Anyone who follows the energy sector closely will know that it is going through unprecedented change. Electricity generated from fossil fuels is rapidly being replaced by local electricity generation. New business models are also offering customers better ways to interact with the energy market.
The energy codes, the commercial contracts that underpin the energy system, were set up over the past 20 years with large, vertically integrated energy companies in mind. They are in need of a major overhaul to support moves to this cleaner, greener future.
Elexon manages the Balancing and Settlement Code (BSC), which makes sure that payments for imbalances in wholesale electricity supply and demand are settled accurately. The Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem are reviewing the codes and code governance arrangements now. This is a real opportunity to simplify these arrangements for the benefit of industry and consumers, and we will publish our views on options for how it could be done shortly.
The BSC is one of 11 codes across the gas and electricity sectors. Changing code rules can be a long process that can put off some energy firms that want to get involved because they have limited resources and competing priorities. The industry has six code managers and five code-delivery bodies, so it is no wonder that some people think the arrangements are fragmented and inconsistent.
The codes have to be simplified and consolidated, and our proposal is that they are reduced to just three. This would reduce costs and resource requirements. It would also streamline code management, speed up the change process, and simplify market entry. Also, energy companies must have credit in place when they sign up to the codes. We believe that pooling the credit arrangements across the codes could lower the overall credit burden on companies.
Ofgem is already developing a Retail Energy Code (REC) that combines the two codes for the gas and electricity retail markets (the Supply Point Administration Agreement and the Master Registration Agreement), and parts of the gas Uniform Network Code (UNC). Elexon believes this model could be built upon.
The REC could be expanded to include the Smart Energy Code. The Smart Meter Installation Code of Practice and the Data Communications Company could also accede to it. The BSC could be merged with the UNC’s management and operation functions to create a “Wholesale and Settlements Code”. This would ensure that the gas market benefits from robust performance assurance arrangements and a better resourced code manager. It would also improve the ability to understand the causes of “unidentified gas” (which can’t immediately be attributed to a particular user).
A third “networks and use of the system” code could bring together five electricity network codes that govern connection and use of the networks. This will help distribution system operators that will need to work closely with National Grid Electricity System Operator.
To ensure consistency, our preference is for one code manager to operate all three codes. Alternatively there would be one code manager for each of the three codes. There should also be a single digital portal to help new entrants, new business models and existing companies navigate the whole system and its processes.
These are options for how the codes could be reformed and there may be others. Over the next few months we will keep talking to BEIS, Ofgem and the industry about our views. Consolidating and simplifying the codes is clearly an opportunity for the industry – but more importantly for the consumer, through reduced administration costs for the market arrangements.
Reforms to the codes will be some way off, so we are making changes now, building on our “best in class” record and our focus on the consumer, achieved through a not-for-profit model. As such, within the current BSC framework, we have been making further improvements to our service. We intend to support new business models through our BSC “sandbox” so they can test their ideas without having to meet the usual code requirements. Our initial work on amending the BSC so customers could be served by multiple suppliers has been developed into modification proposal P379, put forward by New Anglia Energy, a new entrant. We are also leading the design of the Target Operating Model for market-wide half-hourly settlement in the electricity market for Ofgem.
The time is right for fundamental reforms to the codes that go way beyond the previous incremental changes. Elexon is ready to work with the government, Ofgem and the industry to put a new regime in place. Reforms to the code arrangements can help the energy system of the future and support our ambition to create the leading provider of central services to the energy sector by 2025.