Without the right structures and incentives in place, it will be impossible to create the smarter, more flexible system which Britain will need in future. The way in which these codes are formed should therefore be a key concern.
For an example of why code governance matters, you need look no further the capacity market. Small-scale distributed generation has been the big success story so far, elbowing out the transmission-connected combined-cycle gas turbines (CCGTs) which the government wanted built. This was in no small part due the triad avoidance payments which distributed generators are able to collect.
Worried that they were giving an unfair advantage to distributed generation, in January last year Ofgem launched a review into the payments in an effort to “level the playing field”.
The regulator will have the final say, but its decision will be strongly influenced by the recommendations of the Connection and Use of System Code (CUSC) panel, which scrutinises proposed changes to the codes governing the use of the transmission network.
The panel members are obliged to act impartially, but several organisations are nevertheless worried that that they are failing to represent the “full breadth” of the industry. They say the panel is stacked with the employees of the big incumbents and they are not really listening to the concerns of the new kids on the block.
“It would be difficult for panel members not to reflect their big company thinking and the votes show this.”
UK Power Reserve chief executive Tim Emrich
In addition to an independent chair, a secretary and representatives from Ofgem, National Grid and Citizens Advice, the CUSC panel also has seven members representing users of the code. Out of the seven, four are employed by big six energy companies – EDF Energy, Eon, SSE and Scottish Power – and the remaining three work for Drax, First Hydro Company and industry group Energy UK.
“I have no reason to doubt that those who are acting on the CUSC panel are doing their duty and acting impartially, says Association of Decentralised Energy director Tim Rotheray.
“However, if I am someone who has been working in central generation, dealing only in central plant for my entire life, it is very unlikely that I’ve got the perspective of a decentralised generator at a chemical works. It’s outside of my knowledge. It’s outside of my experience.” He says its decisions are therefore likely to be “skewed in a particular direction”.
UK Power Reserve chief executive Tim Emrich agrees: “As anyone who has worked in both a big and a small company will know, there are profound differences in culture, loyalties and thinking. It would be difficult for panel members not to reflect their big company thinking and the votes show this.”
But he also has much harsher criticism of the panel, describing it as “mafia like”.
“The CUSC Panel is no longer a mechanism for the gentle tweaking of rules and regulations to ensure they’re fit for purpose,” he says. “Instead, it’s where National Grid and the big utilities pack the panel and reduce independence in generation, limit choices for the consumer, and maximise profit for their big corporates.”
UK Power Reserve is among the biggest winners of contracts for new distributed generation in the capacity market and stands to take a big hit if triad avoidance payments are cut drastically. “We tried our best to present alternative positions but the working group and panel did not vote in favour of these positions,” Emrich complains. “The chips are stacked against us.”
Mike Toms, the independent chair of the panel, has a very different perspective, saying panel members had a variety of views on what should happen with the payments. “The idea that they all acted like a kind of cartel and all voted for the same thing would be quite wrong.”
Toms says the panel members are elected by the parties which are subject to the code “so it is not a self-appointed club”. He says he has “never heard any suggestion” of companies lobbying to get their employee voted in.
Although he cannot “search the souls” of individual members, he says the panel “tries its best” to be objective. “On occasion, I have seen panel members express preferences for positions which would not be positions which their employers would necessarily like, because they are true to their obligation.” If they were not “the system would become untenable”.
He points out that all CUSC members can put forward proposals and that code modifications are not only scrutinised by the panel but by a wider working group as well. “Anyone who is interested in the issue, and they don’t have to be a CUSC party, can ask to be on the working group.”
Matthew Lockwood, senior research fellow at the University of Exeter’s Energy Policy Group, does not share Tom’s trust in the process, which he describes as “self-authored regulation”. He says there is a wider problem across a number of similar panels.
As of October 2015, employees of incumbents made up at least half of the membership of all but two of the UK’s code governance panels. For three of the panels, the employees of incumbents made up more than three quarters of their membership.
Lockwood says just because many of the panels’ members are elected does not mean they are representative: “The trouble is it appears to be a level playing field, but if you’ve got vastly different resources within companies then effectively you get incumbency domination by default.”
Although there are clear examples of members voting against the interests of their employers, Lockwood says it is difficult to tell if they are acting impartially. “The reality is unless you sit through each and every meeting it’s hard to say.
“If you think about this as a governance system, does Ofgem, which is really the responsible overseer; does it really know; does it have the capacity to know, whether or not that is the case?”, he questions. “How is that actually enforced and what is the compliance mechanism? I don’t think there actually is one.”
It is for this reason that Lockwood says responsibility for scrutinising code changes should be taken “out of the hands of companies” and transferred to a public body; perhaps one separate from Ofgem which is more specialised towards the task. He says the inertia created by the dominance of incumbents means we need to “completely end the self-regulation system.”
It may be true that panel members are acting impartially; making decision entirely based on what’s best for the energy system and giving no particular regard to the concerns of the companies which pay their wages. But without “searching their souls” it really is impossible to tell if this is the case.
As the UK strives to build a smarter, more flexible energy system, the question is, are we willing to take it on faith?