News and Publications

The changing regulation of energy supply

Posted: 08/08/2018


The regulation of energy supply is an area of rapid and in some cases significant regulatory change which should be watched carefully - and not just by those organisations which are currently regulated. This article provides a brief overview of just some of the latest developments. 

What is energy supply? And why does it matter? The “supplier hub” model 

The established “supplier hub” model of energy regulation is increasingly under pressure, with Ofgem recently concluding that it may not be fit for purpose. With new business models and technology emerging, for example making peer-to-peer trading, “prosumers”, and community energy networks realistic propositions, what constitutes a regulated “supplier” is becoming an increasingly significant question. The rising importance of third party intermediaries, use of portable data (see midata) and heat networks also pose questions for a model which views the traditional example of an energy supplier as the regulated nexus through which consumers engage with the market and social, environmental and policy objectives are delivered.

On 23 July 2018 the Competition and Markets Authority concluded that heat networks need to be regulated, with Ofgem most probably adding that role to regulation of traditional gas and electricity suppliers.[1] At the end of July 2018 Ofgem issued its response to a consultation on the future of the supplier hub model, concluding that changes, which could be profound, are needed.[2] 

But what is the regulated “supply” activity
According to the Electricity Act 1989 (section 4) it is “supply to premises …” of electricity conveyed by a distribution system or from a sub-station, whilst the Gas Act 1986 (section 5) provides that it occurs when someone“supplies to any premises gas which has been conveyed to those premises through pipes”.

“Supply” is not further defined and in practical terms suppliers have not traditionally been the businesses that delivered gas or electricity. Consumer interactions with the energy market are increasingly with businesses that challenge the existing “supply” definition. Given so much of the regulatory framework currently hangs on the meaning of “supply”, to identify what is regulated, existing definitions are likely to need re-examination. Alternatively, focusing on “supply”, however defined, as the regulated activity through which consumers engage with the energy market could be abandoned, with a focus instead on defining consumer facing activities that need regulatory intervention, whoever provides them. Regulation of heat networks (per the CMA recommendation) will also need primary legislation.

Obtaining a supply licence
Historically, Ofgem has provided a low barrier for entry to the market by making the licence application process an essentially straightforward administrative task.[3] However, there has been criticism that licences are too easily obtained and applicants are not vetted. Ofgem has recently announced that it will be reviewing its approach to issuing supply licences; greater scrutiny of new suppliers at the licensing stage could be coming.[4] 

What’s in the supply licence?
Supply licences are issued with accompanying Standard Licence Conditions (SLCs). SLCs are long and are the primary, but not sole, mechanism through which the suppliers’ interactions with their customers are regulated.[5] 

Ofgem has been attempting to introduce more of a focus on “outcomes based” or “principles based” regulation. However, detailed and prescriptive regulation remains, in the SLCs and elsewhere. Some of the SLCs of interest, in terms of the changing regulation of energy supply are:

  • SLC 0/0A – also known as the standards of conduct – a complete re-formulation of the previous standards of conduct as an over-arching requirement to treat customers fairly. SLC0/0A require broad outcomes around fair behaviour, easy engagement for customers and protection of vulnerable consumers.[6] Ofgem sees this as the starting point for how suppliers should engage with customers.
  • SLC 25 – replacement of highly prescriptive conditions on doorstep sales (and a broader provision on telesales), with a general requirement that tariffs are easily understood and compared, that domestic customers are not mislead and that appropriate products are sold, whatever the sales channel.
  • SLC 11 – requires compliance with industry codes, which are themselves under constant review and evolving, often in crucial and significant ways, as the industry develops in areas such as settlement. Ofgem’s Licence Lite scheme allows suppliers to get a direction relieving them of their obligation to be a party to, and comply with, key codes, provided robust alternative arrangements are in place.
  • A whole host of SLCs implement schemes or policies reflecting current policy concerns. For example SLC 22D prohibits dead tariffs, SLC 21BA prohibits back billing of more than twelve months, SLC 25D provides Electricity Rebates and SLC 22F deals with supply contracts which are purely for the purposes of electric heating (part of the wider move to increased use of electricity in heating). SLCs 31 to 32 contain fairly exhaustive prescription on the information suppliers have to provide to consumers. However SLC 32A provides a power for Ofgem to direct suppliers to test engagement measures. This latter provision reflects a view that prescription on communications may have gone too far and that alternative approaches should be tried; this in turn reflects both a willingness to make regulatory space for innovation and the influence of the CMA energy market investigation. 

Energy price caps

Following the energy market investigation, the CMA introduced a cap on prepayment meter (PPM) tariffs, by inserting SLC 28A. The PPM safeguard tariff is intended to expire once smart-meter roll-out is completed and when, so the theory goes, PPM customers are therefore better able to shop around for better tariff rates.

Ofgem has subsequently added to this with a vulnerable customer safeguard tariff which similarly caps rates for Warm Home Discount recipients (SLC 28AA). The safeguard tariffs are updated on 1 April and 1 October each year.

On 19 July the Domestic Gas and Electricity (Tariff Cap) Act 2018 received Royal Assent. Ofgem is now required to design and implement a cap on standard variable and default tariffs, “as soon as practicable...” by modifying the SLCs. The cap will be subject to six monthly reviews and will initially last until 2020, extendable until 2022. The detailed implementation of the cap by Ofgem is obviously something of great interest to market participants.[7]

Smart meters

The market-wide implementation of smart meters is an important government initiative, with key obligations placed on suppliers by virtue of the SLCs (25B, 39 to 55). SLC 33/39 (gas/electricity) requires suppliers to “take all reasonable steps” to ensure a smart meter is installed at domestic and small non-domestic premises by the end of 2020. Suppliers are required to comply with the smart metering installation code and there are extensive and detailed provisions around smart metering generally.

Smart meter roll-out has received negative publicity, with delivery and the scale of any benefits being questioned (see here for example).

In the long-run, supplier roll-out obligations will fall away as a key priority. However, the regulation of smart metering, including interaction with the DCC, is here to stay. 

Midata 

The Government’s midata initiative aims to give consumers control of data about them that they can use to make decisions. This is being implemented in the energy sector, with work starting on data standards, enforceable licence conditions and a compliance and enforcement regime.[8]

Supplier of Last Resort

A higher number of suppliers, (slowly) increasing customer switching and greater market diversity of (new) business models means more instances of suppliers becoming insolvent (with two high-profile instances in July alone). Ofgem’s “Supplier of Last Resort” regime allows the regulator to find an alternative supplier for affected customers and is currently under review.[9] 

Guaranteed standards and compensation for delayed switching

Whilst principles based regulation is much talked about, prescription still abounds and is even increasing in some areas. The “Guaranteed Standards”[10] provide for automatic consumer compensation for supplier failings like missed appointments and failures to respond to reports of faulty meters quickly enough. Having previously scaled-back the scope of the standards, Ofgem is now consulting on adding automatic compensation for delayed or erroneous switches and for delays in issuing final bills or credit refunds.[11]

Conclusions 

We have briefly touched on a number of key changes in the regulation of energy supply but there are plenty of other areas of evolving regulation that have a substantial impact on suppliers, for example GDPR, Remit, complaints handling and the ombudsman, electric vehicles and the NIS directive. Increased public ownership of supply has been suggested by the Labour Party as a policy for a potential future government. Each area requires detailed consideration and engagement; whilst the policy directions may have been set, the regulatory details are very often still up for debate. The potential impacts on currently regulated suppliers and other energy market participants are significant. 

Three related themes emerge: (i) As new business models and technologies come to the fore, the established “supplier hub” regulatory model seems destined for some form of change, if only to better accommodate greater variety. A focus on regulating key activities, rather than a traditional business model, seems increasingly attractive. (ii) There are steps to try and create an environment that allows innovation (eg principles based regulation, the Innovation Link and Regulatory Sandbox[12]). But (iii) there is also significant prescription in areas of policy concern (eg price caps, smart meters, switching). Following how these themes play out, and the detailed regulatory provisions that result, is essential for anyone with an interest in how the GB energy supply market is regulated.



[1] Heat networks market study

[2] Future supply market arrangements - response to Ofgem's call for evidence

[3] Accreditation for the purposes of the various industry codes can however be time consuming and complicated.

[4] Ofgem reviews supplier licensing regime

[5] For electricity SLCs see this document and for gas see this document.  

[6] Previous hedging of the condition so that the obligation was to take all reasonable steps to achieve the outcome, and so that there was no breach if there wasn’t significant gain to the licensee and potential detriment to the consumer has been removed.

[7] See 'Government's default tariff cap and Ofgem's broader vulnerable safeguard tariff'

[8] Enabling customer data in the energy market

[9] See SLCs 8 and 9 and here

[10] Electricity and Gas (Standards of Performance) (Suppliers) Regulations 2015/1544

[11] See this page for the proposals put out to consultation

[12] Ofgem's Innovation Link


Return to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP