A new approach to electricity markets: How new, disruptive technologies change everything

Tackling the policy trilemma of achieving an affordable, decarbonised and secure electricity supply is extremely challenging. The UK's electricity system, and the policy framework underpinning it, is holding back innovation and cost-reduction because it is propping up a large-scale, centralised utility business model that is fast becoming obsolete.

Rapid cost reductions and innovation are occurring in 'smart', distributed electricity technologies that disrupt how electricity systems traditionally operate. These technologies – including solar photovoltaics, onshore wind power, batteries, smart thermostats and appliances, and highly efficient lights – hold the key to a cheaper, cleaner, more competitive and secure electricity system that works better for consumers.

A fundamental change in direction is required to ensure that the government backs the innovative businesses and entrepreneurs that are developing these new technological solutions to the UK's energy challenges, rather than the incumbent utilities. This requires major reforms to energy regulation and policy, and to the fundamental structures of the energy market, particularly to enable the rapid development of a 'smart grid'. If the right reforms are implemented, there is a bright future ahead for the UK's electricity sector.

This report sets out a range of reforms that would adapt the UK's electricity system to the emerging distributed electricity technology paradigm. It recommendations include:

• measures to remove barriers to entry that currently restrict competition to the Big Six from challenger utility companies which can build new business models around distributed electricity technologies
• a fundamental review of the government's policies for achieving an affordable, decarbonised and secure electricity system
• reforming the regulatory model for the networks, to enable the rapid development of a smart grid.

Correction: an earlier version of this report suggested that Ofgem employed secondees from incumbent energy firms. This is not the case, and we are happy to correct the record.