Energy Bill 2022: Independent System Operator and Planner and governance of Gas and Electricity Industry Codes

On 6 July 2022, the Energy Bill (the “Bill”) was published, which aims to drive the energy transition towards “cheaper, cleaner and more secure energy” as set out in the Queen’s Speech on 10 May 2022. In this article, we set out the key takeaways concerning Part 4 of the Bill, the Independent System Operator and Planner (“ISOP”), and Part 5, the governance of the Gas and Electricity Industry Codes.

Part 4: Future System Operator

Part 4 of the Bill will establish the ISOP, which is a new independent public corporation, licensed and regulated by Ofgem. The ISOP will have responsibilities across both the electricity and gas systems, to drive progress towards net zero while maintaining energy security and minimising costs for consumers. Government and Ofgem have emphasised that the structure will allow the ISOP to be independent from both commercial energy interests and Government control.

Gas and electricity functions

The ISOP will take on the existing capabilities and functions of the National Grid Electricity System Operator Ltd (“NGESO”) and some of the functions of National Grid Gas plc (“NGG”) via a transfer scheme provided for in the Bill. The transfer scheme is explicit in outlining the necessary duties of consultation and transfer of property rights and liabilities, as well as providing guidance on issues concerning appropriate compensation to transferors on elements of businesses transferred into the ISOP. Also detailed in the Bill is the power to force the sale of National Grid plc assets in connection with the making of a transfer scheme, highlighting the prioritisation of avoiding any disruption to the energy system throughout the transfer of functions to the ISOP.

Specifically, the Bill makes amendments to the Electricity Act 1989 and Gas Act 1986 to create the two new ISOP licenses (the ‘electricity system operator’ and the ‘gas system planner’ licenses). The amendments incorporate the specific facilities introduced by the creation of the ISOP into the current regulatory system, particularly regarding the authorisation of licenses which carry out planning and forecasting functions of the ISOP. The ISOP will be tasked with managing the electricity system in real time through coordinating and directing the flow of electricity onto and over transmission systems, as well as making and administering arrangements to facilitate these systems. The ISOP will also be trusted with the future development of these systems by undertaking advisory, enhanced planning and competition roles to provide a holistic strategy to facilitate the net zero transition.

In addition, the ISOP will be responsible for gas strategic network planning, long-term forecasting, and market strategy functions in connection with the development of arrangements relating to the conveyance or supply of gas. However, it will not take on the real-time gas system operation or Network Emergency Coordinator functions, which will continue to be performed by NGG.

Other functions, duties and powers

The Bill imposes a new statutory duty on the ISOP to respond to requests for advice, analysis or information from Government or Ofgem when requested and where reasonably practical, to inform key policy decisions regarding the strategic planning of the development of the electricity and gas networks, particularly concerning establishing low-carbon solutions which promote efficient, co-ordinated and economical systems of energy distribution and transmission. The ISOP will also be vested with statutory powers to request information and data from other licensees, including gas licensees, as well as exemption holders to fulfil its advisory duty. This will form a vital part of Government’s overall design in meeting the challenges outlined in the British energy security strategy.

The ISOP will have duties to promote particular objectives and must carry out its functions in a way that it considers is best calculated to promote:

1. the net zero objective;
2. the security of supply objective; and
3. the efficiency and economy objective.

As is usual in energy networks regulation, the ISOP will also be subject to other statutory duties, including:

1. keeping developments in the energy sector under review;
2. facilitating competition and innovation;
3. having regard to consumer and system impacts; and
4. having regard to the strategic priorities set out in the Strategy and Policy Statement (“SPS”)[1].

Subject to further consultation, the ISOP may be tasked with new roles in relation to nascent technologies such as hydrogen and carbon capture usage and storage (“CCUS”) in line with the ‘whole system’ approach to developing the energy network going forwards (for our commentary on the Hydrogen and CCUS aspects of the Bill, please see here).

Cost

As with current arrangements for NGESO and NGG, the ISOP will be funded through charges on users of the system that will eventually be passed on to consumers at a level determined by price control mechanisms.

The Bill grants the Secretary of State the power to provide financial assistance to the ISOP in the form of grants, loans, guarantees or indemnities, or through shares or securities, and, where the Secretary of State considers appropriate, to set conditions which this financial assistance is subject to.

Part 5: Governance of Gas and Electricity Industry Codes

The Bill legislates for a new governance framework for the energy codes[2] that will move the responsibility for code governance from the existing combination of code administrators and code panels to one or more newly created code managers. These code managers will be directly accountable to Ofgem rather than industry, which is intended to allow Ofgem to drive strategic change across the codes for the benefit of consumers and competition and support the delivery of net zero and the British energy security strategy.

GEMA’s new functions

The Bill grants the Gas and Electricity Markets Authority (“GEMA”), Ofgem’s decision-making board, 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 and advice provided by the ISOP amongst other things;
• the ability to make direct changes to the codes under a limited range of circumstances where the normal processes would not be appropriate[3];
• 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 GEMA’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 code 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 normal 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

To facilitate the transition to the new governance framework and ensuring that the new code managers can effectively carry out their roles, the Bill will grant GEMA transitional powers. New powers will allow GEMA to modify existing governance frameworks such as codes, licences and contracts, which will be required alongside the appointment of new code managers. It 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. Both code and licence changes will be subject to public consultation and a right of appeal to the Competition and Markets Authority.

Cost

Ofgem estimates that these reforms will cost approximately £37m per year. These costs will be passed down to industry parties through charges and then further passed through to end-consumers energy bills and not borne by the code parties themselves; approximately adding £1 per year to energy bills. Ofgem expects 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.

Comment

The Bill brings about the powers long mooted in relation to system operator and code manager reform. As the networks and industry participants must move at speed to meet the challenges of the net zero objective, it will be important to have centralised bodies also able to respond to these needs.

It remains to be seen how the code manager role will land and how the processes will work, and this will not be realised in the short term.

Next steps

Ofgem will be granted up to seven years to complete the code reform process, although Ofgem states that many of the code reforms may be completed in a shorter timeframe. This is to provide Ofgem with 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 before others.

Depending on several factors, including timings of secondary legislation, new licensing arrangements, and discussions between Government and National Grid plc, Ofgem estimates the ISOP could be established by, or in, 2024.

[1] The SPS is a statement prepared and designated by the Secretary of State that sets out strategic priorities and policy outcomes of Government’s energy policy as well as the roles and responsibilities of those who are involved in implementing that policy. The SPS provides a steer to the ISOP at a strategic level, whilst maintaining its day-to-day operational independence.

[2] These include the Connection and Use of System Code, Grid Code, System Operator – Transmission Owner Code, Balancing and Settlement Code, Master Registration Agreement, Distribution Connection and Use of System Agreement, Distribution Code, Smart Energy Code, Uniform Network Code, Supply Point Administration Agreement, Independent Gas Transporter Uniform Network Code and Retail Energy Code.

[3] Where the change is urgent; where the relevant code manager may have an adverse conflict of interest; where the change is particularly complex; where the change is related to code consolidation; or where the change is required as a consequence of changes made by GEMA to another document.