ELEXON Insights: Independent analysis backs the case for code reforms

Angela Love, Director of Strategy and Communications at ELEXON, discusses analysis which ELEXON commissioned from consultants, Cornwall Insight on options for reforming the energy codes.

Published: July 2019

Options for code reform put forward by energy regulator Ofgem

Last week ELEXON held its annual Balancing and Settlement Code seminar where we discussed our performance over 2018/19 and set out our priorities for the coming year.

One of the key areas of focus was the need to reform the energy codes, which is a strategic priority for us in our 2019/20 business plan. Ofgem and Government are reviewing the energy codes landscape. Joanna Whittington, Director General, Energy and Security, BEIS and Mary Starks, Executive Director, Consumers and Markets, Ofgem, outlined their vision for reforms at our event.

Ofgem set out two potential framework options where either a strategic body would oversee a separate code manager (or managers). Alternatively there would be a model with an integrated rule making body, encompassing code management and strategic functions. Each of these options would be accountable to either Parliament, Government or another appropriate body.

Although Ofgem didn’t go into specific detail on their proposals, ELEXON believes that either model would be a good way to achieve code reform and address the concerns around proliferation of codes and code bodies.

Energy codes need to be simplified and consolidated

The codes play an essential role. They provide the commercial contracts between market participants and they comprise the rules for operating the energy markets. The electricity codes in particular help ensure that the lights stay on.

It is estimated by Cornwall Insight that 80-90% of the end consumer’s energy bill is contained within, linked to, or influenced by the industry codes.

We have been saying for a long time that the codes need to be simplified and consolidated to provide an improved user experience for market participants. The rule change process needs to be more agile.

The codes also need to be fully ready to support the transition to a smarter energy system, including linking heat and electrification of transport and energy, to assist the ‘whole system’ approach.

ELEXON’s Policy View on code reform sets out our initial proposal for consolidating the 11 existing codes into three new codes covering:

  • Retail energy and smart metering (the Retail Smart Energy Code – RSEC)
  • Wholesale energy and settlements (the Wholesale and Settlement Code – WSC)
  • Networks and Use of System (the Networks Use of System Code – NUSC)

Analysis by Cornwall Insight

We want to make additional contributions to the debate on code reform. To help lead the debate we commissioned consultants Cornwall Insight to look at the various options for consolidating the energy codes and we presented our opinion on their independent analysis.

We asked Cornwall Insight to analyse six potential new code governance structures:

  • Horizontal alignment model – ELEXON’s proposal as described above
  • Vertical alignment model – where the wholesale, networks and retail aspects for gas and electricity are separated into two individual fuel specific codes
  • A single code – for the entire gas and electricity arrangements
  • Upstream/downstream split – two dual fuel codes, one for downstream retail activities and the other for upstream wholesale, settlement and system operation functions
  • A framework agreement – a single ‘core’ code containing the standard code functions, with specific separate ‘arms’ to deliver technical and specialist functions
  • Dual fuel retail, single fuel upstream – a dual fuel retail code (to maintain the dual fuel aspects of the Retail Energy Code and Smart Energy Code), and two single fuel codes each covering the upstream, network and market functions

The most important take-away point from the analysis is that all of the options would be an improvement on the current arrangements, when assessed against the objectives BEIS and Ofgem have set for their review.

Cornwall Insight’s analysis ranks the framework agreement, the horizontal model, and the dual fuel retail / single fuel upstream and downstream model as positive overall.

‘Once in a generation’ opportunity to reform the codes

We see consolidation of the codes as a first step, followed by simplification of the code contracts. Ultimately this will allow for a consolidation of code managers and delivery bodies into ‘the code manager’.

Ofgem and BEIS have yet to say when we can expect to see next steps in the reform process. We look forward to working closely with them over the next few months as they determine their proposed course of action.

Major changes are coming to the retail market. We are leading on the implementation of Market Wide Half Hourly Settlement reform in electricity, which will ensure that the industry and consumers get the most benefit from smart meters.

In the future, further changes may be made by BEIS and Ofgem to the design of retail markets, and the arrangements for connecting to, and use of the networks.

Reform of the codes must work in tandem with these developments and in fact it is the key to delivering some of the proposed initiatives in a timely manner. There is a once in a generation opportunity for the industry to work together with BEIS and Ofgem to change the code arrangements for the better.

Reforms will help to make the energy system more adaptable and responsive to major changes in the way we generate, supply and use energy in the future.

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