costs: The costs of supplier failures (SoLR, Special Administration) have been spread across all consumers.

The 2021–22 Crisis: A Turning Point

Supplier Failures

The surge in wholesale prices and the constraints of the price cap led to the collapse of over 25 suppliers, affecting millions of customers (Ofgem: Supplier Exits). The SoLR process and Bulb’s Special Administration highlighted the systemic risks of the current model.

Regulatory Response

Ofgem has tightened licensing requirements, introduced new financial resilience standards, and is reviewing the price cap methodology (Ofgem: Supplier Licensing Review).

Is the Current Model Fit for Purpose?

Key Questions

• Should competition remain the primary driver of consumer value, or is a more managed market needed?
• How can the market balance innovation and resilience?
• What is the right level of consumer protection, and how should it be delivered?
• How can the market support decarbonisation and flexibility?

Options for Reform

1. Strengthening Supplier Standards

• Capital and Hedging Requirements: Ensuring all suppliers have the financial and risk management capacity to withstand shocks.
• Ongoing Monitoring: Proactive oversight of supplier health and business models.

2. Reforming the Price Cap

• Dynamic Cap: Adjusting the cap more frequently to reflect wholesale costs.
• Targeted Protection: Focusing price protection on vulnerable consumers, while allowing more market-driven pricing for others.

3. Market Design Changes

• Default Supplier Model: Assigning customers to a default supplier (potentially regionally), with periodic auctions for the right to serve.
• Supplier of Last Resort Reform: Improving the process to reduce costs and disruption.

4. Facilitating Innovation and Decarbonisation

• Enabling Flexibility: Supporting time-of-use tariffs, DSR, and integration with smart technologies.
• Green Tariff Standards: Ensuring transparency and credibility in green product offerings.

5. Consumer Engagement and Protection

• Simplified Tariffs: Reducing complexity and making it easier for consumers to compare and switch.
• Data and Digitalisation: Leveraging smart meter data to empower consumers and enable new services.

For a comprehensive review, see BEIS: Retail Market Reform Consultation.

Case Study: The Default Tariff Cap Debate

The default tariff cap, introduced in 2019, was intended as a temporary measure to protect disengaged consumers. However, the 2021–22 crisis revealed its limitations: while it shielded consumers from immediate price spikes, it also contributed to supplier failures by preventing cost pass-through. The debate now centres on whether the cap should be reformed, replaced, or removed altogether (Ofgem: Price Cap Review).

International Comparisons

Other countries have taken different approaches to retail market design:

• Germany: Focuses on supplier licensing and consumer protection, with no price cap.
• Texas (ERCOT): Highly competitive, but the 2021 winter storm exposed risks of under-regulation.
• France: Maintains a regulated tariff alongside competitive offers.

These examples highlight the trade-offs between competition, resilience, and consumer protection.

The Road Ahead

Policy and Regulatory Direction

• Ofgem and BEIS are consulting widely on the future of the retail market, with a focus on resilience, innovation, and fairness.
• Industry Codes (e.g., the Supply Licence, BSC) are being updated to reflect new standards and market arrangements.

The Role of Digitalisation

Smart meters, data platforms, and digital services will be central to the next phase of retail market evolution, enabling more personalised, flexible, and efficient offerings.

Lessons Learned

• Resilience is Non-Negotiable: Financial and operational robustness must underpin all suppliers.
• Consumer Trust is Paramount: Protection, transparency, and service quality are essential for a healthy market.
• Innovation Must Be Sustainable: New products and business models must be built on sound fundamentals.

Conclusion

The GB retail energy market stands at a crossroads. The events of 2021–22 have exposed the limitations of the current model and prompted a fundamental rethink. The challenge now is to design a market that delivers resilience, innovation, and fairness—supporting consumers and the net zero transition alike.

References:

• Ofgem: State of the Energy Market 2018
• Ofgem: Supplier Exits
• Ofgem: Supplier Licensing Review
• BEIS: Retail Market Reform Consultation
• Ofgem: Price Cap Review