Ofgem to take on strategic oversight of energy codes

Ofgem will be given responsibility for the strategic oversight of energy industry codes, as well as the ability to establish and regulate code managers, the government has confirmed.

A decision document published on Wedneday (6 April) by the Department for Business, Energy and Industrial Strategy (BEIS) follows a joint consultation it issued alongside the regulator last summer.

Two options were being considered, with the first (and preferred option) being to create code managers overseen by a separate “strategic body” – Ofgem.

The second option under consideration, which was ultimately rejected, was to make the planned Future System Operator (FSO) an “integrated rule-making body”.

BEIS said for simplicity, Ofgem’s existing functions will be expanded rather than a new distinct entity being created.

The scope of the new governance framework will extend to the 10 current electricity and gas codes, as well as relevant central system delivery bodies and engineering standards.

Ofgem will be required to annually publish a strategic direction setting out its vision for how the codes should evolve over the following year, which the code managers will then implement.

The contents of this direction, which will be subject to consultation, must take into account relevant material from BEIS’ latest Strategy and Policy Statement (SPS), as well as consider the implications of recent market developments and any advice provided by the FSO.

In some circumstances Ofgem will have the ability to change the codes directly. BEIS said this would occur in a “limited range of circumstances where the normal processes would not be appropriate”: where the change is urgent; where the relevant code manager may have an adverse conflict of interest; where the change is particularly complex; or where the change is related to code consolidation.

To limit this power, all direct code changes will be subject to public consultation, potential veto by the secretary of state and a right of appeal to the Competition and Markets Authority (CMA).

The regulator will also have the power to select and license a code manager for each in-scope code or engineering standard via a range of selection processes, both competitive and non-competitive.

“We anticipate that these regulations will include several options, such as direct selection of a suitable entity or the creation of a built-for purpose company, as well as detailed criteria regarding when each option should be used,” the decision document said.

Furthermore, Ofgem will also have the power to issue directions to in-scope central system delivery bodies to ensure that they do what is required by a code or what is “reasonably necessary” to facilitate the ongoing efficient operation of the codes.

The regulator will continue to play its existing roles in code governance such as by being responsible for approving material code modifications.

BEIS said it had decided against allowing the regulator to delegate its new functions to third parties such as “senior individuals or a committee of senior individuals” or re-designate all of its new functions to an alternative organisation without new primary legislation.

“However, BEIS will be granting the secretary of state the power to permanently transfer the duty to publish a strategic direction from Ofgem to the FSO, subject to public consultation, if it emerges that the FSO is better placed than Ofgem to exercise this specific strategic function in future,” the department added.

As the transition to the new governance structure takes place on a code-by-code basis, and a code is considered to have gone live once its first manager has been put into place, Ofgem will be granted powers to modify relevant codes and licences, as well as to modify or terminate contracts, for an anticipated period of up to seven years from the passage of legislation.

Ofgem will be granted a power to establish transfer schemes for the purposes of facilitating the transition from code administrators to code managers.

BEIS said the required primary legislation for the proposed reforms will be introduced “when parliamentary time allows”. Some of the proposals will also rely on secondary legislation which will be developed over the next year.

The department said it is not yet possible to set out a firm timescale for the overall transition to the new framework. However, it said that if legislation were to be enacted at the earliest opportunity then Ofgem’s new functions could be expected around 2023.

Wednesday also saw BEIS and Ofgem confirm plans to establish an FSO as an independent public corporation by 2024.