Ofgem fleshes out plans for energy code consolidation

Ofgem has further fleshed out its plans for the consolidation of energy industry codes after being granted new powers to overhaul the code governance framework last year.

The regulator said its proposals to create two unified electricity codes – one commercial and one technical – and one unified gas code is expected to save more than £100 million over a 12-year period.

Explaining its intentions in a new consultation, Ofgem said the passage of the Energy Act 2023 legislation marked a “major transformational step” for the energy sector that will “fundamentally change” the way it is regulated.

The act grants new powers to Ofgem to licence a series of code managers that will be responsible for proposing, prioritising, managing, coordinating, and recommending or approving code changes. In doing so, code managers will take over the main functions of both code administrators and panels.

The legislation also introduces a new strategic oversight role for Ofgem, which will guide code managers through an annually updated Strategic Direction Statement, and grants the regulator time-limited transitional powers to consolidate the current codes.

Ofgem said it intends to begin the process of consolidation prior to the appointment of code managers. This initial consolidation will be limited to bringing the consolidated codes under common contractual frameworks and undertaking targeted rationalisation and simplification. Following their appointment, the code managers will lead the longer-term exercise of rationalising and simplifying the consolidated codes.

The regulator said appointing code managers first would be much more challenging and time-consuming: “For example, we would need to rely on our enduring powers, which are not as wide ranging as the transitional powers granted under the act, and would need to navigate additional challenges, such as potentially revoking or amending code manager licences in order to enact consolidation of codes which already had appointed code managers.”

In line with its previous preference, as stated in a call for input in 2022, Ofgem has opted for “vertical” consolidation within fuels. The regulator dismissed the alternative option of “horizontal” integration into dual-fuel codes, which many respondents thought would be “too complex, disruptive and costly to implement.” It said the majority of respondents agreed that vertical integration would be quicker and less disruptive to implement, while retaining the necessary fuel-specific focus.

Ofgem said it plans to leave the Balancing and Settlement Code (BSC) as a standalone code after stakeholders warned that it is an “already complex code playing a key role in electricity balancing and settlement.” It noted that several options being considered as part of the government’s ongoing Review of Electricity Market Arrangements could have a significant impact on the BSC.

The regulator said it also intends to keep the Smart Energy Code (SEC) and the Retail Energy Code (REC) as standalone codes as their similarities are insufficient to warrant their combination, at least for the time being.

Given the above, Ofgem is proposing to consolidate the other codes into two unified electricity codes – one commercial and one technical – and one unified gas network code.

The electricity commercial code (ECC) would combine the Connection and Use of System Code (CUSC) and the Distribution Connection Use of System Agreement (DCUSA), while the electricity technical code (ETC) would bring together the Grid Code, Distribution Code, the System Operator Transmission Owner Code (STC) and the Security and Quality of Supply Standard (SQSS).

In both instances, Ofgem said the consolidation of these codes would allow the impacts of changes to be considered holistically across the whole of the electricity system. In the case of the commercial code, the regulator said consolidation could also facilitate the alignment connection and charging arrangements across transmission and distribution.

It said the combination of four codes into a unified technical code would significantly reduce the burden on participants in the code change process and allow the soon-to-be National Energy System Operator to consider security of supply matters under a single code.

Ofgem said its analysis indicates that the creation of the commercial and technical electricity codes would save £35 million and £28 million respectively over a 12-year period.

The regulator dismissed the alternative option of creating “one stop shops” for transmission and distribution by combining the CUSC, Grid Code, STC and SQSS into an electricity transmission network code, and merging the DCUSA and Distribution Code into an electricity distribution network code.

Meanwhile, the gas network code (GNC) would combine the Uniform Network Code (UNC) and the Independent Gas Transporters Uniform Network Code (IGT UNC). Ofgem noted that these codes are “already very similar in structure and content, with changes in the UNC often requiring a mirror or consequential change to the IGT UNC.”

The regulator said its analysis suggested that as many as 80% of IGT UNC modifications are required to align with UNC modification or external factors requiring changes to both. By reducing this “unnecessary duplication of rules,” it said the consolidation of the two codes could deliver significant savings of around £41 million over a 12-year period.

Ofgem said it is considering four potential options for transitioning to the new code governance arrangements:

• ‘Big Bang’ – the new arrangements would come into effect for all codes at the same time
• Concurrent – the transition would begin simultaneously for all codes but would likely finish at different times
• Phased – each code would be allocated to one of two or three phases and their transitions would overlap
• Fully sequential – the new arrangements would be implemented one at a time for each code

The regulator said its current preference is the phased approach, which would “allow for work to be undertaken concurrently, where it is beneficial to do so, while reducing the overall complexity of the approach and ensuring that it does not become overly burdensome to industry stakeholders.”

It has also set out an indicative transition sequence in which the BSC and the REC would be the first phase, the ECC and GNC would be in the second phase, and the ETC and SEC would be in the third and final phase.

Ofgem said it would be quicker and easier to implement the new governance arrangements for the BSC and REC first as neither code is expected to be consolidated. The REC is also the most recently created code and was established in anticipation of governance reforms.

The deadline for responses to its proposals is 23 April 2024.