Ofgem proposes to exempt small electricity suppliers from Universal Service Obligation in new retail innovation consultation

Ofgem has opened a consultation titled "Supporting innovation in the electricity retail market" that proposes to exempt electricity suppliers with fewer than 50,000 domestic customers from the Universal Service Obligation (USO)^[1]. The USO is the bundle of baseline supply conditions every licensed supplier must meet regardless of size, and critics have long argued it creates a disproportionate compliance burden for smaller entrants and specialist business models.

What the USO exemption would change

Under the current framework, any company holding a full electricity supply licence must comply with the entire suite of standard licence conditions - including the USO - from the moment it begins serving domestic customers. The licensing regime, while designed to protect consumers from supplier malpractice, has distorted new entry into the retail market and further hindered innovation.

The proposed threshold of 50,000 domestic customers is not arbitrary. Ofgem already uses that figure as the trigger for other obligations: under electricity supply licence condition SLC 22G, suppliers with over 50,000 domestic electricity customers must provide specific protections for customers with restricted multi-rate meters. Applying the same boundary to the USO would create a consistent tiering principle across the licence framework.

Players with innovative business models - such as an electric vehicle manufacturer wanting to supply electricity to charge vehicles - are currently unable to enter the market because they cannot align themselves with the stringent requirements set out in the licensing conditions. A USO carve-out for sub-scale suppliers would directly address that barrier.

The broader licensing reform agenda

The new consultation is the latest in a sequence of Ofgem workstreams aimed at making the retail licensing framework more permissive for innovators. Ofgem's earlier October 2024 consultation proposed reforms to five routes to market: restricted licences; a derogations scheme; individually modified licences; Licence Lite; and licence exempt supply.

That process closed in November 2024. Ofgem reviewed and assessed all submissions and is taking forward work based on the feedback. The new consultation on the USO appears to be a direct follow-on, moving from the general question of routes to market to a specific licence condition that respondents identified as a structural barrier.

Citizens Advice, in its response to the 2024 consultation, called on Ofgem to go further and faster, and to consider the extent to which the wider supply licence - particularly the USO - may hinder innovation. The new consultation is a direct answer to that ask.

The Ofgem Review 2026 final report, published in April, reinforced the direction of travel. The aim is to make regulation more agile and innovation-friendly, supporting Ofgem's growth duty and the UK's ambition to capitalise on its innovation ecosystem - with the reforms framed as a controlled flexibility mechanism rather than deregulation.

Consumer protection tensions

The USO exemption proposal will face scrutiny on consumer protection grounds. Other routes under consideration by Ofgem could be useful mechanisms to enable innovative products and services to operate at a slightly larger scale and for a limited time period, but as enduring or widely adopted options they risk undermining competition by enabling some firms to avoid a fair share of certain costs.

Innovation is reliant on participation, but consumer confidence in the energy sector is low - Ofgem's own monitoring shows that only one in three people trust energy suppliers in general. Ofgem will need to demonstrate that a two-tier licence regime does not leave customers of exempt suppliers with materially weaker protections.

The consultation also sits against a difficult market backdrop. Domestic customer debt and arrears reached a record high of £4.48 billion in the third quarter of 2025, marking the twelfth consecutive quarter of increase, driven by rising average arrears rather than a sharp increase in the number of affected customers.

The key question for respondents is whether a hard customer-count threshold is the right mechanism, or whether the exemption should instead be tied to the nature of the supply model - for example, restricting it to suppliers operating under restricted or individually modified licences rather than full domestic supply. Ofgem's response to that debate will shape how much of the market the exemption ultimately reaches.