Under the Energy Company Obligation (ECO) scheme, suppliers with more than 250,000 household customers are obliged to help them with energy efficiency measures, cutting carbon emissions and tackling fuel poverty.
The regulator believes the way in which the obligation is set incentivises suppliers “to minimise the cost of meeting the obligations rather than delivering best value”.
It states: “Interactions with suppliers’ commercial incentives are unhelpful and adding responsibilities for ECO arguably distorts competition in supply, particularly given the exemption threshold.
“Alternative models could make greater use of competition for funds, whether through market prices for savings or competitive auctions and of area-base solutions, probably working with local authorities and potentially with network companies.”
Ofgem also believes current scheme delivery mechanisms are mostly focused on technologies that are very close to market and while the regulations don’t prevent any alternative products or services entering the market, they “just don’t encourage them”.
Therefore, it suggests without specific innovation directives in place, the market will likely settle on the cheapest options to deliver the obligations set out under the legislation.
However, it adds: “There is a risk that overlaying this approach with additional mechanisms to encourage innovative products and services could add complexity and administrative burden to both the administrators and the obligated parties, which in turn can lead to non-compliance.”