Ofgem proposes reform of energy market codes

Energy regulator Ofgem is proposing wide ranging reforms of the codes governing the energy market including how to deal with environmental issues. Carbon costs will have to be taken into account in proposing changes to the code.

Ofgem has launched a review of the governance of the electricity and gas markets which should make it easier for small players such as renewable energy firms to connect to energy networks.

The review of codes setting the rules governing participation in these markets and access to energy networks is aimed at streamlining the process for making changes to them, and reducing Ofgem’s role in minor modifications. The energy regulator argues that the current system for amending the codes is slow and unwieldy and hinders competition.

It wants to reform the system so it would be involved in major policy changes where the outcomes would be legally binding, but the industry itself would lead on "more routine changes, with low impact on customers… in a form of self governance with little or no involvement from Ofgem".

"Existing processes for amending the codes have worked well to implement incremental change but have been severely tested in delivering major policy reforms," said Alistair Buchanan, Ofgem chief executive. "The review proposals aim to tackle unnecessary complexity and increase transparency to make it easier for smaller suppliers and renewable generators to participate."

At the same time it wants to introduce measures to beef up analysis of proposed code modifications, and introduce initiatives to support smaller players in the market by requiring codes administrators to specifically consider their needs.

It is also proposing to change the criteria for amending the codes to better account for environmental impacts of changes.

In the meantime, Ofgem has produced guidance insisting carbon costs should be considered when deciding code modifications.1 In the past Ofgem has been criticised for not consistently taking account of carbon costs in decisions (ENDS Report 393, p 14 ).

From August this year, any industry participant proposing to modify a code, and the code panels themselves, will have to quantify the impact on greenhouse gas emissions and apply a cost to the emissions.

Ofgem thinks the EU emissions trading scheme (EUETS) and the government’s new shadow price of carbon (ENDS Report 396, pp 30-33 ) now make it possible to place a financial value on emissions.

It has not come down in favour of one means of valuing carbon over the other, and instead says assessments should include a range of scenarios based on both the EUETS and shadow price of carbon. It wants emissions to be treated in the same way that any other costs and benefits would be.

"We would expect such [carbon] costs and benefits to be taken into account… when assessing a modification proposal against the relevant code objective governing efficient and economic network operation."

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