Energy trading UK: Where next for code governance?

Is the UK energy market keeping pace with a push towards a greener more interoperable network? Energy consultancy Gemserv shares its opinion on code governance.

Last month, the UK’s Competition and Markets Authority (CMA) published its long awaited summary of provisional decision on remedies, with the absolute decision to be available in June 2016, writes Tony Thornton, head of transformation at London-based Gemserv.

In the meantime, respondents have until 7 April 2016 to comment and submit alternative remedies, including those related to codes and their governance.

Market transformation is driving a volume of change that is overwhelming code parties, especially those relatively new to the market. They struggle with the degree of resource and expertise that is required to engage with code governance practices.

Should codes be reduced or even, in some cases, removed all together? Should they consolidate into one big code? These are fair questions.

Value of energy network codes

However, codes are multilateral agreements that underpin market interoperability, they ensure fair and equitable competitive market practices (a level competitive playing field), and ultimately of course, support the delivery of services for customers.

They are an intrinsic part of the governance infrastructure to ensure energy markets work, as recognised by CMA which noted in its provisional remedies that codes are critical for the functioning of the regulatory framework.

The volume and complexity of change is not going to go away any time soon, as highlighted by the recent code modification process being fully ‘switched on’ under the Smart Energy Code (SEC) and the impending roll out of a national Theft Risk Assessment Service.

The energy landscape is undergoing transformational change: smart metering, faster switching, a new centralised registration service, and the transition to a low carbon economy. The consequences of all this change means that regulation and codes have to evolve too.

Complexity of smart energy codes

We must find a way to help code parties prioritise where their limited resources can be best focused, supporting the alternative business models that are now prevalent, as well as meeting the changing needs of organisations and the expectations of customers.

We need to remove the duplication where this exists, simplify codes where we can, be consistent in the application of governance practices such as change management, be more accessible and transparent, and perhaps even more critically, more strategically joined up.

[quote] Let’s not forget, to a large extent codes have performed extremely well to date.

Code Administrators have played an important role in marshalling multi-stakeholder views and perspectives, providing a range of services, including the delivery of critical market infrastructure needs, such as the design, delivery and maintenance of critical central systems.

But codes were never designed to contend with complex cross-code issues.

Despite steps taken by Code Administrators to try and join up the dots between them under the auspices of the Code Administration Code of Practice (CACoP), when it comes to significant cross-code cutting issues, the code governance challenge remains. One that requires a better and much more coordinated and strategic approach when tackling significant industry reform.

Code governance harmonisation

Gemserv diagram strategic body
Gemserv’s solution to code harmonisation would provide a mechanism for Ofgem’s strategic steer

The CMA’s proposed remedy – to place Ofgem, the UK’s gas and electricity regulator, at the heart of a more proactive role in code development by setting a strategic direction and greater engagement – is absolutely correct.

We have proposed a solution which builds on what is already proven to work, builds on the CMA’s proposed remedy, and complements Ofgem’s Code Governance Review (Phase 3).

Importantly, it does not introduce yet more risk to the energy market at a time when the fundamental reforms need to be protected from disruptive change, rather they need underpinning to ensure that these reforms can deliver maximum benefits for customers.

Our proposed solution can be introduced within 18 months. At its heart lies a Standard Code Model (SCM), embedded and governed in a reformed CACoP, driving simplification, consistency, transparency, coordination and accessibility across all codes.

Importantly, all future industry change would have to be consistent with these principles to avoid regressive steps that could then undo the improvements that will have been achieved.

Embedding these principles would drive code harmonisation, leading to a natural consolidation of codes where it makes sense to do so. It would pave the way for a consolidated Retail Code, containing all the elements that are pertinent in support of retail competition, delivering a one stop shop for retail services and setting the blueprint for others to follow.

In a thought paper released in January 2016, Gemserv believes that the solution is within the grasp of the energy industry to make it happen quite quickly and with the minimum of fuss.

We have proposed the Strategic Body’s objectives could be to:

  • Deliver a stronger mandate;
  • Embed the Standard Code Model principles;
  • Provide a mechanism for Ofgem’s strategic steer;
  • Provide a cross code sounding board;
  • Produce a joint industry plan;
  • Benchmark and drive improvements; and
  • Improve code party engagement.