Getting to net zero will require significant changes to how households use energy. If decarbonisation policies are successful, people will adopt electric vehicles, heat pumps and other green technologies in much higher numbers. Balancing energy supply and demand will become more complex and the ability to use energy ‘flexibly’ will be increasingly important.

This has major implications for the retail energy market. Britain’s current energy retail model has been around for 30 years and is based on the supplier hub model, where suppliers act as the single link between customers and the wholesale energy market.

It is unclear whether this is the best model to deliver the transition to a decarbonised energy system. Many people across the sector believe the market could operate differently, but there is little consensus on how it should change.

• This report asks how the electricity retail market could be designed to better support the delivery of net zero.
• We assume a future energy market has three key objectives: (1) helping customers adopt low-carbon technologies and incentivising energy to be used more flexibly, (2) protecting vulnerable customers, and (3) enabling innovation.
• There is a wide variety of stakeholder views on the need for reform. Some people think that the whole system is fundamentally broken, however, some believe that we are now seeing promising innovation and incremental reform is all that is needed.
• The main issues identified with the current retail market structure range from a lack of financial incentives to help customers reduce consumption, to low margins and regulatory complexity limiting innovation.
• We identified 5 different alternative models to the current status quo (where suppliers continue to act as the single link between the customer and the wholesale market):
  • Model 1: Loosening regulation to encourage more innovation.
  • Model 2: Introducing a default supplier with a “no frills” service.
  • Model 3: Introducing split metering in addition to a default supplier.
  • Model 4: Awarding franchises on a competitive basis.
  • Model 5: Turning electricity network operators into energy suppliers.
• We do not recommend which of these models, if any, should be pursued. Instead, the report prompts a wider conversation about the long-term future of the energy retail market and the types of changes that could potentially accelerate decarbonisation and better outcomes for consumers.

• It’s unlikely the current energy retail market will deliver decarbonisation quickly enough.
• The Government and wider energy sector need to press on to deliver the current package of reforms.
• These reforms should not distract from setting a longer-term plan for the sector. We encourage a wider discussion of this work and ask that the Government and Ofgem look beyond the near-term reforms to consider an energy retail market of the future

Nesta thanks Karen Dawson and Stuart Cook from Complete Strategy and Tom Luff from Energy Systems Catapult for their contribution to this project.