Guidance

Energy Security Bill factsheet: Code governance

Updated 1 September 2023

‘Ofgem will be at the heart of this new regulatory framework, with a simpler and clearer focus on the interests of customers…and greater powers to drive through changes to industry codes when these are needed to meet broader policy objectives and are in the interests of customers and competition.’ - CMA – Energy Market Investigation Final Report, 2016.

Why are we legislating?

We are legislating to make sure that the rules of the energy system keep pace with our net zero ambitions and deliver for British consumers. The energy codes are documents containing the detailed rules of the electricity and gas systems. These rules cover everything from how buyers and sellers must interact in commercial markets to the technical specifications required to connect to the grid. Currently the codes are in the main governed by committees with industry membership, such as electricity suppliers and gas transporters, and administered by code administrators who are in most cases owned by one or more industry parties. This means that industry is responsible for keeping the contents of the codes updated over time, which is often necessary when a new technology or government policy is introduced. There is currently little incentive for industry to change these rules in a manner that would be contrary to their own interests, even if those changes would benefit consumers or further the government’s strategic priorities. Furthermore, the current processes for changing the codes were designed to deal with a more predictable energy system in the near-term post-privatisation. As incremental changes have been made, the codes have become increasingly complex and fragmented, which has acted as a barrier to innovation and competition.

We will be creating a new governance framework for the energy codes that will move the responsibility for code governance to one or more newly created code managers instead. These code managers will be directly accountable to Ofgem rather than industry, which will allow Ofgem to drive strategic change across the codes for the benefit of consumers and competition. Our desired outcome for energy code governance is a framework that is forward-looking, innovative, agile, easy to understand and able to accommodate a growing number of market participants, and through this, supporting the delivery of Net Zero and the British energy security strategy.

How the Bill will achieve this

Ofgem’s new functions: The Bill grants Ofgem several new functions so that it can fulfil its new strategic role. These include the duty to publish an annual strategic direction statement setting out its vision for how the codes should evolve over the following year informed by government policy amongst other things; the ability to make direct changes to the codes under a limited range of circumstances; the ability to select and license code managers; and the ability to issue directions to central system delivery bodies who are responsible for managing the IT systems that support the energy market. Alongside the new powers Ofgem also plan to carry out a code consolidation and modernisation exercise in order to simplify and make the codes more accessible.
New code manager roles: The creation of Ofgem’s new strategic functions will be complemented by the licensing of code managers, who will take over responsibility for managing the code change process from the existing industry-led bodies. Code managers will be appointed following consolidation and they will be required to deliver the strategic direction set by Ofgem, in close consultation with industry and other interested parties via new stakeholder advisory forums. They will also be responsible for managing modifications to the codes, including proposing, prioritising and taking decisions on changes put forward by other parties as well as raising changes of their own.
Transitional provisions: As part of facilitating the transition to the new governance framework and ensuring that the new code managers can effectively carry out their roles, the Bill will also grant Ofgem transitionary powers. New powers will allow Ofgem to modify existing governance frameworks such as codes, licences and contracts, which will be required alongside the appointment of new code managers. They will also be able to create transfer schemes, which will ensure the passing of information and assets from the existing code administration parties to the newly appointed code managers.
## FAQ

When will the reforms be completed?

Ofgem will be granted up to 7 years to complete the reform process, although many of the code reforms are likely to be completed sooner than that. This is to give Ofgem enough time and flexibility to consolidate the codes, and to minimise the risk of disruption to ongoing industry initiatives. The ‘go-live’ date for each code will be linked to the appointment of its first code manager and some codes may be reformed sooner than others.
How much will these changes cost?

We estimate that these reforms will cost around £37m per year. These costs will be passed down to industry parties and then further to consumers, which will add less than £1 per year to their energy bills. We expect the benefits of these reforms to outweigh the costs due to the introduction of more efficient processes, the removal of barriers to innovation, and the prioritisation of code changes that advance consumer welfare and decarbonisation.    

Background

In 2019, a joint BEIS and Ofgem consultation was published to gather initial views on reforms to energy code governance.

The 2020 Energy White Paper committed to overhaul energy code governance as part of our transition to a clean energy system. 

Our 2021 consultation built on the previous stakeholder engagement and went into more detail on the institutional governance options for code management. A majority of respondents (82%) agreed with the preferred option of Ofgem being designated as a ‘strategic body’ over the codes with separate code managers accountable to them.

Further information

The following documents are relevant to the measures and can be read at the stated locations:

• Consultation, Impact Assessment and Response (2021)
• Consultation, Impact Assessment and Response (2019)