Ofgem seeks views on code consolidation

Ofgem has issued a call for input on the consolidation of energy codes, including which codes should merged together and whether their governance arrangements should also be consolidated.

The regulator is also seeking views on the licencing of the code managers that are due to take over the roles of both code panels and administrators.

Explaining the impetus for consolidation, Ofgem said their fragmented structure makes it difficult to coordinate and implement changes across codes: “When a change is required in one code, the mechanisms in place to understand the impacts on all the other codes have not always been effective. This lack of coordination can inhibit the efficient delivery of strategic change.”

The regulator said the “gradual and piecemeal” evolution of the codes has also increased complexity, making it difficult for parties to engage with and understand the rules that apply to them. This in turn has hindered compliance, competition and innovation.

It said the consolidation of codes should seek to make them quicker and easier for market participants to engage with and understand; enable the codes to be more agile and adaptable to significant market or industry changes; facilitate the delivery of strategic change; and support the ongoing operation of central systems.

Ofgem commissioned Cornwall Insight to explore potential options for code consolidation, which the regulator grouped into three broad themes: no consolidation, vertical consolidation and horizontal consolidation.

No consolidation

Code managers would instead being tasked with delivering improvements such as rationalisation, simplification and digitalisation within their individual codes to support their efficient operation and cross-code coordination.

Vertical consolidation

The codes relating to gas and electricity would be kept separate, except for the existing dual-fuel codes – the Retail Energy Code (REC) and the Smart Energy Code (SEC) – which could be combined into a single retail code.

Cornwall Insight explored multiple options for vertical consolidation:

• Minimal reform of networks codes: This option would combine the Uniform Network Code (UNC) and the Independent Gas Transporters (IGT) UNC into a single gas code, the Connection and Use of System Code (CUSC) and Grid Code into a single electricity transmission code and the Distribution Connection and Use of System (DCUSA) and Distribution Code (D Code) into a single electricity distribution code.
• Minimal reform of technical codes: This option would combine the UNC and IGT into a single gas code and the Grid Code, Security and Quality of Supply Standard (SQSS), System Operator – Transmission Owner Code (STC) and D Code into one electricity technical code.
• Dual fuel retail, single fuel upstream: This option would combine all codes into a dual fuel retail code and two separate, single fuel electricity and gas upstream codes each covering both wholesale and networks. An alternative version of this option would further divide the upstream codes between wholesale and networks.

Horizontal consolidation

The existing codes would be consolidated into retail, communication, engineering, charging and wholesale codes, all of which would be dual fuel.

Ofgem also discounted a further option explored by Cornwall Insight of creating a single overarching ‘core’ that would be underpinned by several modules specific to areas of the industry.

The regulator said this would “too large and unwieldy” to be overseen by a single code manager and would also require a “big bang” approach to implementation that would significantly delay the delivery of code reform.

Ofgem said its initial preference is vertical consolidation on the basis it would be quicker to delivery than horizontal consolidation, with less disruption to licensees and central systems.

Horizontal consolidation has already been delivered at the retail level, with the merging of the Supply Point Administration Agreement (SPAA) for gas and the Master Registration Agreement (MRA) for electricity into the REC.

However, Ofgem said dual fuel codes at the wholesale and networks levels could be extremely complex and that some aspects of gas and electricity codes are different for fundamental operational reasons, meaning synergies may be lower or non-existent.

The regulator said maintaining separation between fuels could inhibit consideration of cross-fuel issues but this could be addressed in other ways such as reducing the number of codes and better aligning their structures.

Ofgem said it currently sees limited benefits in consolidating the REC and SEC.

Delivery of code consolidation

Three possible options are being considered for delivering code consolidation:

• Common contractual framework only: The existing contractual arrangements underpinning the codes being consolidated would be amended to establish a single common contractual framework. This would bring the provisions of two or more existing codes into a single document, under one code manager licence. However, all existing governance and substantive rules would remain separate. The consolidated code would likely have separate schedules containing the predecessor code provisions, each with its own governance arrangements.
• Common contractual framework and governance arrangements: In addition to amending the contractual arrangements to create a single code document, Ofgem would also use the transitional powers contained in the government’s Energy Security Bill to establish common governance arrangements for each consolidated code. These governance arrangements could include code modification processes, party accession and code enforcement. Ofgem said the arrangements that are consolidated could vary between codes.
• Consolidation with rationalisation of code arrangements: In consolidating the SPAA and MRA, Ofgem rationalised and transferred their substantive rules to the newly created REC using the significant code review process. It said the same thing could also be done for other codes.

Ofgem identified the second of these as its preferred option on the basis it would reduce complexities and facilitate the efficient and effective delivery of code managers’ functions upon their delivery. The regulator said the third option could significantly delay code reform and the appointment of code managers although it may be desirable as a long-term goal.

Code manager licence conditions

Following a joint consultation with the regulator, the government announced plans in April to replace code panels and administrators with code managers that will be given strategic oversight by Ofgem.

As part of the call for input, Ofgem is seeking views on the content of code managers’ licences, which it grouped into three categories:

• Governance and conduct: definitions and interpretation of the licence; code governance and requirements to become a party to and comply with the codes; management of conflicts of interest; requirements to tender for services; data handling; corporate and financial controls; supporting, engaging and consulting stakeholders, and decision-making; and cooperation and cross-code working.
• Funding and incentives: budgets, incentives and the methodologies for charging code parties to fund code managers.
• Deliverables and reporting: the production of delivery plans based on Ofgem’s strategic directions; complying with these delivery plans and reporting on progress; obligations towards Ofgem and the government; requirements to simplify codes; and end of licence term and code manager of last resort arrangements.

Ofgem has identified multiple specific areas as priorities including: the management of conflicts of interest; corporate and financial controls; all parts of the funding and incentives category; and the production of, compliance with, and reporting on delivery plans.

The deadline for responses to the call for input is 1 February 2023. Subject to the progression of the government’s Energy Security Bill, which sets out the legislation for energy code reforms and was introduced to parliament in July, Ofgem said it intends to publish additional calls for input in 2023 to inform a full consultation on the implementation of the reforms after the bill receives royal assent.