Expert Commission on Energy Regulation: main report

Annex B

The following sections highlight the existing structures and processes by which the single GB-market, business infrastructure, connection to and operation of the power network are maintained, and identify a number of international comparators (further examined in Annexe A), which have relevance for the types of process and relationship that Scotland and rUK could follow and establish as components of the strategic partnership.

Current Arrangements

UK Government, through the Department of Energy and Climate Change ( DECC), sets the direction of travel within energy policy for the UK. The promotion of renewable energy and energy efficiency are currently devolved to Scotland. The efficient functioning of the electricity and gas markets, and regulation of the 'wires and pipes', are the responsibility of the Office of Gas and Electricity Markets (Ofgem, which is the executive (operational) arm of the Gas and Electricity Markets Authority ( GEMA).

Ofgem and GEMA

Ofgem's powers are derived from statute through the following legislation: Gas Act 1986 (part 1), Electricity Act 1989 (part 1), Competition Act 1998, Utilities Act 2000, Enterprise Act 2002, and the Energy Acts of 2004, 2008, 2010, 2011 and 2013. As an example, under the Gas Act 1986 and the Electricity Act 1989 certain activities concerning gas and electricity may only be carried out with a licence (or under a relevant exemption or exception). One of the responsibilities of Ofgem is to determine the content of gas and electricity licences, and to grant licences to successful applicants in accordance with published criteria.

Ofgem is governed by GEMA (The Authority). The Authority members are appointed by the Secretary of State at the Department of Energy and Climate Change and include seven Non-Executive Directors; the board has a membership of nine, and decisions of the Authority are made by ordinary resolution of the Board which meets monthly. In addition to the activities of the Board, GEMA operates six committees which have different roles and frequency of meetings. These committees serve to review the internal transparency and governance of the regulator, and also to ensure oversight of operational activity areas delivered by Ofgem.

Ofgem's principal objective is to protect the interests of existing and future electricity and gas consumers. Its aims include promoting value for money, promoting security of supply and sustainability for present and future generations of consumers, the supervision and development of markets and competition, and regulation and the delivery of Government schemes.

Strategy and Policy Statement

To ensure the independence of the Regulator from Government, the Energy Act 2013 introduced a requirement for a Strategy and Policy Statement ( SPS). The SPS takes the form of a transparent process to improve alignment between the Government's strategic energy objectives and regulation of electricity and gas markets by the independent Regulator, Ofgem, while respecting Ofgem's independence in making regulatory decisions ^[83] .

Industry Codes ^[84]

The industry codes underpin the electricity and gas wholesale and retail markets. Licensees are required to maintain, become party to, or comply with the industry codes in accordance with the conditions of their licence.

The codes define the terms under which industry participants can access the electricity and gas networks. The table below sets out the codes, and identifies the organisations responsible for the process of changes and modifications to the codes.

International Comparators

The Commission has identified several international comparators of joint regulatory models gained from Regulators governing countries or regions of comparative size to Scotland where two or more countries co-operate to regulate a single market. These include: the Single Energy Market ( SEM), established between Northern Ireland and the Republic of Ireland, and the Nordic and Iberian markets. Additional regulatory insight has been gained from discussions with regulators in the Minnesota Public Utility, and experts advising the Australian Energy Regulator.

The resource requirement for regulating the electricity, gas and/or water sectors varies in terms of budget, and also staffing level, depending on the relative and absolute size of the market and sectoral scope. For example, the Spanish multi-utility regulator - the National Commission on Financial Markets and Competition (CNMC) - covers, electricity, natural gas and fuel, telecommunications and audio-visual, rail and air transportation and postal services as well as the competiveness authority - it has a total staff of 515. Its counterpart in Portugal - ERSE, has a staff of around 75 and covers electricity and gas; the individual regulator counterparts in the SEM each have around 120, which appears broadly consistent with the circa 150 seen for NVE (Norway) and 100 for Ei (Sweden) on electricity and gas and district heating. We have not considered the resources required beyond this within the scope of the CER.

The examples of the SEM, Nordic and Iberian markets are distinct in that they encompass arrangements and agreements designed to join together markets which were previously separated. The situation for Scotland and rUK would clearly be different. In the event of independence for Scotland the two nations would separate, but work to retain and regulate the single wholesale markets and associated business infrastructure for electricity and gas.