Comment by Tom Luff, Head of Policy and Business Model Innovation at Energy Systems Catapult

The way households use and pay for energy is becoming much more varied. Specialist companies are carving out new opportunities in the market, providing value for consumers adopting low-carbon technologies like heat pumps, electric vehicles and solar. Yet regulation remains largely built around an outdated model.

Ofgem’s proposed exemption from the Universal Service Obligation (USO) could be an important step towards a more diverse market. But the bigger opportunity is taking this principle further and letting regulation reflect the different roles businesses play and the risks they create.

Specialist suppliers facing barriers to growth

Ofgem is asking for feedback on a proposal to exempt electricity suppliers with fewer than 50,000 domestic customers from having to supply any domestic customer on request. It describes this as a “proportionate, targeted measure that could reduce barriers to entry, support innovation and encourage new business models, while maintaining important consumer protections”.

The proposal is welcome and aligns with previous Energy Systems Catapult proposals for more proportionate, risk-based regulation, including differentiated application of the USO. But its wider significance lies in the principle behind it: not every business operating in the energy market needs to be regulated in the same way. Ofgem is proposing to differentiate according to supplier size. It should go further – extending that logic to the different functions businesses perform.

Supplier regulation was designed around a model in which one company performs a bundle of functions: procuring energy, settlement, billing, customer service and managing the overall consumer relationship. That made sense when the market was built around a single supplier providing a largely standardised service. But technology is increasingly allowing these functions to be separated and performed by individual specialists.

New providers like Axle Energy, Ohme, Kraken and UrbanChain are already emerging with targeted services to aggregate flexibility, optimise EV charging and home energy use, enable local energy trading and finance low-carbon technologies. Many are not trying to become universal energy suppliers. They may instead perform one or two specific functions extremely well.

A more diverse market should therefore not simply mean more companies offering essentially the same supplier proposition. It should allow competition between different ways of meeting consumers’ energy needs.

Our Heat-as-a-Service work has already illustrated the potential for fundamentally different business models. Rather than simply buying kilowatt hours, consumers can buy the outcome they actually want – such as a warm home – with the provider responsible for optimising the technology, energy use and flexibility behind the scenes.

The UK has built a strong ecosystem for developing these kinds of technologies and business models. Increasingly, however, the constraint isn’t invention but getting innovations to market. Through our work with innovative scale-ups, we repeatedly hear that routes to market and regulatory requirements can be a greater barrier to growth than technology readiness itself.

What could this mean for household bills?

With household energy bills firmly at the top of the political agenda, this matters beyond market design. Allowing specialist providers to compete on individual services can lower barriers to entry, increase competition and help consumers use energy more efficiently.

Regulatory diversity should mean not just more choice, but better value for consumers and lower costs across the energy system.

How should regulation respond?

First, regulatory differentiation should go beyond company size. Regulation should reflect the services businesses provide, the functions they perform and the risks they create. Our research into secondary supplier models has found that households could receive specialist services from multiple providers while maintaining appropriate consumer protections. Other regulated sectors already distinguish between categories of provider on a similar basis.

Financial services, telecommunications and payments all regulate different types of provider according to the activities they undertake and the risks they create, while energy has remained more heavily centred on a single supplier model.

Second, we need to move from innovation by exception towards permission by design. At present, innovative propositions can depend on complex industry code modifications or regulatory changes to create bespoke arrangements for individual use cases. Businesses develop new propositions and then have to persuade the system to accommodate them. This is inevitably slow, reactive and difficult to scale.

The framework should instead establish clear, upfront routes to market for different types of providers, with proportionate requirements and consumer protections built in from the outset. Ofgem’s 2024 work on innovation in the retail market recognised the need for “appropriate routes to market to sell innovative products and services to consumers”. The USO proposal takes a step in this direction – where multiple propositions face the same barrier, a generally available exemption can provide a clearer route than repeated case-by-case treatment.

Third, regulatory reform should test and learn. Ofgem cannot – and doesn’t need to – design every feature of the future retail market in advance. The USO exemption offers an opportunity to test greater regulatory diversity at a manageable scale, monitor consumer outcomes and emerging risks, and use that evidence to adapt the framework over time.

Consumer protection secured and innovation unlocked

None of this means abandoning the traditional supplier model or weakening consumer protection. Universal suppliers will continue to play an important role, including holding the whole bundle together for consumers who want simplicity. But they shouldn’t be the only way consumers get energy services.

The 50,000-customer exemption could therefore be much more than a narrow adjustment to the USO. It points towards three principles for wider reform: different rules for different business models; permission by design rather than innovation by exception; and a test-and-learn approach that allows new models to develop while protecting consumers.

Ofgem has opened the door to differentiating on supplier size. The bigger prize is walking through it – applying the same thinking to the functions businesses perform and the risks they create, to unlock clean energy innovation and the services consumers want.