Posted:
7 September 2022
Media Centre
Energy retailers must radically evolve to help customers navigate net zero and move away from an energy system reliant of volatile fossil fuels
- Smarter approaches to identifying and tackling fuel poverty
- Wholesale price signals must be sharpened to drive energy system flexibility
- Retailers must consider outcome-based requirements that incentivise low carbon choices
- Current perceptions of what makes a green energy retailer is becoming outdated
Wednesday 7th September 2022: Energy retailers need to radically rethink their approach to consumers – moving beyond maximising the sale of kWh, helping customers navigate net zero and move away from an energy system reliant on volatile fossil fuels – according to a new report by Energy Systems Catapult.
By stepping up and playing a bigger role in helping consumers navigate complex low carbon choices, energy retailers can help their customers to retrofit their homes, switch to low carbon transport and to help provide flexibility to the energy system.
The independent report Clean Energy Retail – The Role of Clean Energy Retailers in the Energy Transition by Energy Systems Catapult and supported by OVO Energy also found the ambition of energy retailers would be stifled without policy and regulatory reforms that incentivise low carbon choices and new innovations.
Policy reform should focus on:
- Incentivising Low Carbon – enabling energy retailers to develop offers which incentivise people to make low carbon choices and become more flexible. Faster rollout of smart meters will be crucial but wider reform is also needed to sharpen wholesale price signals market-wide with half-hourly settlements and strengthen green tariff frameworks. Furthermore, outcome-based requirements (see Notes to Editors) on householders or retailers should be considered to drive positive low carbon behaviour.
- Improving Customer Experience and Competition Metrics – making low carbon energy options simple and easy to move to whilst maintaining trust. This means simplifying the customer experience and improving data access, as well as redefining the roles of energy retailers and improving the way we measure retail competition (ie. not simply about increasing number of suppliers to choose from and % of population switching).
- Innovation, Vulnerable Households and a Just Transition – ensuring the transition to clean energy is accessible for all. Consumer protection measures must be updated and move with the times to continue to look after consumer interests. We also need smarter approaches to addressing fuel poverty, making use of data to identify those at risk and partnerships to help determine interventions.
This will require energy retailers to build trust and strengthen relationships with customers, and develop innovative propositions, that focus on:
- Consumer outcomes – focusing on delivering the outcomes that reflect consumer preferences, house type, level of EV charge, desire for ‘green’ electricity etc, as opposed to simply billing for gas or electricity.
- e.g. models include a fixed price for outcomes, such as EV “miles” or household “temperature”, and incentivising consumers to optimise usage with the aid of automated technology. Fixed price outcome model is already common in the telecoms / broadband sector.
- Low carbon products and services – developing personalised, “modular” and adaptable propositions – including bundling a range net zero products and services (e.g. heat pumps, EV chargers, solar, battery storage, etc..).
- Vulnerable households – support for vulnerable households should be designed to also drive low carbon objectives that improve future resilience and drive energy efficiency measures which can help lower the cost of energy bills and cut carbon.
- Financing – facilitating long term financing for customers, managing the complexity of installing energy efficiency and low carbon technologies with SME partners.
- Innovative tariffs – mainstreaming innovative tariff offerings, such as “time of use”, “type of use” and green tariffs to improve the customer experience and make the best use of new energy assets.
To thrive in the future, energy retailers will need to consider new strategies, business models and partnerships; educating customers on their net zero journey, embracing digital developments and boosting skills and capabilities.
Guy Newey, chief executive of independent innovation centre, Energy Systems Catapult, said: “There has never been a more challenging time for the energy sector – with the huge increase in wholesale energy prices driving the cost-of-living crisis, on top of the complex transition to net zero.
“The next phase of the net zero transition is going to require energy retailers that can make that transition as easy and as cheap as possible for customers.
“This presents a once-in-a-generation innovation opportunity for energy suppliers to harness the potential of new digital and clean technologies to create better consumer offerings – whether that is improving household energy efficiency or installing new tech which can protect consumers against future price volatility.
“Ensuring households and businesses benefit from this opportunity will require them to build trusted and enduring relationships.
“Energy suppliers are already starting to revisit the way they do business – the days of customers simply being a number of kWh to bill at the end of a pipe or wire are over.
“Those that will thrive in the future energy system will be those that can provide the energy experience that consumers and society want and need – warm, pollution-free homes, at an affordable price. “
Raman Bhatia, CEO of OVO, said: “This year, we have seen the impact of our exposure to volatile fossil fuels on energy prices. Whilst we work with Government and industry to develop an immediate solution to support households, we must not lose focus on the longer term measures that will create a greener, more flexible energy system including installing energy efficiency measures, decoupling electricity from gas and creating innovative products to help engage our customers with their energy usage.
“Our teams are working hard to decarbonise homes across the UK while ensuring we don’t leave anyone behind on the journey to net zero.”
ENDS
Please find the full report here
Notes to Editors:
Significant change is needed across the energy system for the Net Zero transition:
- The CCC’s Sixth Carbon Budget highlights that the power sector could require:
- More than a doubling of generation production by 2050
- Significant reduction in carbon intensity by 2030
- Increased flexibility to reduce system costs.
- Heating from low-carbon sources (broadly flat since 2017), must increase to 50% by 2035, and reach 100% before 2050.
- The 2030 ban on selling new petrol and diesel vehicles, will drive electricity demand.
- In parallel, are requirements for digital critical national infrastructure in the energy sector.
Outcome-based requirements:
The introduction of outcome-based requirements on key players in the system could help to drive change. For example, homeowners could be set a long-dated requirement to ensure that their homes meet a net zero consistent standard of carbon performance (e.g. by 2040).
This potential approach could be introduced as part of a policy framework of incentives, regulatory requirements and low-cost finance to drive decarbonisation of buildings.
The broad approach of setting a long-dated regulatory requirement has successfully driven the development of low carbon vehicles that are attractive and aspirational for consumers (as well as becoming legally mandated by 2030).
Another approach could be to set energy suppliers a “Clean Electricity Standard”, which would require them to supply a certain proportion (or carbon intensity) of their energy from clean sources – and this proportion would increase year on year.
Future Energy Retail Propositions, could include:
The net zero transition will require significant low carbon investment (heat pumps, insulation, etc.) but energy consumers often lack the means for this. Propositions that overcome the barriers to financing, installing and maintaining low carbon assets will help increase access to them. Examples of this include:
Various propositions have been developed in this area but rollout has been limited. Consumer incentives to reduce carbon remain weak and so the energy retailer has limited leverage – although the current high energy prices might address this. Many of these propositions require high levels of trust in energy retailers (e.g. providing building data and confidence that service offer will be met) and potentially longer-term relationships. Some of these services require the formation of new partnerships with other entities (property developers, manufacturers, installers, etc.) and / or greater levels risk (financial, technical etc.) to avoid competing across too many fronts. |
A green tariff involves the consumer’s energy use being matched with the purchase of renewable or other low carbon energy, or linked to the procurement of other environmental benefits. There are many different types, including:
As of August 2021, 9 million British households were on green tariffs, with over half of all new electricity tariffs launched being badged as ‘100% renewable’ or ‘green’. However, there are challenges in relation to the current frameworks. Varying claims of relative greenness can make it confusing for consumers to make meaningful comparisons or to understand if/how their choice is driving additional investment in low carbon electricity generation. Also, the REGO scheme is not sufficiently granular in terms of time-specificity to drive behaviour that benefits the grid. Greater time-tagging to reflect the carbon intensity of the grid (see section on Wider Enablers) could mitigate this. |
| Time-of-use tariffs offer customers varying prices per unit of electricity depending on when it is consumed. This could allow the energy retailer to charge higher prices when electricity supply is scarce relative to demand (e.g. when the wind is not blowing) and help the customer to shift consumption to cheaper times of the day through the use of automation and other technology.
Basic forms of these tariffs have existed for many years (e.g. Economy 7 and Economy 10 tariffs) but there are still very few dynamic tariffs in the market, and many have recently been withdrawn. The scope will need to expand to help mitigate issues resulting from the increase in intermittent renewable electricity generation and the uptake of EVs and heat-pumps. However, the full value of domestic flexibility cannot be adequately accessed and rewarded, undermining commercially sustainability (see section on Building an Enabling Policy Framework). Also, how dynamic the tariffs can be hindered by technical factors such as limited rollout of smart meters, market-wide half hourly settlement not expected to be completed until 2025, and limited data available on network signals. There are also concerns about potential consumer harm if exposed to unpredictable price fluctuation. A crucial role for energy retailers will be to understand how to persuade and enable consumers (e.g. through automation and simplicity), unlocking demand response whilst maintaining delivery of the outcomes that consumers want. |
| To cater directly for the uptake in ‘smart’ low carbon assets, energy retailers are exploring tariff options targeted at particular technologies which are increasingly using automation and direct load control to save consumers money without having to manage unpredictable and fluctuating prices. Tariffs aimed at EVs are currently the most advanced, with charging propositions including vehicle-to-home (e.g. Indra), vehicle-to-grid (e.g. Octopus-Powerloop) and numerous others (e.g. Ovo Drive + Anytime, Intelligent Octopus, Good Energy Green Driver 5-hour, E.On Next Drive, EDF GoElectric). Other asset-specific tariffs have been launched including for heat pump (e.g. Good Energy – Green Heat), battery storage (e.g. Moixa, EDF/Powervault) and smart control tariffs (e.g. Ovo Smart Home). There are also potential propositions to link consumers’ low carbon assets to energy procurement outside the home for a simplified and easier to manage experience, such as linking public EV charging to consumers’ energy bill.
Recent trials have highlighted the potential of consumers to respond to signals to alter demand in response to network needs but longer-term behavioural change to alter demand may be difficult for many consumers. Interoperability in the metering and control communications is a crucial component of many of these propositions, particularly to avoid consumer lock-in to a particular supplier or manufacturer. |
Many consumers like the idea of ‘community energy’, particularly when it relates to cheaper, greener energy and where it benefits their local area. Many consumers also trust the motives of not for profit ‘communities’ more than profit maximising corporations. Future opportunities for retailers to explore might include:
There is much divergence with regards to what ‘community’ actually means and therefore who energy retailers should be engaging with when designing community propositions. Additionally, consumer perceptions around capability of community groups in relation to ensuring energy security could undermine confidence in community propositions. |