If the UK’s decarbonisation journey so far has happened mainly behind the scenes - replacing coal fired power generation with gas and renewables - the next phase is going to be far more visible.

Over the next decade or so, people across the UK will need to quickly adopt low carbon technologies such as heat pumps and electric vehicles, increasing the demands on our energy system.

At the same time, the power system will become more reliant on intermittent and dispersed energy sources like wind and solar, making the rewards for ‘flexing’ demand much greater (ie avoiding energy use at peak times when supply is limited, and using excess energy at off-peak times when supply is abundant).

This will mean much more interaction between energy customers and energy suppliers than we have at present. For example, from the grid’s point of view, a country of 10 million EVs would represent a bank of battery storage that could be called upon, significantly helping to smooth out peaks and troughs in demand. From the perspective of domestic and commercial consumers, bills could become significantly more affordable if they could opt to dial their electricity usage up and down in response to availability.

But none of this will be possible unless the energy market and consumers can interact successfully.

At the moment, energy retailers provide the interface for almost all consumer interaction with the energy market, but there’s a big question as to whether they can successfully support the transition to net zero.

As it stands the energy market has problems. This is widely acknowledged by the sector itself and, looking at data on trust in energy suppliers, by the public at large.

During the 2021-22 energy crisis, 26 suppliers, serving some 4 million customers, went bust. Since then, the range of tariffs on offer to consumers has been limited - a competitive market with little competition. It’s only recently that this has started to shift.

But whether the sector can organically evolve to offer services and products that help deliver net zero - or whether more significant reforms are required - is open to debate.

Retailers argue that while innovation in the sector has been a long time coming, it’s now taking root, driven by challengers like Octopus (now the UK’s largest electricity provider), with legacy suppliers starting to follow suit.

Reforms already in the pipeline, such as changing the way that household bills are settled, will create far more incentive for retailers to offer innovative tariffs, for example those targeted to EV customers, or to people who want to save by avoiding peak times. Several energy retailers are setting up heat pump installation services, or trying to differentiate themselves through promising to help consumers manage their energy demand.

But others argue that the current retail market simply isn’t designed in a way that’s optimal to delivering net zero.

Although it’s hard for most people to believe - with bills still historically high - selling energy isn’t a high margin business. In the few instances where energy retailers are making healthy margins, these usually come from their other business activities. The problem with low margins is that they create low incentives for investment, and therefore low incentives for innovation.

Despite these low margins, and heavy market regulation, many consumers still don’t have access to affordable energy because the rules make it difficult for new innovative companies to enter the market and offer alternatives.

In addition, there are limited incentives for retailers to help customers reduce their energy demand, insulate their homes or adopt low-carbon technologies. Pricing structures, and the way that government green levies are weighted towards electricity bills, means there’s little financial reward for consumers to opt for low-carbon electric options either.

Any fundamental restructure to a market that affects every British household comes with significant cost and risks (and would require a hefty amount of political capital to push through). But seriously engaging with the question of how the market could look - and if a different structure would better serve households as well as getting us to net zero more quickly and efficiently - is surely worthwhile.

In part two of this blog we'll look at potential alternatives for a future energy market.