Ofgem proposes to take strategic oversight role for energy codes

Ofgem has proposed taking on a strategic oversight role for energy code governance as part of a joint consultation with the Department for Business, Energy and Industrial Strategy (BEIS).

Presenting this as their preferred option for reform, they said the regulator would issue a strategic direction for energy codes on an annual basis and ensure it is delivered by a series of code managers that would take on most of the functions currently performed by industry-led code panels.

“The scale of our ambition for the energy system can only be delivered through a governing architecture to match,” BEIS stated in its foreword to the consultation – one of a number of documents published by the department this morning (20 July), which also included proposals to transform National Grid Electricity System Operator into a fully independent Future System Operator (FSO) and a smart systems and flexibility strategy.

“As the energy system itself undergoes a transformation equal to any it has undergone in the past, so the rules and governing institutions of the system must adapt to foster the transition away from fossil fuels to clean energy. Many of the detailed rules that facilitate the gas and electricity systems are set out in codes.

“Although these codes have done a remarkable job guiding the industry post-privatisation, many of them were designed to deal with a more predictable energy system and have seen only incremental changes over time. This has resulted in a code governance framework that is complex, fragmented, and lacks incentives to innovate, despite our urgent need for a more unified, flexible, and dynamic approach.”

BEIS continued: “The centrepiece of these proposals is a new institutional governance framework for codes, which would introduce a strategic function to set a clear direction for code reform and a code management function to implement it.

“This new framework will allow the codes to facilitate the significant changes required to transition to a cleaner energy system, such as code consolidation and simplification. It will also ensure that the codes develop in line with the government’s wider vision for a future energy system and with what is best for consumers and competition, in addition to making the code landscape more forward-looking, flexible, and innovative.”

The proposals are the follow up to an earlier consultation in 2019 in which BEIS and Ofgem outlined two potential models for reform of energy codes and governance. Under the first model, code managers overseen by a separate “strategic body,” and under the second, these roles would be combined into an “integrated rule-making body”.

They have now identified the first of these models as their preferred option, with Ofgem taking on the role of the strategic body.

“As the strategic body, Ofgem would develop and annually publish a strategic direction for codes, ensure it is delivered by code managers, decide whether to approve material code changes and, under some circumstances, lead code changes itself,” the latest consultation stated. “It would also select and license code managers, holding them to account via licence.”

The code managers would replace the existing code administrators after “a suitable transition period” and would be selected through a competitive tender process that would be open to any organisation with the appropriate skills and capabilities.

“They would also take on most of the roles that are currently held by industry-led code panels,” the document added. “However, crucially, we expect that industry input would remain key to the code change process, including through new stakeholder advisory forums.

“Code managers would be responsible for developing an annual delivery plan based on the strategic direction issued by the strategic body. They would also manage the code change process, decide on the approval of non-material code changes, make recommendations on material code changes to the strategic body, and monitor and report on code change outcomes.”

BEIS and Ofgem said they are still considering the second model, whereby the new FSO would become the integrated rule-making body (IRMB).

“We believe that the FSO would be well suited to this role because its focus on whole systems thinking would complement the strategic function’s main responsibility to provide strategic direction across codes,” they explained.

“In an IRMB, the strategic function and code manager function would be combined, meaning that there would be no separate code managers. The FSO would therefore hold most of the responsibilities outlined above.

“However, Ofgem would retain some oversight and decision-making roles under this option, such as the ability to approve material code changes, in line with its duties as the regulator and to protect against potential conflicts of interest.”

They said they are leaning towards the first option as it would “result in a less complex governance landscape than the alternative, build on the existing expertise of Ofgem, provide a greater net benefit, and be more straightforward and quicker to implement.”

To provide flexibility and future-proofing, they are additionally proposing to pass primary legislation to allow Ofgem to delegate some its powers and responsibilities to alternative bodies, subject to approval from the secretary of state, who would also be able to transfer the entire role to another body if necessary.

To ensure reform is delivered as quickly as possible, they said Ofgem should begin a review of options for further code consolidation before the new governance structure is implemented. They said the resulting consolidation could begin in 2024 under the first option and in 2026 under the second, although this would be dependent on the passage of legislation, the outcome of the consultation on the FSO and the detailed design of the reforms.

The deadline for responses to the consultation is 28 September.