SmartestEnergy’s Colin Prestwich thinks it is time to amalgamate industry codes and industry code administrations
Code governance in the energy industry is being reviewed by several organisations. It is the right time to consider the amalgamation of codes and code administrators so that the governance is consistent and changes can be made more easily. This does mean, however, that the structure of the industry needs a fundamental overhaul.
Four reviews are currently examining governance. The first is the Competition and Markets Authority (CMA), which provisionally found that slow and cumbersome code changes adversely affect competition and stifle innovation. Parties have conflicting interests or limited incentives to promote and deliver policy changes, while Ofgem is unable to influence the code modification process. The CMA wants to see adjustment both in the way codes are changed and how the changes are implemented. It has three proposed remedies:
- Making code administration or implementation of code changes a licensable activity (Remedy 18a).
- Granting Ofgem more powers to project-manage or control the code change timetable (Remedy 18b).
- Appointing an independent code adjudicator to determine which code changes should be adopted if there is a dispute (Remedy 18c).
Smartest Energy thinks the CMA is correct that the actions currently being taken to ease cross-code modification do not provide a formal overarching change mechanism. But giving more power to Ofgem would probably stifle the innovation the CMA wants to encourage. Ofgem already has powers to control the timetable.
A code adjudicator is not necessary, but would have the advantage of separating the responsibility for economic regulation from oversight of industry code change.
We do not believe that making code changes a licensable activity will have much of an effect, unless the intention is to give code administrators a responsibility to drive change. This would be inappropriate, as the change programme would ultimately be driven by Ofgem. Obviously, more directional change should come from government, but lower level change proposals should continue to come from stakeholders.
In other reviews, Ofgem itself is also following up on its previous code governance review. It expects to consult soon on more detailed proposals for change on such issues as significant code reviews, code administration, self-governance and charging methodology governance. The remit of this work is knowingly superficial as Ofgem is mindful of the CMA work.
Elexon, the code administrator which oversees the Balancing and Settlement Code (BSC), is conducting the third review, into its strategy and the service it offers BSC Parties. The requirement to have the BSC in force is placed on National Grid through its licence, so it already falls under Ofgem’s regulatory remit. The BSC also enables Ofgem to direct National Grid to step in to deliver the BSC Modification process where Elexon or the BSC Panel have failed to comply with the modification procedures or any Authority decision in relation to the modification procedures. Elexon’s activities are funded through BSC Parties and, unlike other code administrators, it is independent and not for profit. It is currently very difficult for Elexon to widen its activities because of its position as the BSCCo, even though its central position in the industry makes it the obvious choice to take on a greater role for co-ordinating across the board.
Meanwhile, the government’s “red tape challenge” – a route for business to tell government how it can cut red tape and reduce bureaucracy – is looking at the energy industry. The deadline for responding was 14 September. Government has kept some issues out of scope because of the CMA investigation. This is a shame: it is probably the initiative that would be best placed to deal with industry governance, as there are so many statutory obligations of the various parties to consider.
Who does change concern?
Electricity suppliers are obliged to be a party to and comply with six codes: Connection and Use of System Code (CUSC); Balancing and Settlement Code (BSC); Master Registration Agreement (MRA); Distribution Connection and Use of System Agreement (DCUSA); Smart Energy Code (SEC); and the Theft Risk Assessment Service (TRAS).
All of these codes have differing governance, funding, ownership, change and voting structures. Small suppliers in particular find it very difficult to navigate their responsibilities and to instigate and follow changes. These codes also govern, directly or indirectly, distribution network operators (DNOs), meter operators, data collectors, data aggregators and the smart meter Data Communications Company (DCC).
Suppliers are responsible under the BSC for the performance of their agents (under the so-called Supplier Hub principle), but this is outdated, because it reflects a period when the supplier contracted directly with all of the entities in the hub. In fact, agents are often separate companies and may not have a contractual relationship with the supplier (for example customers can procure metering and data collection services direct from agents such as data collectors). It is not possible for the supplier to ensure that the agent fulfils all of its obligations under the BSC. Agents should now be independently governed by the BSC.
The lack of a single governance structure overseeing all the codes and all the different parties also leads to inefficiencies in the implementation of change, especially that which involves more than one code.
As the CMA has pointed out, at some point in the future, there is going to be a requirement for all meters, when they are “smart”, to be settled half-hourly. This is clearly going to be a massive industry change, which will involve many parties and several codes. We believe that the DCC needs to be more integrated into the BSC arrangements for sensible change to take place. Central data collection is the Department of Energy and Climate Change’s (Decc’s) solution for smart metering. A common approach to settlement is needed, but that does not mean that data collection in the existing half-hourly market needs to be centralised, merely that the DCC and individual data collectors have their activities overseen by the right governance.
The way forward
Without a fundamental restructuring, there will just be further proliferation of codes. National Grid is already responsible for the CUSC and indirectly, through Elexon, for the BSC. We believe that National Grid should
have similar oversight of the other codes, discharging its responsibilities through a new “Super Code Administrator”. In the long run, the codes could be merged. In the short term, there would be much greater efficiency.
As Elexon acknowledges, there are definite advantages in code administrators having a one-stop shop to make code governance easier for existing parties as well as new entrants.
A Super Code Administrator would have design authority and change review functions, which we anticipate could be fulfilled by Elexon. Many of the operations and IT functions could be re-contracted to the companies currently fulfilling those roles, such as Gemserv and ElectraLink. This is not a proposal for central planning, merely more central co-ordination. Change should continue to be driven by industry and its stakeholders. This is important for competition so that innovation is not stifled. Efficiencies could also be achieved in the area of credit and collateral, which currently have to be provided to National Grid, Elexon and the DNOs. There are also low-level contradictions between the codes which could also be much more easily ironed out with a Super Code Administrator.
It is not appropriate for Ofgem to propose change if it is the final arbiter of change. If change is not forthcoming from industry, then customer representatives, service providers and other stakeholders should be able to raise changes. We see merit in the Code Administrator(s) having the capability to raise changes, so long as these are assessed on an equal footing to those proposed by stakeholders.
We believe that longer-term issues such as smart grids and embedded generation would also be much more easily resolved if there were a Super Code Administrator.
With more and more embedded generation, the split between transmission and distribution seems more and more arbitrary. Use of system charges and the embedded benefits of losses and TNUoS should be calculated as if there were just one system. This could happen if National Grid was given overall control and full system operation responsibility (while retaining current ownership). It is becoming increasingly apparent that there is a need for ancillary and balancing services to be available at all voltages. The perceived inconsistencies of supplier imbalance and DNOs’ desire to load-manage could be resolved.
The industry must prepare for the future by consolidating both its codes and its code administrators. The CMA’s current proposals do not meet this need.
All suppliers, distributors and agents (including the DCC) should be governed under one code. More parties should be able to propose changes and Ofgem should continue in its role as regulator but should not instigate change unless directed to do so by government. Elexon is the natural choice for the role of Super Code Administrator and National Grid’s obligation to set up the BSC should be extended to the other codes.
Industry organisations respond:
A standard code model with many users will work better than a one-stop shop
Dear New Power
I read with great interest Colin Prestwich’s Opinion article in October’s New Power calling for a ‘one-stop code shop’. As head of transformation at Gemserv (an existing code administrator), you may be surprised to hear that I agree with the core element of his argument – there is a need for significant change in how industry governance is structured and managed. After all, Gemserv’s vision is “to ensure complex markets work for everyone’s benefit”. However, I don’t believe a ‘Super Code Administrator’ is the answer – importantly, my view would be exactly the same even if that super administrator was Gemserv. Let me explain why.
In order to reach the right answer, we need to ask the right question, ie what problem are we trying to solve? The Competition and Markets Authority (CMA) frames the problem as slow and cumbersome code changes adversely affecting competition and stifling innovation. This is a broad statement and, being a practitioner, I would like to put it another way, in the form of two problems. First, we need to ensure strategic change can be progressed effectively, delivering the required policy outputs in a timely manner. Second, we need to deliver an efficient governance regime that enables all parties, on a process and practical level, to engage with the change process. If those are the problems, how do we solve them?
As a code administrator, we understand the challenges faced by market participants. Codes are complex, reflecting as they do the complex nature of the energy markets they serve. We have been working closely with our stakeholders to critically assess what needs to be done. We understand that there is too much change, and that codes can be impenetrable. We believe there is no room for complacency and that reform is necessary.
However, we should not lose what is already working well. Many industry participants (including Ofgem) acknowledge that code administration works for a majority of changes. The challenge is with large complex code changes that require joined-up thinking and better co-ordination.
We therefore propose that all codes should follow four key principles: consistency (eg terms and structures that are common, standardised practices); simplicity (with language that is easy to understand); accessibility (eg support, guidance, navigation); and co-ordination (eg cross-code management practices). The principles should be developed and housed under a standard code model, a blueprint that all codes should follow.
Not a single governance structure, but a common approach, and we already have the building block: the Code Administration Code of Practice (CACoP). A strategic body would oversee large, complex code changes to ensure efficient practice; this could dovetail with Ofgem’s proposed changes to its Significant Code Review mechanism (currently being consulted on).
Consequently, as I said before, I don’t believe a super code administrator is the solution. The approach disregards the working practices that have been honed and refined over the years and which work extremely well. Tearing up the whole governance framework and starting again is not a proportionate and effective approach. Rather, it will introduce a de facto monopoly service provider, that will not compete away inefficient costs, will constrain innovation, and will lead to consumers ultimately having to bear the cost burden for an inefficient and ineffective code administration service.
For the same reason, licensing code administrators is not the answer, as it will add cost and complexity. A much more effective driver is contestability in code administration (without cross-subsidy from monopoly services), where competition delivers the best results, rather than creating monopolies or building barriers to entry.
A standard code model will act to drive reform where it is needed most, it embraces best practice, and will act as a catalyst towards code consolidation – creating fewer codes, but with meaningful boundaries and accountabilities, eg a single Retail Code rather than creating giant code that nobody can even lift let alone understand or navigate!
Yes, we need to change, but let’s ensure it delivers the right output: a consistent, simpler, accessible and co-ordinated industry governance regime.
Head of transformation
Joint working and better co-ordination can help reduce the codes burden
Dear New Power
SmartestEnergy’s opinion piece in the October issue of New Power rightly raises a number of issues facing code administration and stakeholders both now and into the future with the challenges of substantial industry change both now and in the years ahead.
In particular we agree with the need for more central co-ordination, which would facilitate more efficient implementation of cross-code change. CACoP Principle 13 will facilitate this through improving the visibility of related modifications across industry codes, encouraging co-ordination and impact assessment, as well as streamlining the associated change processes.
However, neither Principle 13, SmartestEnergy’s proposal for a Super Code Administrator, nor the CMA’s proposals will address the challenges independent suppliers face with the industry code change processes. Nor do they propose how market participants should be ‘proactively informed’.
In this context we see opportunity for code optimisation, for example a single code modification website that tracks all modifications and all modification work groups, which would provide all parties with a more holistic view of industry change and significantly reduce administrative costs. This would help address the amount and sheer weight of change occurring in parallel, which makes even tracking, understanding and prioritising proposed changes challenging for smaller market participants.
Other ideas to facilitate greater supplier engagement include reconstituting the Cross-Codes Electricity Forum, which used to be run by Elexon [in partnership with National Grid and ElectraLink].
While there are issues and sensitivities around scope of work for each code body, it would be possible to establish a joint code bodies working arrangement to also include gas. This could be used to push and pull information to and from suppliers, as well as to address cross-code change pipeline management. The aim would be to canvass industry and policy maker views on possible matters for change. Change suggestions could be categorised into non-material, cross-code impacting, material, major or other appropriate categories, and the amount of change in each category assessed and grouped. This could feed into the proposed methodology for implementing Principle 13, as this would facilitate proactively managing cross-code changes and the potential clash of any major changes while also helping to feed in smaller participant views earlier in the process.
In general terms, we don’t consider that code administrators have added to the challenges facing independent and smaller suppliers, but we would like to see a closer regulatory scrutiny of code compliance. Our belief is that there are many code breaches that lead to poor customer experience and the task and cost of resolving issues often falls on new entrant suppliers that tend to be acquiring customers.
Overall, when considering how easily proposed remedies can be implemented, the level of inherent complexity involved must be fully worked through to prevent unintended consequences. First Utility looks forward to further participating in this debate and around solutions to improving engagement with smaller market participants.
Senior regulatory and policy manager