Ofgem: Consumer Future & Regulation

The repeated lesson from innovation is that consumer research is a poor indicator of what consumers want, especially at times of real disruption and technology-driven change.

Instead, it's heterogeneous business models - companies new and old willing to create the products and services they think consumers will buy, and investing their own money in delivering them that discovers the consumer future. That's the story of the iPhone (consumers said they didn't want touch screens, but Apple did it anyway). Henry Ford apocryphally said: "If I asked customers, they'd say they want faster horses".

That example is extreme - but there are two reasons. First, consumers don't always know whether they'd like something until they've used it. Second, there are so many consumer niches - everyone is different. In a dynamic market, suppliers can identify things that appeal to each niche, whereas "whole industry solutions" or "what consumers want" regulation necessarily create lowest common denominator solutions.

Energy is no exception. Research tells us it's a low-engagement business. But the dominant business model since privatisation has been to disengage consumers - large companies with massive inherited customer bases benefit most from consumer inattention. We're already finding that empowering consumers with transparency creates more engagement - not switching away, but asking questions - seeking to understand how they can better use energy - and really knowing what it's costing them.

A dynamic competitive market also brings costs down, especially in technology. Big bang, whole-of-industry approaches typically deliver solutions to 5 year old problems, with massive cost overruns and technologies which are already out of date. Instead, quickly opening up APIs to switch same day, for example, would enable each supplier to identify the priority for itself - and make speed of switching a competitive advantage. It'd also bypass the usual problems with industry-wide cost-benefit analysis. If some suppliers adopt the new technology, they bear the cost but have better products. Others can avoid the cost, if they think it's best for their business. This approach can work in so many other areas - as we develop a new future for smart meters, how does it look if we open up new ways to integrate and interact?

The real question for consumers is - who will they trust to take them on the journey? Companies who succeed will have an unerring sense of what consumers will want, will know how to wrap it up for them and will bet their own capital on making it happen, rather than begging for government handouts or industry programmes. They will be trusted to bring solutions that are in the best interests of the customer - not just the supplier. And it's hard to go from the intransigence of a typical large utility to start sowing the seeds of your own destruction - to empower customers to stop being supplied by you, or to take control of how much they buy and how they buy it. Or to start being their own generator instead. But companies which take a leadership stance, and truly act in the consumer's interests are those which will be long-term winners.

Ultimately, we believe that competition can work to drive down costs and bring energy futures to consumers which right now may seem unimaginable. This will require just as much regulatory effort as now - maybe more - but effort focused on enabling new consumer propositions and products to emerge, and to ensure a transparent functioning market which meets the critical social obligations of this sector.

Regulation is critical in providing a level playing field and minimum standards, coupled with competition to discover what consumers really want and to drive efforts among the best companies to be so much better than the minimum standards laid down by regulation.