Innovation and the governance of energy industry codes

Abstract

Energy industry codes set the rules for a large range of practices in gas and electricity networks and markets. They are a key but often overlooked element in the governance of energy. Crucially, for any aspect of energy policy to function well in practice, the relevant codes must be aligned with that policy. Central to this issue is code governance; i.e. the arrangements for changing or modifying codes. While Ofgem has a final veto, and can suggest where there is a need to make major changes to reflect new policies, the process of governing codes still lies primarily with the industry itself. It has long been recognised that there are a number of problems with the code governance system. One is the complexity and fragmentation of both codes themselves and the code governance process, which deter market entry and participation by smaller actors in the governance system. A second, related, issue is the dominance of incumbents on code panels and working groups. A third problem is a lack of fit between code objectives and wider policy objectives. Overall, the concern is that codes deter innovation. These problems inspired Ofgem’s 2008 Code Governance Review, but they have nevertheless persisted. Further reforms are being adopted under the CMA’s energy markets investigation and a further Ofgem review. However, these reforms remain piecemeal and incremental, and do not engage with the fundamental principle underlying code governance, which can be seen as one of ‘self-authored regulation’. This principle was designed to reduce regulatory risk and problems arising from informational asymmetries, but has opened up risks of regulatory and informational capture, and regulatory inertia. An alternative reform agenda, based on a strategic engagement with these trade-offs, is suggested here, which involves relocating code governance into the public sphere, not to Ofgem, but rather to a dedicated codes management body