Energy Act 2023: System Operation And Energy Code Governance – Oil, Gas & Electricity

In the seventh in our series of briefings following the passing
of the Energy Act 2023 (the Act) on 26 October 2023, our team at
Norton Rose Fulbright look at the framework adopted under the Act
to build an efficient, flexible, low carbon and low-cost
electricity and gas systems and its potential implications.

System Operation

With the energy system becoming more complex, the government
published its “Energy White Paper: Powering our net zero
future” in December 2020, in which it pledged to ensure that
the institutional arrangements governing the energy system are fit
for purpose in the long term. The desire was to build on the
reforms to the system operator instituted in April 2019 when the
electricity system operator – National Grid Electricity
System Operator (NGESO) – became a legally separate function
within National Grid.

In January 2021, Ofgem published its report on the review of GB
energy system operation¹, the aim of which was to
consider the current and future challenges facing GB system
operation and assess whether the right governance framework was in
place to deliver the UK’s net zero emissions targets. Ofgem
recommended that the system operator be given additional
responsibilities (most notably in the context of network and energy
system planning and independent advice) and to make it fully
independent from the transmission network owner. It also
recommended separating key gas network planning functions from the
gas transmission owner and combining these planning functions with
the electricity system operator as an independent body.

Taking on board Ofgem’s recommendations, the government
published a joint consultation² with Ofgem in July 2021
proposing the creation of a more strategic and independent body
– the Future System Operator (FSO), with
responsibilities across both the electricity and gas systems to
help meet the net zero target whilst maintaining energy security
and minimising costs. After broad support, the government confirmed
it would proceed with the creation of an FSO and this has now been
legislated for in the Act.

The Act establishes the FSO under the auspices of an Independent
System Operator and Planner (ISOP) with roles and
responsibilities across both the electricity and gas sectors: on
the one hand, it is tasked with co-ordinating and directing the
flow of electricity onto and over transmission systems – the
main existing role and responsibility of NGESO; on the other hand,
it will be responsible for long-term strategic planning and
forecasting in relation to the conveyance and supply of gas.

The Act requires the ISOP to carry out its functions in a manner
that promotes its three core objectives of meeting net zero,
ensuring security of supply, and promoting an efficient,
co-ordinated, and economical system for the transportation of
electricity and gas. When carrying out its functions, the ISOP must
also facilitate competition and innovation, take a whole-system
approach to gas and electricity, and consider consumer impact.

Whilst the Act sets out the general framework for creating the
ISOP and its associated key duties and powers, the details are yet
to be seen and will be implemented through secondary legislation,
new and updated licences, and amendments to energy codes. It is
expected that the ISOP will be founded on the existing capabilities
and functions of NGESO and (where appropriate) NGG, and will be
implemented through a phased approach, potentially as early as this
year.

Energy Code Governance

In July 2019, Ofgem and the government published a joint
consultation setting out proposals on reforming the energy industry
codes³ – the technical and commercial rules of the
electricity and gas systems. One of the desired outcomes was to
create an energy code framework that was agile and responsive to
change and made it easier for any market participant to identify
the rules that apply to them and understand what they mean and
innovate to the benefit of energy consumers.

A further consultation⁴ was published in July 2021 on
the design and delivery of future governance arrangements of the
energy codes. Two potential governance models were proposed –
Ofgem acting as a strategic body with separate code managers
(option 1) and the FSO acting as an integrated rule making body
combining both strategic and code manager functions (option 2). In
April 2022⁵ the government confirmed its preference for
option 1, giving Ofgem new strategic code functions. The Act
therefore expands Ofgem’s functions by requiring it to publish
an annual ‘strategic direction statement’ setting out its
strategic assessment of government policies and industry
developments that may necessitate modification of energy codes.
However, the Secretary of State (SoS) may transfer this function to
be exercisable by ISOP (instead of Ofgem). However, given the need
for the ISOP to mature in its system-wide operation and planning
function, it is not expected that the ISOP will take on these
strategic direction duties at least in the short term.

The Act also enables Ofgem to modify energy codes in several
specific circumstances bypassing the normal code modification
procedure. Currently, the industry drives the process of amending
industry codes. Proposals for code modification are considered via
a Code Panel – a group of members appointed by parties to the
relevant code – which is required to consult the industry
with regards to code modifications and requires Ofgem’s
approval for material code modifications. The Act now allows Ofgem
to directly modify industry codes, within certain parameters.
Notably, Ofgem can make such modifications where necessary ‘as
a matter of urgency’ to avoid adverse effects on consumers or
other interested persons, or, in the case of complex modifications,
where required for the purpose of implementing a strategic
direction statement.

The Act also introduces ‘code managers’ in both the
electricity and gas sectors, responsible for the governance of a
designated code. Code managers are required to hold a code manager
licence and are to be selected by Ofgem.

Whilst the Act also provides for the designation of central
systems that support the operation and processing of data necessary
in connection with industry documents, the government decided not
to license central system delivery bodies for the time being.

Footnotes

1. Review of GB energy system operation |
Ofgem

2. Proposals for a Future System Operator role -
GOV.UK (www.gov.uk)

3.
Reforming the energy industry codes – GOV.UK
(www.gov.uk)

4. Energy code reform: governance framework – GOV.UK
(www.gov.uk)

5. Energy code reform: governance framework – GOV.UK
(www.gov.uk)

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