Decision on the preliminary Strategic Direction Statement and governance arrangements for industry codes

What changed

Ofgem has confirmed its preliminary Strategic Direction Statement (SDS) under the Energy Act 2023 and two governance instruments that go with it: a consistent modification prioritisation process across the designated codes, and a licence obligation on code managers to cooperate with modifications that support SDS alignment at the code manager's reasonable request. The decision was published on 1 August 2025 and follows the January 2025 consultation. Annex A sets out proposed legal drafting for the prioritisation procedure; Annex B sets out proposed Authority guidance defining how prioritisation will be applied in practice. Both Annexes are published for transparency but will be reconsulted on under Schedule 12 to the Act before becoming binding.

This is the first operative SDS under the new framework. Ofgem now has a stated strategic direction for the designated electricity and gas codes, a procedural mechanism to prioritise modifications by reference to that direction, and a licence-backed lever to compel cooperation from the new code managers. The transitional powers used here are temporary, but the structure they are bedding in is the steady state.

What this means in practice

Three things move at once.

First, the locus of code development shifts. Under the old self-governance arrangements, modification panels assembled by industry parties decided what got worked on and in what order. Under the SDS framework, the alignment of a proposal with Ofgem's stated strategic priorities becomes a gating criterion for prioritisation. A modification that is technically sound and supported by the panel can still be deprioritised if it does not advance the SDS. Conversely, a modification that aligns with the SDS gains a procedural tailwind. Proposers will need to demonstrate alignment in their proposal documents, not just defend the technical merits.

Second, the code managers carry a new duty. The licence obligation requires them to cooperate with the modification process where it supports SDS alignment, at the code manager's reasonable request. The "reasonable request" language preserves discretion, but the obligation is licence-backed, which means non-cooperation is enforceable through licence sanctions rather than reputational pressure within an industry panel. This changes the incentive structure for code managers: their compliance risk is now tied to Ofgem's strategic priorities, not just to the technical quality of code administration.

Third, the substantive content of the SDS becomes the document to read. The strategic priorities listed there are now the filter through which every modification will pass. Parties with modification proposals in flight, or planning to bring one, should map them against the SDS priorities before deciding how to frame the case. Parties whose business models depend on modifications that do not align with the SDS face a harder route.

The practical effect on transaction costs is mixed. Prioritisation should reduce the volume of low-value modifications that clog the panels, which is a real saving for active participants. But it adds a new alignment-demonstration step at the proposal stage, and it concentrates judgment about strategic value in Ofgem's policy team rather than dispersing it across the industry. Whether the net effect is faster or slower depends on how Annex B's guidance is finalised, and on how Ofgem chooses to exercise the discretion the framework gives it.

What happens next

The legal drafting in Annex A and the guidance in Annex B will be reconsulted on under Schedule 12 to the Energy Act 2023. Ofgem has signalled "further proposals" within Annex A that go beyond the January 2025 consultation, so the next round is not a tidying exercise but a substantive consultation on additional policy changes. Parties who responded to the January consultation should not assume their points are closed.

The SDS itself is preliminary. The Energy Act framework contemplates a full SDS following the transitional one, and the priorities can be revised. Industry parties should treat this version as the baseline that future modifications must align with, but should also engage as the document is reviewed.

Code manager appointments are running in parallel. Ofgem has separately decided on code manager selection and on code manager licence conditions, and the new licence obligation to cooperate with SDS-aligned modifications sits within that licence architecture. As code managers take up their roles for each designated code, the cooperation duty becomes operative for that code.

The next signals to watch are the Schedule 12 consultation on Annex A and B, the appointment timetable for code managers across the 11 designated codes, and the first modifications that test the prioritisation process in practice. Once a few cases have been decided, the discretion in "reasonable request" and the weight given to SDS alignment versus technical merit will be visible from the outcomes rather than from the framework documents.