Energy code reform: Code manager licence conditions and code modification appeals to the CMA

In this joint DESNZ / Ofgem consultation, we set out our proposals for code manager standard licence conditions and code modification appeals to the Competition and Markets Authority (CMA). This follows our [first joint consultation in 2024](https://www.gov.uk/government/consultations/energy-code-reform-code-manager-licensing-and-secondary-legislation), which covered a selection of code manager licence conditions, as well as proposals for the secondary legislation underpinning Ofgem’s code manager selection process. Since then, we have laid the [Code Manager Selection Regulations 2024](https://www.legislation.gov.uk/uksi/2024/1081/contents/made), which will enable Ofgem to select code managers and so begin implementing code governance reforms. We are now developing a full set of code manager licence conditions and proposals for the code modifications appeals process to the CMA. This consultation covers: Code manager licence conditions - the full set of standard licence conditions, including some follow-up on proposals from the original consultation. Code modification appeals to the CMA - proposals for how eligible parties may challenge Ofgem decisions on code modifications, so that industry has appropriate routes to challenge decisions and achieve a fair outcome. The consultation is open to all, but we would specifically like views from: * existing code parties * existing code administrators * consumer groups * energy sector research groups * wider industry players * academics * any other organisations with a direct interest ### Consultation webinar, Tuesday 20 May 2025 DESNZ and Ofgem will hold an online webinar on Tuesday 20 May 2025, 10am to 12pm, to summarise our key proposals and answer questions about the consultation: * [register your interest in attending](https://events.teams.microsoft.com/event/f44b1393-cbd4-4a61-a81c-0c8f77de1f7e%40cbac7005-02c1-43eb-b497-e6492d1b2dd8) ### Responding to the consultation If responding via email, please copy your response to both the Department for Energy Security and Net Zero and Ofgem: * codereform@energysecurity.gov.uk * industrycodes@ofgem.gov.uk Read our [consultation privacy notice](https://www.gov.uk/government/consultations/energy-code-reform-code-manager-licensing-and-secondary-legislation/energy-code-reform-secondary-legislation-and-code-manager-licensing-consultation-privacy-notice). ## Executive summary Britain’s energy sector continues to undergo significant technological, operational, and commercial change as we continue to work towards delivering our mission to make the UK a clean energy superpower by 2030 and accelerating the UK’s journey to net zero. The transition to a low carbon energy system can only be achieved if the sector rules and governing institutions evolve to enable it. We need an electricity and gas system that allows any challenges to be efficiently and effectively overcome, while empowering the uptake of new opportunities to ultimately benefit consumers. The detailed rules contained in the gas and electricity industry codes play a key role in facilitating the energy market in Great Britain. Overseen by the independent energy regulator, the Office of Gas and Electricity Markets (Ofgem) [[footnote 1]](#fn:1) and governed by industry-led processes, the codes have been fit for purpose when dealing with an energy system that was more predictable and subject to incremental changes over time. However, we recognise that the existing code governance structure was not designed to deliver the proactive foresight and coordination that will be needed to meet the challenges of the evolving sector. In this joint consultation, the Department for Energy Security and Net Zero (the Department) and Ofgem, collectively referred to as “we” and “our” where relevant, set out further proposals for code manger standard licence conditions and the policy underpinning the code modification appeals to the Competition and Markets Authority (CMA). Key policy proposals covered in this consultation are summarised below. ### Code manager licence Here we set out our proposals on the high-level contents of the code manager licence, consulting on the full end-to-end licence (Annex A). We have also developed policy on the following areas and seek views from stakeholders on our proposals, and the associated draft licence conditions. * Code manager budgets (follow-up from first consultation): We propose that budgets should be open to appropriate scrutiny, with costs economic and efficient. The consultation revisits the question of including an appeal mechanism and reconsiders the approach to Ofgem oversight of budgets. * Conflicts of interest (follow-up from first consultation): We aim to ensure code manager independence and prevent any conflicts of interest that could impact negatively on a licensee’s ability to deliver its duties. * Code manager objectives: Licences will include the core objectives for code managers to have regard to while carrying out their duties. These will set out high-level functions and characteristics of the role, promote positive outcomes for consumers, and support the delivery of Ofgem’s new annual Strategic Direction Statement (SDS). * Delivery plans: Our aim is that the codes should align with government policy priorities, following the direction set by Ofgem’s SDS. Code managers will be required to develop and implement delivery plans which facilitate this. * Controls on the business: To ensure that code managers are financially stable and appropriately resourced to deliver their duties, we propose that licences will include certain controls on the business, similar to those in existing energy licences. * Procurement: While third parties are not licensed by Ofgem or subject to the same regulation as code managers, we propose the licence should include restrictions and requirements around procurement, with the aim of protecting against adverse consequences where licence functions are outsourced. * Optional charging: We aim to provide flexibility for code manager optional charging arrangements, subject to a set of criteria. * Performance: We aim to ensure code managers’ good performance and to allow Ofgem to take appropriate steps if performance is poor. * Provision of information to, and co-operation with, the Authority: [[footnote 2]](#fn:2) We aim to engender a cooperative relationship between Ofgem and code managers, and to ensure Ofgem can access the information it needs to carry out its role as regulator. * Ease of use of the code: We propose that licensees should ensure codes are easy to use. * End of licence: We propose that licences should include mechanisms to ensure that, where a licence is handed over to a successor, there is minimal disruption to services and relevant assets are handed over. * Code maintenance and modification: We propose that licence obligations should reflect the new roles and responsibilities created by code reform around maintaining and modifying codes. ### Code modification appeals to the Competition and Markets Authority (CMA) The code modification appeals process gives eligible parties who feel adversely impacted by a code modification decision the opportunity to challenge Ofgem decisions on a wider basis than a Judicial Review (JR). This allows for a review by the CMA. After reviewing the modification decision, the CMA can overturn the decision or pass it back to Ofgem for re-determination if the decision was wrong on one or more grounds. This process exists to ensure fairness and accountability within the system. Changes to the code modification process introduced by code governance reform mean that the CMA appeals framework needs to be updated. The appeals framework is designed to allow effective opportunities for different interests and views to be represented, whilst being as accessible, simple, rational, flexible and independent. This consultation sets out our proposals for four key parts of the appeals process: * Codes in scope of the appeals process: we propose retaining the existing codes which are in scope for the appeals to the CMA process and bringing the Retail Energy Code (REC) into scope. * Eligibility to appeal: we propose no changes to eligibility criteria, as the new appeals process does not introduce new appellants or remove existing rights, leaving no reasonable basis for modification. * Appeals triggers and exclusion criteria: we propose that the code manager’s recommendation should replace the existing code panel’s recommendation (a role which will cease to exist) to form the basis of the appeal trigger. * Alternative modifications: we propose that when alternative code modifications are raised, the code manager should have the discretion to recommend more than one modification for approval where they are considered equally better than other modifications and the status quo in facilitating code objectives ## General information ### Why we are consulting The Department and Ofgem are consulting on the Code Manager Standard Licence Conditions (SLCs) and the Code Modification Appeals to the CMA policy. ### Consultation details Issued: 1 May 2025 Respond by: 27 June 2025 Enquiries to: Code Governance Reform Team Department for Energy Security and Net Zero 7th Floor 3-8 Whitehall Place London SW1A 2EG and Code Governance Reform Team Office of Gas and Electricity Markets 10 South Colonnade Canary Wharf London E14 4PU Email to: codereform@energysecurity.gov.uk and industrycodes@ofgem.gov.uk Consultation reference: Energy Code Reform Audiences: Code parties, code administrators, consumer groups, energy sector research groups and any other organisations with a direct interest. Territorial extent: Great Britain ### How to respond The consultation is available online. If possible, we would prefer to receive responses via the following link: [energygovuk.citizenspace.com/energy-security/energy-code-reform-manager-licensing-modification/](https://energygovuk.citizenspace.com/energy-security/energy-code-reform-manager-licensing-modification/) If you would prefer to respond via email, please ensure you respond to both email addresses below and use the response form available on the GOV.UK consultation page: Email to: codereform@energysecurity.gov.uk and industrycodes@ofgem.gov.uk If you would like to send a hard copy, please send copies to the following addresses, as this is a joint consultation. Write to: Code Governance Reform Team Department for Energy Security and Net Zero 7th Floor 3-8 Whitehall Place London SW1A 2EG and Code Governance Reform Team Office of Gas and Electricity Markets 10 South Colonnade Canary Wharf London E14 4PU The Department and Ofgem will share with each other all responses that are received. When responding, please state whether you are responding as an individual or representing the views of an organisation. Your response will be most useful if it is framed in direct response to the questions posed, though further comments and evidence are also welcome. ### Confidentiality and data protection Information you provide in response to this consultation, including personal information, may be disclosed in accordance with UK legislation (the Freedom of Information Act 2000, the Data Protection Act 2018 and the Environmental Information Regulations 2004). Ofgem and the Department are joint data controllers for this consultation. All responses (or parts of responses) will be published by Ofgem on its website unless explicitly marked as confidential. If you want the information that you provide to be treated as confidential, please tell us and explain the reason. Please clearly mark the parts of your response that you consider to be confidential and, if possible, put the confidential material in separate appendices to your response. Please be aware that we cannot guarantee confidentiality in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not be regarded by us as a confidentiality request. We will process your personal data in accordance with all applicable data protection laws. See our [privacy policy](https://www.gov.uk/government/publications/desnz-consultations-privacy-notice/privacy-notice-relating-to-consultation-responses-received-by-desnz). All responses will be processed by the Department and Ofgem as this is a joint consultation. ### Quality assurance This consultation has been carried out in accordance with the government’s [consultation principles](https://www.gov.uk/government/publications/consultation-principles-guidance). If you have any complaints about the way this consultation has been conducted, please email: bru@energysecurity.gov.uk ## Introduction This consultation builds on the previous energy code reform publications, including the March 2024 consultation and October 2024 response, where we consulted on our initial proposals for code manager standard licence conditions. Our proposals in this document and the full code manager licence conditions (set out in Annex A) have resulted from our own internal analysis, in addition to extensive engagement with industry, consumer groups, and cross-government stakeholders, spanning a range of sectors and jurisdictions. The document is separated into two main chapters, Code Manager Licence and Appeals, with subsections underneath covering one primary policy area, an options assessment (if relevant), our related proposals, and a set of questions that we seek your views on. The final two chapters provide a recap of all the consultation questions and an overview of planned next steps. We set out the full end-to-end licence in Annex A. The document is ordered as follows: * Chapter 1: Code Manager Licence 1.1 Introduction and overview of Code Manager Licence 1.2: Code manager budgets: appeals to Ofgem and oversight (follow-up) 1.3: Conflicts of interest (follow-up) 1.4: Code manager objectives 1.5: Delivery plans 1.6: Controls on the business 1.7: Procurement 1.8: Optional charging 1.9: Performance 1.10 Provision of information to, and co-operation with, the Authority 1.11: Ease of use of the code 1.12: End of licence 1.13: Code maintenance and modification * Chapter 2: Code Modification Appeals to the Competition and Markets Authority 2.1 Introduction and Overview of Code Modification Appeals 2.2 Codes in scope of the appeals process 2.3 Eligibility to appeal 2.4 Appeals Triggers/ Exclusion Criteria 2.5 Alternative code modifications * Appendix 1: Licence skeleton from the March 2024 consultation * Appendix 2: Table with provisions that address code manager performance ## 1. Code Manager Licence ### 1.1 Introduction and overview of Code Manager Licence Currently, code governance is managed by code panels, supported by code administrators. As part of our reforms, governance of codes will instead be managed by code managers, who will be licensed by Ofgem. These code managers will play a central role in ensuring we deliver our aims for code governance reform. They will be established and licensed in a way that ensures they govern codes in an independent and impartial manner and will be responsible for facilitating the development of codes in line with Ofgem’s new Strategic Direction Statement (SDS). [[footnote 3]](#fn:3) The SDS will set out Ofgem’s vision for how the codes should evolve, based on its strategic assessment of government policies and developments relating to the energy sector that will, or may, require modifications to the designated industry codes. [[footnote 4]](#fn:4) The SDS, in conjunction with licensed code managers, will play a critical role in ensuring the effective and co-ordinated development of the code changes needed to deliver on net zero ambitions and broader benefits to consumers through the energy transition. Industry stakeholders will retain a key role in the code processes, with new Stakeholder Advisory Forums informing code managers’ decision-making. [[footnote 5]](#fn:5) This will help to ensure that the vital expertise and knowledge held by industry participants can be harnessed by code managers. The Energy Act 2023 (the ‘Act’) [[footnote 6]](#fn:6) introduced code management as a licensable activity. The table below sets out a high-level summary of the main features of the code manager role. | Make decisions under the codes | Administer code governance arrangements | Align code with Ofgem’s strategic direction | | --- | --- | --- | | Prioritise modifications, decide whether to approve certain code changes [[footnote 7]](#fn:7) and make recommendations to Ofgem on whether to approve others. Other decisions may include those not directly related to code modifications, such as on (depending on the code) accession, performance assurance, novating party IDs, etc. | Provide code administration and secretariat services to, amongst other things, facilitate the code modification procedures and provide assistance to code parties and stakeholders (including consumer advocates) relating to the code. | Prepare delivery plans setting out how they will ensure their respective codes develop in line with the SDS set by Ofgem. [[footnote 8]](#fn:8) We propose code managers will have an objective to facilitate the delivery of the strategic direction statement. Identify and develop relevant code changes through proposing code modifications. | Code manager licences will contain a set of standard licence conditions (SLCs) which will apply to all holders of the licence, as well as special conditions which will apply to particular licence holders. Ofgem, working jointly with the Department, are leading the development of these SLCs, prior to these being designated by the Secretary of State. Special conditions will be developed by Ofgem and included at licence grant. These will reflect the individual circumstances of each code and code manager, for example, the relevant code objectives. #### Overview of previous decisions In the March 2024 consultation, we set out our proposals on priority aspects of the proposed code manager licence, as well as our proposed approach to code manager selection. In the October 2024 response, we set out the following decisions. Licence condition numbers refer to the condition numbering in the draft licence in Annex A. Note these may differ in the final version of the licence. 1. Not for profit requirement (condition 10) The licence will require code managers to carry out their core regulated activities on a not-for-profit basis. The licence will allow for recovery of costs with no allowance for a profit margin. 2. Setting code manager budgets (condition 20) Code managers will publish and consult on a draft budget and then set their forecast costs ahead of the forthcoming budget period. We committed to reconsider whether a defined appeal route would be beneficial to the budget scrutiny process (see chapter 1.2). 3. Code manager funding and cost recovery (conditions 22 – 23) Ofgem will decide on a code-by-code basis what mechanisms will be used for code managers to recover their costs through core charges. [[footnote 9]](#fn:9) Code managers will also be required to prepare and adhere to a cost recovery statement to aid transparency and provide a useful tool for parties that expect to pay charges. 4. Code manager incentivisation (condition 25) Code managers will not be subject to any financial incentive mechanisms or revenue at risk. Code managers will be subject to performance metrics in the code and will be able to modify them in line with the code modification procedures, which includes consultation with stakeholders. 5. Conflicts of interest and independence (conditions 15 – 19) The licence will prohibit code managers from engaging in preferential or discriminatory behaviour, and from becoming a related undertaking of specified parties (including code parties and External Service Providers). [[footnote 10]](#fn:10) We will require that code managers do not prevent or distort competition, and that code manager boards must have a certain number of independent directors. Code managers will also be required to obtain legally enforceable undertakings from any ultimate controller (such as committing to not cause the licensee to breach its licence). We stated that we would revisit further details on independent directors, exceptions, and that we would work on the drafting for “not prevent nor distort competition” (see chapter 1.3). 6. Financial and operational controls (conditions 10 – 14) A package of financial and operational controls will be implemented to address identified risks associated with the financial stability and operational capability of code managers. These controls cover the availability of all necessary resources, indebtedness and transfers of funds, assurance on the financial stability of the licensee, and a prohibition on cross-subsidies. 7. Code maintenance and modification (condition 27) The licence will require code managers to have in place and maintain the relevant code. [[footnote 11]](#fn:11) We committed to consulting on incorporating further detail on this licence condition (see chapter 1.13). #### This consultation We are now consulting on the remaining licence conditions, and the policy behind them. We also revisit areas that we stated in the October 2024 response that we would consult further on. The licence skeleton consulted on in the March 2024 consultation, with notes on where updates have been made, can be found in Appendix 1. In Annex A, a complete draft of the code manager licence is provided, including the licence conditions from the March 2024 consultation. We welcome stakeholder views on the end-to-end licence. Ahead of SoS designating the SLCs, the detailed drafting of the SLCs will be refined, both in response to stakeholder feedback to this consultation and Ofgem’s second consultation on the implementation of Energy Code Reform [[footnote 12]](#fn:12) (“Ofgem’s second implementation consultation”), but also as part of our ongoing review of the SLCs to ensure they are clear, consistent and aligned with best practice. Some conditions have been based on existing conditions in current licences, so we will also keep the drafting under review in light of any changes made to those existing conditions. For example, if the existing code modification and maintenance conditions (sometimes referred to as ‘code owner’ conditions) are amended, we would consider carrying these changes across to the proposed code manager code modification and maintenance condition. Consultation question Q1: To what extent do you agree with the draft end-to-end code manager licence? For example, do you think there any licence conditions missing, or whether there any inconsistencies or duplication? ### 1.2. Code manager budgets: appeals to Ofgem and oversight (follow-up) The March 2024 consultation set out proposals for ensuring that code manager budgets are open to appropriate scrutiny and that costs remain economic and efficient. We stated that the licence will require that code managers consult with stakeholders on a Draft Budget and Draft Work Plan, presenting all costs clearly and transparently. We stated that Ofgem would have the power to direct code managers to revisit some or all of the budget and to take actions including, but not limited to, providing additional evidence, recalculating certain cost categories and providing third-party assurance on the content of the budget. Our proposals did not include a mechanism for stakeholders to appeal code manager budgets to Ofgem. In the October 2024 response, we set out our intention to proceed with the overarching approach to budget setting but acknowledged that many respondents to the consultation disagreed with the proposal not to include an appeal mechanism. Therefore, we stated our intention to revisit the question of whether to include an appeal mechanism, and to reconsider the approach to Ofgem oversight of budgets. #### Summary of options and proposals In line with our stated intention to revisit Ofgem oversight of budgets, we present two options: * Option 1 (preferred): Code manager licences include provision for appeals to be raised to Ofgem against code manager budgets. * Option 2: No appeal mechanism and instead proceed with our previously consulted-on proposals in which Ofgem has the power to direct code managers to revisit the budget. #### Proposals and analysis Option 1 (preferred): Appeals to Ofgem Our preferred option is for the code manager licence to require code managers to include, in the relevant code, a process under which certain stakeholders can raise an appeal to Ofgem in respect of one or more items in a code managers’ Annual Budget. [[footnote 13]](#fn:13) Having further considered the approach to oversight of code managers’ budgets, as well as responses to the March 2024 consultation, we consider that there are benefits to including an appeal process. As stated in the October 2024 response, we recognise the need for stakeholders to be able to effectively challenge code manager budgets in addition to the consultation process. While we consider that the primary mechanism for challenge should be through open and transparent engagement with stakeholders, we recognise the potential benefits of a further route for challenge, should stakeholder comments not be adequately addressed through the consultation process or where other issues are identified. Any appeal process would need to be carefully designed to limit the impact on ongoing delivery of services and to ensure that Ofgem has clear criteria against which appeals may be assessed. Under this option, we are proposing some key features that should be included in the licence, informed in part by existing appeal processes in codes and licences. These features are discussed in more detail below and our proposed licence drafting is presented in condition 21 of Annex A. Clear criteria for who can appeal the budget Since code parties will fund code managers through charges, we propose that any code party should be able to raise an appeal. We also recognise that charges ultimately impact on consumer bills and propose that Citizens Advice and Consumer Scotland should also be able to raise an appeal. We welcome comments on whether Citizens Advice Scotland should also be included as a party who may appeal the budget. [[footnote 14]](#fn:14) Grounds for appeal and assessment criteria We propose that the licence includes a set of grounds on which an appeal may be raised. We propose that appeals may be raised where a cost item: a) was not presented in the Draft Budget or Draft Work Plan [[footnote 15]](#fn:15) in accordance with the requirements for those documents specified in the licence. For example, the proposed licence condition on code manager budgets states that costs must be presented in a comprehensive, accurate, coherent and transparent manner. Where an item is not presented in this manner, an appeal may be raised. This could be where costs are insufficiently granular or where certain costs have been withheld without a clear explanation being provided. b) was not properly consulted upon in accordance with the proposed standard condition 20 of the code manager licence (‘Annual Budget of the Licensee’) or where the code manager failed to have reasonable regard to the consultation responses submitted. The proposed licence places requirements on code managers to share Draft Budgets and Draft Work Plans with stakeholders and to consider all comments provided. Following the consultation period, code managers will be obliged to consider all comments received and to revise the Draft Budget and Draft Work Plan as they deem fit, before publishing a final Budget and Work Plan. They will also be obliged to publish an explanation of how comments received in the course of the consultation were taken into account, and to publish a comprehensive explanation of why any revisions to the Draft Budget and Draft Work Plan have been made. An appeal could therefore be made where this process has not been followed correctly or where insufficient explanation has been provided as to why consultation responses did not result in amendments to the Draft Budget and/or Draft Work Plan. c) is not a Recoverable Cost. Code managers may only recover costs that meet the definition of Recoverable Costs, as defined in the licence. d) is a manifestly inappropriate provision for the activity in question. We consider that there should be the ability to appeal against a budget on the grounds that a cost is clearly inappropriate. e) will, or is likely to, prejudice unfairly the interests of one or more code parties, or cause them to be in breach of the relevant code, the Energy Licences and/or law. [[footnote 16]](#fn:16) There may be circumstances where a stakeholder considers that a budget item, either the cost or the activity itself, could cause them to breach another obligation such as one required by their licence. Ability for Ofgem to dismiss appeals Trivial or vexatious appeals could be highly disruptive by delaying code managers from spending in line with their annual budget. Since code managers will likely have limited reserves and may only spend against costs that have been set out in their budget, an appeal could prevent spending on the provision of essential services. To minimise disruption from appeals that are without merit, we propose that Ofgem may dismiss appeals that are clearly trivial or vexatious, or that do not make a case that it meets one of the appeal grounds. This would allow Ofgem to dismiss appeals that are patently without merit in a timely manner. A similar provision is found in the Smart Energy Code (SEC). Appeals should be in relation to one or more individual budget items Some of the appeal mechanisms relating to existing code bodies involve appeals against the budget as a whole. [[footnote 17]](#fn:17) We consider that appeals against the whole budget risk preventing code managers from carrying out functions that are not related to the appeal while the outcome of the appeal is determined. We therefore consider that appeals must be made against one or more individual cost items. This is currently the case for appeals against the Retail Energy Code Company (RECCo) budget. [[footnote 18]](#fn:18) We consider that this will mitigate the risk of overly broad, unfocused appeals and that it will allow Ofgem to carry out more targeted assessments. Appeals against specific items would allow for certain activities to be paused pending a resolution, while other activities could continue (see below). We do not propose that individual appeals would be restricted to a single cost item, but each item would need to be specified by the person making the appeal. Appeals should not stop the whole budget being spent against while the appeal is in progress Related to the above, we consider that appeals should not result in code managers having to pause delivery of their functions. However, if they continue to spend against a cost item that is subject to appeal, a successful appeal could require repayment of funds that have already been spent. Since code managers recover all their costs from code parties, reimbursement of already-incurred costs would be challenging. We therefore propose that where a cost item is subject to an appeal, spending against that cost item must be paused, except where Ofgem directs otherwise (e.g., where the item in question is a service essential to the running of the code). Clear outcomes We consider that the appeal process should set out clear steps that Ofgem may take following consideration of an appeal. We consider these outcomes will allow for flexibility for Ofgem to take different approaches depending on the circumstances of the case. We propose that, where Ofgem upholds an appeal, it may direct the licensee to: * make no changes to the cost item; * to pursue a revision to the Annual Budget; * revise the provision for that budget item to a figure which Ofgem considers to be a more appropriate forecast of the cost likely to be incurred (whether higher or lower than the original figure); and/or * direct the code manager to remove the cost item entirely and make suitable revision to its Annual Budget and Work Plan. Option 2: No appeal mechanism and rely on Ofgem power to direct Code Managers Under this option we would proceed with the position set out in the March 2024 consultation, whereby Ofgem would have the power to direct code managers to revisit the budget and require them to take actions including, but not limited to, providing additional evidence or recalculating certain cost categories. This could occur, for example, where SAF or other stakeholder comments have not been sufficiently addressed, or where Ofgem had concerns about the values reported. Additionally, we proposed that this could include the ability for Ofgem to require the code manager to provide third-party assurance on the content of some or all of the budget. We remain of the view that there are benefits to this approach, such as reducing the risk of delays caused by appeals, but we now consider that relying upon this approach alone would not provide as much of a safeguard against excessive budgets as would an appeal mechanism (under Option 1). Additionally, we consider that the direction power places too great an onus on Ofgem to scrutinise budgets, whereas an appeal mechanism allows code parties and other specified parties to identify and raise issues with the published budget. We consider that if an appeal mechanism is introduced, the need for the Ofgem power to direct is reduced. However, we remain of the view that Ofgem should have the ability to issue directions to code managers in line with the above proposals, whether or not an appeal has been raised by a code party. We also remain of the view, as set out in the March 2024 consultation, that Ofgem should not have the power to veto a Draft Annual Budget or Annual Budget where an appeal has not been raised. We consider that the proposed appeal mechanism under Option 1 is a more appropriate route for issues with budgets to be raised and addressed. Consultation questions Q2: To what extent do you agree with our proposal, under Option 1, that the code manager licence will include a mechanism for code parties, Citizens Advice and Consumer Scotland to appeal code managers’ budgets to Ofgem? Should this also include Citizens Advice Scotland? Q3: To what extent do you agree the licence drafting provided in condition 21 of Annex A delivers the intent of our proposed policy on budget appeals? Do you have any other views or comments on the licence drafting? ### 1.3. Conflicts of interest (follow up) Empowered and accountable code management with independent decision-making is a key aim of code governance reform. Throughout the selection process, and as the code manager takes on its role, it is important that any potential bias and conflicts of interest are identified and effectively removed or, where appropriate, mitigated. In the October 2024 response, we decided to proceed with incorporating a package of licence conditions intended to address and mitigate conflicts of interest. [[footnote 19]](#fn:19) Additionally, we indicated that we would consult further on the following policy areas related to conflicts of interest: * 50% sufficiently independent directors: where the 50% “sufficiently independent director” requirement should be set out; * Exceptions in the SLCs: the process for receiving exceptions to specific licence conditions and the possibility of setting out specific circumstances for exceptions in the standard licence conditions; * Exception route for additional licence conditions: whether any additional conditions should include a route for exceptions; and * Updated licence drafting: the drafting for paragraph 5.5.b of the “Not prevent nor distort competition” licence condition, and the definition of “External Service Provider” (which, if our proposal is adopted, results in a change to the draft for “restrictions on becoming a related undertaking”). #### Summary of Proposals * 50% sufficiently independent directors: to set this out in the code manager licence; * Exceptions in the SLCs: that the process for receiving exceptions to specific licence conditions is described in the interpretation section. No exceptions to “restrictions on activity and “restriction on becoming a related undertaking” in the SLCs, but proposal to introduce “treasury management” exception to “restriction on investment”; * Exception route for additional licence conditions: to add possibility of exceptions to “sufficiently independent directors” and “procurement of service capability”; and * Updated licence drafting: new drafting for paragraph 5.5.b of the “Not prevent nor distort competition” licence condition and the “restrictions on becoming a related undertaking” licence condition. #### Proposals and Analysis 50% sufficiently independent directors In the October 2024 response, we stated that we were minded to increase the proportion of directors needing to adhere to the “sufficiently independent directors” licence condition from 20% to 50%. We noted that this would be appropriate to ensure that, at a minimum, the board does not have a majority of directors affiliated with code parties. We also noted that a 50% independence requirement would prevent the board having a majority composed of executive directors, which would help to ensure a balanced board (with no one constituency having a majority) and align with corporate governance best practice. We indicated that we would consult further on whether this requirement should sit in the code manager licence, or another document such as the relevant code. We propose that the requirement for 50% sufficiently independent directors should be in the code manager licence. [[footnote 20]](#fn:20) Code managers will be obliged to follow the requirements set out both in the licence and the code. The key difference between having the requirement set out in the code rather than the licence is that code parties (amongst others) can initiate changes to the code through the code modification process (noting that Ofgem will still be involved and likely need to approve the modification). We are not convinced that this requirement would benefit from this open governance. Given the importance of maintaining independent code managers, we believe it is appropriate that changes to the board independence should only be initiated by Ofgem, not code parties. We do not believe it would be beneficial for this requirement to potentially diverge and become different across code managers. However, if some divergence does become necessary or desirable, appropriate flexibility can be realised through the use of special licence conditions or on an ongoing basis through the exceptions process (see the next section, “Exceptions in the SLCs”). Exceptions in the SLCs In the October 2024 response we stated our intention to introduce the ability for Ofgem to disapply certain licence conditions, to a specified extent, by exception. The licence conditions concerned were restrictions on activity, restrictions on investment and restrictions on becoming a related undertaking. We noted that we would consult further on any requirements on the process for receiving an exception and whether there should be exceptions set out in the standard licence conditions specified (i.e., those listed above), meaning that they would be allowed by default for all code managers. Process for receiving an exception The requirements on the process for receiving an exception from the Authority will be specified in the “Rules of interpretation” section of the licence (see part C of condition 2 in Annex A). The section, as consulted on, notes that any derogation (i.e. exception) from the Authority needs to be made in writing. The exception will also need to specify what is disapplied and in what circumstances. Restrictions on activity This condition restricts the code manager from performing any activities other than what is required to fulfil its Code Manager Business, unless the Authority consents otherwise. [[footnote 21]](#fn:21) To ensure that appropriate mitigations are in place, we believe that additional activity to the Code Manager Business should be allowed on a case-by-case basis, through special conditions or exceptions through Authority approval. We do not think there is a strong case for exceptions to be set out in the standard licence conditions, allowing them by default for every code manager. We recognise that there may be instances where the code manager performing additional activities do not raise conflict of interest concerns, or that such an arrangement can be beneficial in some cases. In practice, additional activities could be realised through two routes, either by the code manager requesting that the Authority approves an exception to this licence condition, or through raising a code modification to add to the code manager activities in the code. Requesting an exception to the licence condition from the Authority would be more suitable for activities that do not fit within the remit of the core code manager role. When assessing the request for an exception, we would consider things such as whether the additional activity would raise any concern for conflicts of interest or would otherwise impact on the ability of the code manager to continue to deliver against its licence, including if there are any synergies. Where an additional activity would fall within the remit of the code manager role, it could be added to their role through raising a code modification that clarifies that the code manager may carry out this activity (so indirectly its Code Manager Business). Ofgem would have oversight of any proposed code modification. Restrictions on investment This condition restricts the code manager from holding any investments, unless the Authority consents otherwise. We have considered exceptions in existing licences and whether these would be applicable to the code manager. These have included exceptions regarding treasury management and de minimis business, which we are now consulting on. * Treasury management: In the electricity transmission licence, electricity distribution licence and smart meter communication licence, investments are allowed where they are “acquired in the usual and ordinary course of the licensee’s treasury management operations.” Code managers will be required to operate their Licensed Activity [[footnote 22]](#fn:22) on a not-for-profit basis, and investments to create profit will not be permitted. However, investments can also include bonds. Therefore, an exception could be beneficial should the code manager have sums of cash that would earn a better short-term rate of return from bonds rather than bank deposits (e.g. if costs are recovered sooner than they are due to be spent). We are seeking stakeholder input on whether to incorporate such an exception (see condition 17.4 in Annex A). * De minimis: In the electricity and gas transporter licences, there are exceptions to the restrictions on investments for “de minimis business”, which allows the licensee to carry out business which does not exceed certain limits on aggregate turnover and aggregate amount, usually around 2.5% of the total. At present, we do not consider that any exceptions regarding “de minimis” spending would be applicable to the code manager. The original purpose of these conditions was to manage property portfolios the networks inherited. However, the wording is flexible to allow for other minor revenue streams, and we welcome stakeholder input on whether this potentially could be relevant for the code manager. Restrictions on becoming a related undertaking This condition restricts the code manager from becoming a “Related Undertaking” [[footnote 23]](#fn:23) of specified parties, unless the Authority consents otherwise. As with “restrictions on activity”, we propose to not include any exceptions in the standard licence conditions, noting that the Authority can approve exceptions under the licence and/or include exceptions in special conditions. Ownership and control of the code manager is a key risk for conflicts of interest and should the code manager be under ownership arrangements not allowed by the licence condition, we believe that it is important for the code manager to clearly demonstrate how risks will be mitigated before an exception is granted. Exception route for additional licence conditions: Sufficiently independent directors and Procurement of service capability (clause 7.5) In the October 2024 response we noted that we would continue to consider whether any additional licence conditions should include a route for exceptions. We are now consulting on incorporating routes for exceptions to two additional conditions, “sufficiently independent directors” and clause 7.5 of “procurement of service capability”. [[footnote 24]](#fn:24) Sufficiently independent directors We propose to add a clause to the ‘sufficiently independent directors’ licence condition to allow for exceptions through Authority approval. This is common in similar condition in other licences [[footnote 25]](#fn:25) and would allow, in the circumstances specified by the exception, for the code manager to have fewer “sufficiently independent directors” than ordinarily required by the licence condition (see condition 16 in the Annex A). Incorporating such an exception would allow for flexible management of any potential exceptions on an ongoing basis when new directors are appointed, or should new circumstances arise (that do not present potential conflicts of interest). This could be relevant where an SPV is set up to perform the code manager role and the parent company has the same board as the code manager. In this instance it would not be possible for the directors to adhere to this condition. If Ofgem is satisfied that it is appropriate for the code manager and its parent company to have the same directors, an exception could be granted. Procurement of Service Capability (clause 7.5) We propose that code managers will be prohibited from outsourcing to a third party where a relevant Conflict of Interest is present (see condition 7.5 in Annex A). [[footnote 26]](#fn:26) However, we recognise that there may be instances where contracting with third parties would provide efficiencies and benefits, and that any initial conflicts of interest can effectively be mitigated through appropriate controls. Therefore, we propose to include a route for exception to this condition, in instances where the Authority is confident that any risk is sufficiently mitigated. Updated licence drafting In the October 2024 response we stated that we would revisit the drafting for the licence condition “Not prevent nor distort competition” and the definition of “External Service Provider”. Below we outline our proposals for the updated drafting. Not prevent nor distort competition In the response to the March 2024 consultation, there were some concerns about clause b) of this SLC (condition 5.5(b) in the March 2024 consultation, condition 15.5(b) in this consultation) casting too wide of a net. In our response we clarified that the intent of the drafting is to expressly prohibit code managers from distorting competition in markets or activities that are covered by the relevant code. We stated that while we do not intend this licence provision to have a broader scope, relevant competition law would still apply. We have revised the drafting to more accurately capture this intent, and the clause now reads (with changes from the last consultation indicated in bold and with strikethrough): > The Licensee must at all times undertake its Licensed Activity in a way that is most likely [best calculated (deleted)] to ensure that it does not restrict, prevent, or distort competition: > > (…) > > b) in the provision of, or in any of the markets for, commercial activities that are [connected with the markets that are wholly or in part (deleted)] governed by the Relevant Code [under the Principal Energy Legislation (deleted)] External Service Provider/Restrictions on becoming a related undertaking One respondent to the March 2024 consultation suggested we expand the definition of “External Service Provider” to include “service providers whose role is closely associated with the code manager’s operation of code processes” (which could include Central System Delivery Bodies). [[footnote 27]](#fn:27) The definition of “External Service Provider” was at the time of the last consultation present in two licence conditions, “Restrictions on becoming a related undertaking” (see condition 18 in Annex A) and “Sufficiently independent directors” (see condition 16 in Annex A). Therefore, we have considered how extending the definition would impact these two conditions. The “sufficiently independent director” condition includes a clause which states that “[the director must not] have held a position that could be deemed to cause an unacceptable conflict of interest in their role as a sufficiently independent director”, and then specific examples are listed. We consider that this drafting sufficiently mitigates the risk of conflicts of interest in instances where a prospective director would have affiliations with a service provider closely associated with the operation of code processes. However, “restrictions on related undertaking” does not include this broader clause, and there could potentially be a risk of conflicts of interest if the code manager becomes a related undertaking of such a service provider. To mitigate this, we propose to redraft the first part of the condition (with the new addition in bold): > The Licensee must use its best endeavours to, subject to the Authority having otherwise consented, ensure that it is not and/or does not at any time become a Related Undertaking of a party where it could be deemed to cause an unacceptable conflict of interest with their role as code manager. In particular, they must not become a Related Undertaking of: [..] We consider that this more effectively addresses the risk rather than extending the definition of “External Service Provider”, which could have unintended consequences for other licence conditions that use that term. For example, the definition is now also part of the “Procurement of Service Capability” standard condition (see condition 7 in Annex A). Consultation questions Q4: To what extent do you agree with the proposals set out above on conflicts of interest, including where to include, or not include, exceptions in the licence? Q5: To what extent do you agree that the revised licence drafting in conditions 15-19 of Annex A delivers the intent of our proposed policy on conflicts of interest? Do you have any other views or comments on the licence drafting? ### 1.4. Code manager objectives We have previously indicated that the code manager licence may include a set of objectives that code managers will be required to seek to achieve in the course of carrying out their functions. Many code panels, as well as some code administrators and Central System Delivery Bodies, currently have objectives placed on them. For example, a number of code panels have objectives to act transparently, facilitate the relevant objectives of the code, and to give effect to the relevant code promptly, economically, and without undue discrimination. [[footnote 28]](#fn:28) Note that our proposed code manager objectives are distinct from the relevant objectives of a code, which will continue to exist in the new framework and against which modification proposals will be assessed. #### Summary of proposals We propose that code manager licences will include a set of code manager objectives and a requirement that code managers carry out their Code Manager Business in the manner that is most likely to facilitate achievement of those objectives. [[footnote 29]](#fn:29) We intend that these objectives will set out how code managers should carry out the role. The majority of the proposed objectives are similar to existing objectives placed on code panels, but we are also proposing new objectives on promoting positive outcomes for consumers and supporting the delivery of Ofgem’s new SDS. [[footnote 30]](#fn:30) We propose that the licence contains the following ‘code manager objectives’, which are discussed in more detail in the next section: * to facilitate the full and prompt implementation of the code in accordance with its terms and provisions; * to implement the code in a fair manner and without undue discrimination between code parties or classes of code parties; * to implement the code as economically and efficiently as is reasonably practicable; * to facilitate cross-code coordination and collaboration between code managers, Central System Delivery Bodies, SAFs and other code bodies; * to conduct its Relevant Business [[footnote 31]](#fn:31) transparently and openly, subject to the express provisions of this licence and the relevant code, and to any other duties of confidence owed to third parties; * to carry out its Relevant Business in such a manner that is calculated to promote positive outcomes for consumers; * to carry out its Relevant Business in such a manner that is calculated to facilitate the delivery of the strategic direction set out in the relevant sections of the then current Strategic Direction Statement; * to carry out its Licensed Activity in such a manner that is calculated to support innovation in relation to the activities governed by the relevant code. Note that these objectives are intended to apply to code managers’ day-to-day operations and not to other decisions or assessments made against specific criteria set out in the relevant codes (such as assessing whether a proposed code modification better facilitates that code’s relevant objectives). #### Proposals and analysis Implementation of the relevant code Code managers will implement the code for which they are responsible, a function currently carried out by code panels and code administrators. We propose that three objectives are included in the licence which set a requirement to implement the code as follows: * fully and promptly and in accordance with its terms and provisions; * in a fair manner and without undue discrimination between code parties or classes of code parties; * as economically and efficiently as is reasonably practicable. These are similar to objectives currently in place for code panels. Although we have already proposed separate requirements that code managers do not unduly discriminate between any persons or any class or description of persons, we consider there to be value in setting a clear objective that places a specific requirement on implementing the code in a fair manner without discrimination. We also consider it important to set an explicit objective on implementing the code economically and efficiently. We intend that this would apply more broadly than a requirement on code managers not to incur costs that are uneconomical, wasteful or inefficient (see proposed drafting in condition 20 of Annex A), which would apply only to their own Recoverable Costs. An objective on implementing the code as economically and efficiently as practicable would extend to decisions made in the course of implementing the code, including seeking to ensure that it does not result in inefficient costs for other parties, including Charging Parties. [[footnote 32]](#fn:32) Facilitating cross-code coordination and collaboration We have previously identified that a key issue with the existing framework is the fragmentation of codes and lack of coordination between them. [[footnote 33]](#fn:33) We consider that code managers should play a central role in improving coordination and collaboration between code managers of other codes, as well as Central System Delivery Bodies and SAFs. As set out in chapter 1.13 below, Ofgem’s second implementation consultation includes proposals to facilitate cross code working in the modification process. [[footnote 34]](#fn:34) An objective on cross-code working will support this requirement, but we would also expect code managers to consider further actions they could take. This could include, for example, setting up or engaging proactively with cross-code forums, incorporating cross-code initiatives into codes, or working with other code managers on modification proposals. However, we recognise that there are a range of possible approaches and that the most appropriate may differ by code. We therefore consider that a broad objective represents the best approach, rather than specific requirements. Acting transparently We have previously set out our view that energy code reform should improve transparency, and we consider that code managers should act as transparently as possible in all their activities. [[footnote 35]](#fn:35) We have already proposed a requirement that costs are, as far as possible, published transparently and comprehensively, but we also consider that a broader objective to conduct its business transparently and openly would help ensure openness in decision-making and general conduct. We recognise that there are circumstances in which full transparency may not be possible, for example in relation to sensitive commercial considerations or other duties of confidence, and the licence drafting we have proposed reflects this. However, where possible, we expect code managers to seek to carry out their role as transparently and openly as possible. Promoting positive consumer outcomes Achieving consumer benefits is a central driver of our energy code reforms. To reflect this intention, and to ensure that code managers put consumer benefit at the heart of their role, we propose that code manager licences include a clear objective requiring them to promote outcomes that will be of benefit to existing and future energy consumers. We consider that this will complement already proposed requirements intended, in part, to protect energy consumers, including those on budget setting and conflicts of interest, but consider that a specific objective on promoting consumer outcomes would encourage code managers to more carefully evaluate the impact of decisions made in the course of carrying out their business. We recognise that this may involve considering a range of factors that may not always be complementary (for example, impact on bills and facilitating net-zero), and we also recognise that not every decision will have clear impacts on energy consumers. However, we would expect code managers to demonstrate how they had considered the impact on energy consumers when making decisions, and how they had sought to ensure that positive outcomes were maximised in the context of their broader duties and objectives. There are precedents within the energy sector for objectives on seeking to achieve positive consumer outcomes. The Energy Act requires that the NESO “has regard to… the consumer impact of a relevant activity”, [[footnote 36]](#fn:36) while the REC mission statement includes reference to “promoting… positive consumer outcomes”. [[footnote 37]](#fn:37) Principle 15 of the Code Administrator Code of Practice (CACoP) is that “Code Administrators shall endeavour to provide an assessment of the impacts of a Modification on the end consumer and on the drive for net zero”. [[footnote 38]](#fn:38) Taking these approaches into account, we propose that code manager licences include an objective requiring the licensee to carry out its Relevant Business in such manner that is calculated to promote positive outcomes for existing and future consumers in relation to the activities governed by the relevant code. Facilitating delivery of the Strategic Direction The Act includes a new duty for Ofgem to issue an annual SDS for designated industry codes. The SDS must contain a strategic assessment of government policies and developments relating to the energy sector that Ofgem considers may, or will, require modifications to the designated industry codes. [[footnote 39]](#fn:39) Through this new role, Ofgem will set direction for the development of designated gas and electricity codes. [[footnote 40]](#fn:40) Part of a code manager’s role will be to work to develop the codes they manage in line with the strategic direction set by Ofgem through the SDS. In chapter 1.5 – ‘Delivery Plans’ we propose requirements for code managers to develop delivery plans setting out how they intend to resource and facilitate delivery of the priorities presented in the relevant SDS. As well as a requirement to develop delivery plans, we propose that code managers should have a more general objective to facilitate delivery of the SDS in carrying out their role. We consider that this objective would make clear the expectation that code managers should be implementing the SDS more generally, would expand the requirement beyond the immediate delivery plan, and could compel code managers to act on the SDS before delivery plans are fully in place (where appropriate). Facilitating innovation In the September 2021 consultation on the Design and Delivery of the Energy Code Reform, we proposed that code managers will play an important role in supporting innovation across the sector. [[footnote 41]](#fn:41) We consider that facilitating innovation by existing and prospective market participants should be a key element of the code manager function and propose that code manager licences should include an objective on facilitating innovation. While wider strategic initiatives to support innovation will likely be transmitted through the SDS, we consider that supporting innovation should also be part of code managers’ day-to-day activities, where appropriate. This could include, for example, providing information and guidance to prospective innovators and collaborating with other code managers on initiatives that support innovation. We also expect code managers to play a key role in processing code derogation requests [[footnote 42]](#fn:42) as part of the regulation sandbox, which is designed to help innovators trial or bring to market new products, services, and business models without some of the usual rules applying. [[footnote 43]](#fn:43) We also consider that this would align with a similar duty placed on NESO by the Energy Act 2023 to ‘have regard to’ particular matters, including “the desirability of facilitating innovation in relation to the carrying out of relevant activities”. [[footnote 44]](#fn:44) Consultation questions Q6: To what extent do you agree with the proposed objectives? Are there other objectives you think should be included? Q7: To what extent do you agree that the draft code manager licence condition in condition 3 of Annex A delivers the intent of our proposed policy on code manager objectives? Do you have any other views or comments on the licence drafting? ### 1.5. Delivery plans The Energy Act 2023 establishes a duty for Ofgem to publish an annual SDS. [[footnote 45]](#fn:45) This must contain a strategic assessment of government policy and developments related to the energy sector that will, or may, require changes to industry codes. [[footnote 46]](#fn:46) We propose that code manager licences will include a requirement on code managers to prepare and execute delivery plans setting out how they will facilitate delivery of the SDS through industry codes. Our proposed approach is intended to provide flexibility, recognising that code managers are the owners of delivery plans and that delivery plans will differ from code to code, while being sufficiently clear to allow code managers to understand the requirements and ensure that the right content is captured. We have also sought to design an approach that optimises the effectiveness of the delivery plan when considering the sequencing of the publication of code manager budgets and Ofgem’s SDS, as discussed below. In response to Ofgem’s December 2022 Call for Input, most stakeholders agreed that the licence should include obligations related to delivery plans. [[footnote 47]](#fn:47) Some highlighted the importance of the code manager consulting and seeking input from stakeholders during the development of the plan. Flexibility was also raised, with two stakeholders suggesting that the finer details (e.g. plan contents and requirement to follow the plan) should be kept separate from the licence. #### Summary of proposals Our proposed approach is to include the following features in the SLCs: * The code manager must publish a draft delivery plan alongside their draft budget (the delivery plan and the Work Plan could be the same, or part of the same, document); [[footnote 48]](#fn:48) * code managers must publish a draft delivery plan for consultation; * each plan must cover at least the next 12 months from publication; * high-level requirements for the content of the plan would be set out in the licence; * code managers must comply with licence directions or guidance issued by Ofgem regarding the content of the plan; * code managers must take all reasonable steps to comply with the plan; * each new plan must include