Ofgem is looking at ways to improve the codes governing the energy system and the procedures for updating them. Tom Grimwood speaks to industry figures to find out what changes they would like to see – from minor tweaks to major reforms.

Underpinning the operation of the energy system is a series of industry codes that suppliers, generators and networks must sign up to as part of their licence conditions. They are hugely important, establishing a wide variety of crucial arrangements and determining the flow of billions of pounds of revenues and costs each year. They are also “live” documents, meaning they are constantly being reviewed and updated.

The governance of these codes varies from case to case. But generally speaking, each one has a corresponding administrator and panel. Although Ofgem often has the final say over which changes are adopted, modifications are typically proposed by ­signatories to the codes. These proposals are then scrutinised by the panels, which either present their recommendations to the ­regulator or make the decisions themselves.

Many of the panel members are appointed to represent the interests of a specific group or consumers in general. However, they are typically elected by the signatories to the codes they are overseeing. In theory, this should open up the membership to smaller and newer players. In practice, the ­panels have tended to be dominated by the employees of large incumbents that have the resources and relationships necessary to win and hold seats.

Announcing a major review of the codes in November, the business and energy ­secretary Greg Clark said this system of ­“self-regulation” has reduced competition and innovation from new entrants and pushed up prices for consumers.

“Incumbents have often been able to put their interests ahead of those entrants or consumers,” he explained. “We need to find a solution that harnesses industry knowledge of the system without handing over the keys to insiders.”

In an outline of its joint review with government released several weeks later, Ofgem said there is a “growing industry consensus” that the current arrangements, designed ­several decades ago, have become outdated and a barrier to progress.

Changes have become slow and reactive, with even simple decisions taking “many years”, and the large number of poorly co-ordinated code bodies means systematic reforms are difficult. The codes themselves are also over-complex, running to more than 10,000 pages and weighing in at about 50kg if printed out on A4-size paper.

Ofgem said the “comprehensive” review will consider options for improving ­industry codes and their governance, including the scope for “fundamental reform”. But even ­without a radical transformation, industry ­figures tell Utility Week there are numerous smaller changes that could help address the ­regulator’s concerns.

Minor tweaks

Many identify a lack of accessibility as a key issue. Several suggest digitalising the codes to make them easier to understand. Kyle Martin, deputy director for power at Energy UK, says a software app, for example, could be used to create a “bespoke code” for each signatory, saving them from having to read “thousands of pages and annexes you’d never need to know or care about”.

Grace Smith, senior regulatory analyst at UK Power Reserve, agrees that accessibility is a big problem. It can sometimes even be unclear which parts of the industry fall under what code.

“You’re trying to set down in legally robust terms the workings of an entire industry. It’s never going to be a small document,” she explains.

“The important thing is that new entrants in particular should be able, maybe with the help of the code administrators, to find the parts that are applicable to them quickly and easily, without having to invest a lot of their own resources simply understanding the rules of the game.”

Smith cites Elexon’s practice of appointing an account manager to each signatory to the Balancing and Settlement Code (BSC) as an example that fellow code administrators should follow.

With others, she says: “You find yourself explaining the same idea repeatedly, which can be quite frustrating.” As a result, companies with innovative ideas can find it “hard to get the ball rolling”. Smith says many of the projects applying to take part in Ofgem’s “regulatory sandbox” don’t really require a derogation from the codes, but rather a ­better understanding of the existing rules.

The chief executive of Elexon, Mark Bygraves, says this helps explain why it came top in Ofgem’s most recent satisfaction survey for code administrators.

He says other practices trialled by Elexon include holding webinars and conference calls to help interested parties keep abreast of developments and decide whether they want to attend panel meetings. It also publishes a regular change report, with a page on each of the proposals currently being considered. “It’s all about putting information out there to enable all parties… to keep themselves informed,” he adds.

Bygraves views Elexon’s role as a manager rather than just an administrator, providing all of the services that underpin the operation of the BSC. It is a model that Ofgem is keen to see others adopt.

Stew Horne, head of energy networks and systems at Citizens Advice, says ­Elexon’s more proactive approach to supporting the change process has encouraged smaller ­parties to raise their own modifications. “On some of the other codes where the parties have to do the heavy lifting, that’s a significant barrier to change.”

Objectives and guidance

Horne believes governance could also be improved by setting a consistent set of objectives across the codes. “You might try to push the same change through two codes,” he remarks, “and it might pass through one but not the other because they don’t agree.”

Along similar lines, he says a stronger steer from Ofgem could reduce delays. Last year, Elexon published a white paper outlining proposals to create a new type of BSC party called a customer notification agent, which would allow customers to buy power from multiple suppliers.

Horne thought a modification to create such a party would be promptly submitted by one of the suppliers that stood to benefit, or even by one of the big six trying to “break from the pack”.

Instead, he explains: “Nobody proposed a modification for nine months, which seems crazy because everybody’s talking about this future market and the benefits are really tangible. It just seems like a clear example where if Ofgem drove the process more, or if smaller parties were empowered to make changes, you’d start to see faster and more fundamental change.”

Energy UK’s Martin agrees Ofgem should be “a lot more vocal” on code changes. He gives the example of UNC621, which sought to align the charging arrangements for gas with those in the rest of the EU. Ofgem eventually decided the proposal wasn’t compliant with the EU directive it was intended to implement – and therefore rejected it.

“You can go through a very long process of code modification – over a number of years in some cases – and Ofgem will say ‘That’s not what we wanted; can you start again, please?’ And we’ve seen that a ­number of times over the years.” Martin says ­earlier guidance from Ofgem would “save a lot of time on its own”.

This is also a problem recognised by UK Power Reserve’s Smith: “Ofgem are ­observers for most code governance. However, they tend to be quite quiet until it reaches the authority decision stage, which means a lot of time and effort has been invested, without much feedback on whether or not it’s likely to be successful.”

But not everyone agrees Ofgem should have a stronger presence in the code change process. “Actually we think Ofgem should step away and get less involved,” says ­Stefan Leedham, director of governance at Electralink.

He believes the regulator should only step in when modifications have a significant impact on consumers and policy goals. If the change process were quicker, taking “weeks rather than months or years”, it wouldn’t matter so much if the regulator rejected a proposal at the end of the process.

Excessive influence

As previously mentioned, another pressing issue that will need to be addressed by code reform is the excessive influence of large incumbents.

“If you look at most of the code panels out there today, you’ll find a lot of employees of big companies or historical fossil fuel companies on there,” says Martin, who was once a member of the Connection and Use of System Code (CUSC) panel.

Although one renewable developer now has a seat on the CUSC panel, the rest of the elected positions are held by the ­representatives of large incumbents or their subsidiaries, including Scottish Power, Eon, SSE, Uniper and Engie.

Martin says few of their smaller rivals are willing to spare the resources to have employees sitting on panels: “There’s a whole host of issues that won’t be relevant to that person as well.

“You might have one or two mods a year that are actually material to them… but due to the nature of the codes you could be sat there for multiple meetings without getting any useful input into codes, which makes it a challenge for them to then justify their time on those panels.”

Angela Love, director of strategy and communications at Elexon, says one option may be to provide funding for dedicated seats for specific groups of under-represented parties.

However, Leedham says this will not solve the underlying problem of a lack of engagement: “Just creating the seats doesn’t mean that they’ll be able to fill them.

“For several years under the SPAA ­[Supply Point Administration Agreement], the small supplier seat was held by EDF Energy,” he adds. “And then if you pay for it, what you tend to find is that you just end up with consultants filling it that answer to the people who pay them.”

Martin says the concerns of smaller ­parties could also be alleviated ­somewhat by changing the appeals process for ­modifications: “Currently, you can only appeal to the CMA [Competition and Markets Authority] if Ofgem goes against the decision of the code panel.

“If the panel is, for example, made up of large thermal generators, not that they are, you’ve got no way to appeal that through the CMA if you felt hard done by.”

Major reforms

All of the solutions discussed so far represent relatively minor tweaks to the current way of doing things. But many are hungry for more radical changes. One of the more drastic reforms being considered by Ofgem is a consolidation of the codes to make them shorter and less numerous.

The regulator already has firm plans to create a new Retail Energy Code that would replace several existing ones, including the Master Registration Agreement and the SPAA. Among those Utility Week spoke to, there was universal support for extending this approach to other codes.

Consolidation

At a working group held by Ofgem in February, Elexon presented proposals to create a total of three codes, all of which would cover both gas and electricity. The Retail Energy Code would be expanded to include the Smart Energy Code. The BSC would be combined with the Uniform Network Code (UNC) to create a wholesale and settlement code. And a combined network code would be formed by merging the CUSC, the Distribution Connection and Use of System Agreement, the Grid Code, the Distribution Code and the System Operator Transmission Owner Code.

“What we are proposing is we could move to a three-code model, but then either have one code manager over those three codes, or have three different managers, one across each of the codes,” explains Elexon’s Love. “If there’s different ones, we maybe need an overarching panel to co-ordinate change.”

Citizens Advice’s Horne believes ­having fewer codes, with the associated panels and administrators, would make it easier to engage with the change process: “We are a charity. As a statutory advocate, we’re able to resource quite a few of the codes.

“But we have to pick our battles and prioritise. And actually a bit of consolidation of the codes would go a long way in terms of us being able to cover more bases and make consumers’ voice louder.”

John Twomey, senior market development manager at National Grid Electricity System Operator, says: “There is definitely a case to look at consolidation of the codes. And certainly, if you look at what’s happened in the market, there’s a real relationship that exists between transmission and ­distribution, and generators and demand customers. And therefore you very much could see the logic in a world where you bring some of those codes together.”

At the same time, Twomey says having fewer codes will be of limited value unless something is done to make them shorter and less complex: “You also need to condense the level of detail that sits in those codes. From my perspective, bringing two codes together which are 1,000 pages each into a 2,000-page code isn’t going to solve the issue.

“But what could solve the issue is consolidating two 1,000-page codes into something which is 1,000 pages in its entirety.”

According to Electralink’s Leedham, one way of doing this would be to move towards principles-based regulation rather than setting exact dos and don’ts. He says the overly prescriptive nature of the codes is demonstrated by the inclusion of clauses to prevent signatories committing offences such as fraud that are already covered by general law.

Energy UK’s Martin says leaving some ambiguity in the codes would put the onus back on industry to “behave itself” or face reprimand by Ofgem.

However, Twomey cautions that there is likely to be division on this issue: “Some see these codes as being their contract with industry and they want them to be detailed and they want them to be very transparent in what they need to do, and others want them to be very agile and for change to happen quicker.”

Standardisation

As well as consolidation, Leedham would like to see more standardisation across the codes: “We run three codes and each one has a different process, and all 11 have something different. Could we not have one single change process?”

He says this proposition unfortunately met opposition at the work groups held by Ofgem recently, not because people are against the idea in principle, but because “everybody believes their own process is the best”.

While Leedham is focused on the code change process, Elexon’s Love says there is also an argument for standardising the ­funding models for the code administrators: “At the one end you’ve got the Data and Communications Company, which is fully price controlled and licensed. You then have the electricity system operator, which is under licence under National Grid’s price control. Then you have Electralink and Gemserv, which are commercial operators within the market. And then you have the Elexon not-for-profit model.

“Somewhere along that line is the most efficient and economical way of delivering these arrangements and we need to understand where it is and what the ideal model is for us to use going forward.”

Ending self-regulation

Catherine Mitchell, professor of energy policy at the University of Exeter, welcomes many of the aforementioned suggestions, including the consolidation of the codes, which she believes should be combined into a single all-encompassing document.

But she says they all fail to address the main problem plaguing the code change process – the industry “self-regulation” ­highlighted in Greg Clark’s speech.

“I think it is very important that we move away from signatories, in effect, being in charge of code changes,” she argues.

When the codes were put in place as part of the privatisation of the gas and electri­city sectors in the late 1980s and early 1990s, “it was felt that competition would be the answer and the signatories would know best what was needed and we should therefore let them take charge of those codes.

“And that was an ideological and naive approach to competition. Obviously, if you’re a code signatory, you’re not going to change a code which undermines your private interests.”

Mitchell continues: “In other countries when the energy system was privatised or liberalised, they did not put in place that regulation of codes. Codes were just part of normal regulation. It was nothing that the companies could get involved in.”

She says adopting arrangements that more closely resemble those in other European countries will be essential if Britain is to achieve its goal of developing a “sustainable, equitable and secure energy system in time to meet the carbon budgets. And I think it absolutely is one of those situations where a mid-way fudge doesn’t do it.”

Under her suggested model, all code administrators would be transformed into code managers. However, this would mean more than just taking a more proactive role in supporting the code change process, as Elexon says it already does.

While Ofgem would remain the final arbiter in many instances, the code managers would absorb the functions of the code panels, which would be abolished entirely. They would be responsible for proposing, developing and assessing modifications in ­consultation with stakeholders and based on guidance from the government and Ofgem.

Mitchell has long called for the creation of a system operator that is publicly owned and fully integrated across gas and electricity. If this happened and all the codes were combined into one, she says it would “make sense” for this entity to become the sole code manager.

National Grid’s Twomey worries that abolishing the code panels would also mean losing the valuable “expertise and experience” of its members. He says the panels can work well if they have “the right people, with the right make-up and the right structure”.

But Energy UK’s Martin says it is a possibility that is definitely worth exploring. All options should be “on the table”, he remarks, adding that the model proposed by Mitchell could allow a better representation of competing interests, although it could easily create a “long-winded” and “messy” change process, depending on how it is implemented.

And despite his concerns, Twomey certainly sees the value of ending “open ­governance” – whereby modifications are proposed by code signatories – for issues such as network charging that are so commercially important they can make or break business models.

Frustrating progress

Citizens Advice’s Horne says the battle over the removal of triad avoidance payments ­several years ago exemplifies the problems this creates. He says codes signatories submitted more than 40 alternatives to the main modification, forcing the CUSC panel to produce roughly 1,000 pages of reports, “which was just unbelievable”.

He suspects many were submitted with this purpose in mind, to gum up proceedings and prevent changes from being implemented. He says the saga “really reveals the ability for industry to frustrate progress and use the process to hold back reforms that save consumers money. There were millions of pounds on the table for that one.”

Ultimately, Horne is “agnostic” about what the arrangements should be, saying it’s the outcomes that really matter. This is a view shared by Tim Rotheray, director of the Association for Decentralised Energy: “We’re trying to achieve the most cost-effective way of decarbonising our energy economy and we know that the digital revolution and the decentralisation of equipment will be part of that. They’re not the whole answer but they are going to have a key role to play.

“What that means is that energy users and customers have the potential to play a very significant role in the future system. The codes were designed for energy experts, for central plants, the grid and Ofgem. They were not designed for hundreds of thousands of participants, but tens of participants.”

He says the real test of success will be whether energy customers can participate in “shaping and influencing” the codes and navigate through them in a “reasonable, cost-effective and not burdensome way”.

If not, then an important opportunity will have been wasted.

The main codes

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