‘Golden opportunity’ for combined reform of system operation and code governance

The review of system operation announced by the government in its recent energy white paper as well as its ongoing review of code governance, together provide a “golden opportunity to reform these arrangements holistically”, Elexon has a stated in a new paper.

The administrator of the Balancing and Settlement Code said reforming gas and electricity system operation and code governance in tandem would allow “once in a generation” changes to be made.

In its energy white paper published in December, the Department for Business, Energy and Industrial Strategy (BEIS) said it would “ensure that the institutional arrangements governing the energy system are fit for purpose for the long term, consulting in 2021 over organisational functions, including system operation and energy code governance.”

BEIS said this work would include a review of the roles and structure of the Electricity System Operator following its legal separation from National Grid Electricity Transmission in April 2019.

After conducting its own review of energy system operation, Ofgem revealed proposals last month to fully separate the ESO from National Grid to create an impartial body with an expanded remit. It said this Independent System Operator could also incorporate some or all of the functions of the system operator for gas.

As part of their joint review of energy code governance, BEIS and Ofgem also issued proposals in 2019 to either transform code administrators into code managers and create a “strategic body” to oversee them or combine the roles within an “integrated rule-making body”.

On the basis of these aforementioned proposals, Elexon has outlined three options for the reform of energy system operation and code governance.

Under the first, the system operators for gas and electricity would be merged into a “whole-system operator” but there would be no major changes to the structure of code administrators or the number of codes.

Under the second, the gas and electricity system operators would likewise be merged and the code administrators would be consolidated into a Market Operator – “a single body managing the codes and changes to code rules across the energy, heat and possibly hydrogen sectors.” Elexon said this organisation would be similar to the integrated rule-making body suggested by BEIS and Ofgem.

Under the third and “most radical” option, the whole-system operator and the Market Operator would be combined into one. Elexon noted that this is currently the model in most European counties, “albeit in a very different market structure”.

The not-for-profit company identified the second as its preferred option. It said the first would “miss the opportunity to deliver benefits from reforming the energy market governance landscape”, whilst the third would require “a vast amount of work and would potentially be unwieldy”. It argued that independence between system and market operation should be preserved because “if the two roles are combined in one body, it risks conflicts of interest between managing the system and setting the rules that govern it.”

Elexon chief executive Mark Bygraves said: “The scale of change needed across the energy sector to achieve net zero is vast. Elexon has been advocating consolidation of the energy code arrangements for a number of years and we believe there is now a golden opportunity for holistic reform of the code and system operation arrangements.

“We welcome the government’s white paper and we want to contribute to the reform process that follows it. We believe that the options we have set out are an ambitious, but achievable, set of changes which the government could consider as part of the next steps.”