The Future System Operator and Energy Codes Reform

Department for Business, Energy and Industrial Strategy written statement – made on 20th July 2021.

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Photo of Kwasi Kwarteng Kwasi Kwarteng The Secretary of State for Business, Energy and Industrial Strategy

I am pleased to announce the launch of the consultations on the future system operator (FSO) and the energy codes governance reform. This is a key step that will contribute towards helping us achieve the government’s net zero targets and our commitment in the Energy White Paper “to ensure that the institutional arrangements governing the energy system are fit for purpose for the long term, consulting in 2021 over organisational functions, including system operation and energy code governance”.

Net zero is an unprecedented challenge for our economy and society – and the energy system at its heart. It has created the need for new technical roles and responsibilities in the electricity and gas systems to drive decarbonisation while minimising costs and maintaining resilience. We will require an organisation with the mandate, whole-system perspective, and engineering capability to fulfil the new and enhanced roles effectively, and the organisational design, incentives, and accountability to fulfil them impartially in the best interests of consumers.

The future system operator (FSO) consultation sets out the case for an expert, impartial, cross-vector FSO to ensure the energy system drives progress towards net zero. The system operators are in a unique position at the heart of their respective systems, both to keep each system operating in real time day to day and to be forward-looking. To help us achieve net zero, we propose bringing the Electricity System Operator (ESO) and the forward-looking elements of the Gas System Operator (GSO) together in a new entity, which will enable the systems to be transformed. The consultation also sets out the potential roles that could fall to the new organisation and presents two potential organisational templates which might be adopted. Finally, it sets out considerations on implementation.

Today, we are also launching a consultation on the design and delivery of the energy codes reform. The energy codes are the detailed technical and commercial rules of the gas and electricity system, which cover wholesale, transmission, distribution, and retail. Many of the codes were designed pre-privatisation which has resulted in a code governance framework that is complex, fragmented and lacks incentives to innovate, despite our urgent need for a more unified, flexible and dynamic approach.

Building on a consultation from 2019, we have now developed two governance models further and will be consulting on our preferred option of designating Ofgem as a strategic body over the energy codes, alongside separate code managers. As the strategic body, Ofgem would assess and respond to relevant government policy and priorities to ensure these are reflected in codes. It would also select and license code managers, who would replace the existing code administrators and take on most of the roles that are currently held by industry-led code panels. However, crucially, we expect that industry input will remain key to the code change process, including though new stakeholder advisory forums.

To help us develop our view on these reforms, we are seeking views on where improvements could be made to existing arrangements. Our final position will be shaped by the outcomes of these consultations.

These energy system governance reforms are intended to apply only to England, Scotland and Wales. Energy is generally devolved in Northern Ireland and so the scope of the review and proposed reforms do not apply to NI’s energy system governance, system operator or energy regulator.

I will place copies of both the Future System Operator Consultation and Energy Codes Consultation in the House Libraries.