Energy Systems Catapult welcomes the opportunity to respond to this Ofgem call for input on cost allocation and recovery.

Consumer-serving entities, not the regulator, should decide how to package and allocate system costs to best meet the needs of consumers. Ofgem should consider pivoting from its review of cost allocation and recovery to focusing on enabling a retail energy market that is highly competitive and innovative. Such a market would be most effective at minimising the cost of energy for consumers, as well as underpinning economic growth.

Key points

• We strongly disagree with the underlying logic in the call for input that Ofgem should determine the structure of retail offerings. In a well-functioning market, it is consumer-servicing entities (e.g. retailers) who decide how to allocate and recover the system costs to which they are liable, in a way that best meets consumers’ needs.
• Ofgem does have a direct role in setting the cost allocation (methodologies) for network tariffs. But the timing of this retail-focused call for input so soon after Ofgem’s open letter on reforming Transmission Use of Network charges could cause confusion, not least because some of the phrasing and examples in the call for input seem to conflate network tariffs with retail tariffs.
• There are decisions around the allocation of policy costs that are pertinent to enabling decarbonisation and equity, but that these are matters for government. It is vital that Ofgem works jointly with the Department for Energy Security and Net Zero, and uses the evidence gathered through this consultation to inform a decision on the allocation of policy costs.
• Ofgem’s approach could block innovative consumer propositions from entering the market. Ofgem could be exacerbating consumer harm by locking out business models, products and services that could better serve consumers in managing their energy costs, achieving a desired level of comfort, and decarbonising.

Recommendations

Ofgem should pivot its efforts to:

• Prioritise meaningful reform of the retail energy market to enable vigorous competition and innovation to meet consumers’ different needs.
• Accelerate its work on electricity networks tariff reform.
• Work with government to define the policy aims and identify options for reforming the recovery of policy costs.
• Work with government to define the policy aims and identify options for targeting support to consumers.