Gemserv urges Ofgem to issue strategic directions to code managers

Gemserv has urged Ofgem to give strategic directions to code managers to guide their decision-making as one of a number of early improvements to governance ahead of more significant reforms.

The company, which administers the Master Registration Agreement and the Smart Energy Code, said in a new report that the regulator should also introduce new financial incentives for performance and funding for innovation.

Gemserv said the key problems with code governance are already well understood, stating that strategic direction, accountability, the independence of decision-making and the simplicity of codes all need to be improved.

The report noted the initial proposals by the Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem to transform code administrators into more proactive code managers and create a strategic oversight body or alternatively combine them all into an integrated rule-making body.

But Gemserv said these reforms will be “complex and take time to implement” and will also take place in an “already changing institutional landscape”, with distribution network operators evolving into distribution system operators and the electricity system operator possibly being fully separated from National Grid

The report said: “The energy transition is accelerating and there is a risk that market and governance reform cannot keep up, let alone be a driving force. Uncertainties about future market rules and governance risks are impacting investor confidence, putting 2030 decarbonisation and affordability targets at risk.”

“There are several no-regrets initiatives that may commence in the short and medium term to help deliver the net zero policy goals,” it added. “We hope these suggestions will contribute to the forthcoming BEIS and Ofgem consultation on the desired longer-term outcomes for the energy code framework. However, they can only be a partial solution – they will not be a substitute for fundamental institution and code reforms.”

In its Energy White Paper published in December, BEIS said it will provide Ofgem with a strategy and policy statement to help guide its regulatory decisions so they are consistent with the net zero emissions target. Gemserv said Ofgem could in turn do the same for code panels and managers, whilst also stipulating improvements such as the standardisation of data. It said Ofgem should also provide high level strategic coordination to ensure code managers and panels collaborate effectively.

Gemserv additionally called for:

• Proactive governance from code managers and panels, which should seek to address controversial decisions and explore options to address future market changes.
• Reputation incentives, with code managers and panels being required to report regularly on their progress in complying with their strategic guidance.
• Financial incentives to improve performance and accountability. These could target a range of measures including stakeholder surveys and code modification timescales.
• Innovation funding to enable code managers to improve their performance through novel initiatives where funding is not available under the current governance structure.
• Competitive appointment of code managers, most notably in instances of consolidation.
• Simplification, with code managers being required to review their customers journeys.
• Digitalisation, with code managers being required to collaborate on the creation of common platforms for rules and compliance.
• Transparency, with code managers to make market data, processes and rules open and available to market participants.
• Changes to compliance checks to ensure they are fit for purpose and risk based, for example, relying more on auditing and sampling.

Germserv director of strategy Trevor Hutchings said: “We think that there are several opportunities to act now, making demonstrable improvements to code governance which will unleash further innovation, competition and efficiencies in the market.  This can be done without jeopardising wider reform over the longer term.”

Industry expert and lead author of the paper, Bob Hull, said: “Energy codes have successfully underpinned the energy system since the late 1990s but have become complex and change is slow.

“In the meantime, markets and technologies have moved on and they need to be modernised to help drive the transition to net zero.  Our recommendations should deliver early benefits and can provide a strong catalyst for future change.”