ELEXON insights: Code Governance Review
This ELEXON insight offers our view of how energy codes (the commercial arrangements underpinning the energy system) could be consolidated and simplified for the benefit of new entrants and energy companies that are already in the market.
Latest – September 2019
We have published our response to Ofgem’s and BEIS’s (Department for Business, Energy and Industrial Strategy) consultation on reforming the energy industry codes.
We continue to strongly support reform of the code arrangements, in particular the objective of consolidation and simplification, and we will work with Ofgem and BEIS to help them deliver the best possible outcomes for the industry and consumers.
Of the two models put forward by Ofgem and BEIS for reforms, our initial preference is for Model 1 where a separate strategic body works with a code manager (or code managers). We believe that Ofgem is ideally placed to perform the strategic body function.
Read the full ELEXON response to Ofgem’s and BEIS’s Reforming the Energy Industry Codes consultation
Timeline
- July 2019 – ELEXON commission Cornwall Insight to assess the case for reforming energy code. Angela Love presents our views on Cornwall Insight’s analysis at our Annual BSC Seminar.
- February 2019 – Angela Love presents at the BEIS and Ofgem Energy Codes Seminar and outlines a proposal for code consolidation and simplification.
- December 2018 – BEIS and Ofgem announce a review into the energy codes.
- June 2017 – ELEXON publish views on the Ofgem’s proposals under the Code Governance review, Implementing the Competition and Markets Authority’s (CMA) recommendations.
The energy codes review
In December 2018, the Government, through the Department for Business Energy and Industrial Strategy (BEIS), and Ofgem announced a review into the energy codes.
The review is considering options for improving the existing code arrangements, including scope for fundamental reform.
ELEXON’s view
We believe the codes could be consolidated and simplified to support smarter more flexible energy systems.
Today we have responded to the review by publishing our policy view setting out options for reforming the codes.
In this we propose that the 11 codes for the gas and electricity sectors are consolidated and simplified into three codes to govern both sectors:
- A Retail Smart Energy Code covering all aspects of the energy retail markets, including codes which govern smart metering
- A Wholesale and Settlements Code combining the BSC with the management and operation functions of the existing Uniform Network Code (which governs the gas sector)
- A Networks and Use of the System Code bringing together five electricity network codes governing connection and use of the networks
Angela Love, Director of Strategy and Communications at ELEXON, previously gave presentations at a BEIS/Ofgem workshops on the Energy Codes Review on 2nd and 18 February 2019 where she outlined our views.
Cornwall Insight Study on Code Consolidation
ELEXON has made a further contribution to the review by BEIS and Ofgem into energy codes by commissioning consultancy Cornwall Insight to assess the case for reforming the codes, and to also consider how our proposal (above) compares with other options for reforms. All of the models analysed by Cornwall have benefits compared with the current arrangements.
Angela Love presented our views on Cornwall’s analysis at our Annual BSC Seminar on July 11 2019.
- Cornwall Insight Study for ELEXON on options for reforming the energy codes
- Presentation by Angela Love on Cornwall Insight energy codes analysis
Benefits of simplifying and consolidating codes
Under the simplified model we believe that there will be a number of benefits:
- A simplified and more efficient user experience
- Easier processes for new and existing users to navigate
- A scalable and flexible solution for future changes to energy market rules
- The ability to process changes more quickly and the opportunity for more tailored engagement of parties
- Consistent processes including a one-stop-shop service desk for market participants to use which would cover all the codes
- The potential pooling of credit arrangements between the codes to reduce energy companies’ credit burden
- The ability of the Code Manager to coordinate and prioritise change, and be guided by Ofgem and Government on important changes
- Greater interaction between Distribution System Operators and the Electricity System Operator
- Cost synergies
We believe that there is a real opportunity for the industry to deliver a new code model, and these benefits. Reforming the codes will provide a framework for the future, embedding industry best practice and enabling new business models.
Reforms can enable the alignment of gas, electricity, transport and heat delivering a whole system approach.
Funding Model
Currently there are a variety of different funding approaches that are used across the Code Managers and delivery models. The Data Communications Company is fully licenced and price controlled.
National Grid Electricty System Operator (administrator for the CUSC, Grid Code and the STC) is licenced under National Grid and subject to their price control. Gemserv and Electralink are commercial organisations whereas ELEXON operates on a not-for-profit basis.
We believe that it is also the right time to consider each of these models and determine which one delivers the desired behaviours and most efficient and effective means of providing the services needed.
There is sufficient merit in moving to a model which emulates the end-to-end code management service that ELEXON offers. We have a ‘best-in-class’ record on customer satisfaction with our services as evidenced by Ofgem’s Code Administrators’ Performance Survey.
This is underpinned by our ‘not-for- profit’ business model and our transparency which sees us publish our business plan including budget every year for industry comment.
How the new arrangements can be delivered
We recognise that there is a lot of change within the energy market currently and the codes review could place an additional burden on the industry. But the codes review should be seen as complimentary to, and supportive of these other initiatives. It may even be the vehicle to implement some of their conclusions.
We believe that bringing the codes together under the ownership of the Code Manager, or Code Managers, will result in simpler arrangements going forward.
There has been progress towards this such as incorporating the independent gas transporters into the UNC and the changes to the funding governance and ownership of Xoserve. And more recently the development of the REC shows how simplification could be achieved. However, we need to go further.
We believe our vision is achievable and that if there is a will to change the Codes landscape for the better, the result will be major benefits to customers and the wider industry.
Improvements to code governance
Ofgem and industry have delivered incremental improvements to energy code governance. This has included scope for ‘self-governance’ where the industry can decide on routine changes to the codes, without needing Ofgem’s approval.
However the energy system is changing rapidly with more localised electricity generation and new business models entering the market. More widespread reforms to the codes may be needed to support moves to a smarter energy system.
The review will also revisit the Competition and Markets Authority’s (CMA) remedies for code governance following the completion of its investigation into the energy market in 2016. It is expected that BEIS and Ofgem will announce next steps for the review in the coming months.
Background reading
- Ofgem Energy Codes Review – 26 November 2018
- Gov.UK Energy network codes review documents – December 2018
- Competition & Markets Authority: Energy market investigation – 24 June 2016