In the context of science, ‘entropy’ is commonly defined as the amount of order or lack of order in a system. It is the natural tendency for order to breakdown and for disorder to increase. Unfortunately, entropy is not a rare sight these days, considering the chaotic state of current global events.
In the context of energy, entropy is at its highest in a very disordered system, like in a mixture of gases. This is something to note, as introducing biofuels and hydrogen to the current domestic gas supply is currently under consideration.
In the context of Markets, there is a structured system in place to control entropy and maintain order. Government creates legislation, a regulator issues licences, and parties establish codes (through central bodies). This governance framework ensures a regulated market infrastructure within which participants must remain compliant in order to operate without censure or penalty.
How does this apply to the energy market?
In a regulated market, there is always the need to balance freedom to operate, innovate and compete, with the need to protect, secure and include. The balance between governance (arrangements set by market regulators) and compliance (actions taken by market participants) is settled on the ‘pivot’ of risk. For those who govern, risk is about minimising harm to the market; and for those who comply, risk is about minimising harm to their operations.
When addressing risk, there is acknowledgement of enforcement and its potential to impact on revenues and reputations. For the governing, the intent and detail of governance needs to be clearly communicated so that enforcement can be justified and enabled if necessary. For the complying, the policies and processes of compliance need to be uniformly followed so that enforcement can be avoided.
What changes can we anticipate?
If legislation, licencing and codes can be considered the Energy market’s rules, then DESNZ and Ofgem’s intentions, with more flexible licences, code consolidation and the introduction of licenced code managers, must be the creation of a new ‘rulescape’. Following what seems like an unusually high number of consultations, Ofgem is effectively creating a new operating environment that participants will need to adapt to, in order to avoid a ‘brush with enforcement’.
This new rulescape is not necessarily unwelcome, unnecessary or unfair, but it will be new and therefore in need of new compliance. One immediate example is the need for GB Retail Energy Suppliers to submit their Schedule 31 Levelisation Audit by the 16th of December 2024.
If the legislation, licences and codes are indeed the “rules” to help manage the market, then the central systems are the “tools” by which participants interact and engage with consumers, regulators and fellow participants. The evolution of Energy Data Task Force to Digital Spine and now to Data Sharing Infrastructure is setting the objective for a single setup to innervate and facilitate the energy market’s connections, communications and interactions.
A “toolscape”, if you will!
The drive to maintain a benign order in the Energy market, is a commendable and desirable ambition. And rules and tools are the two principal means for achieving this outcome in a regulated market. However, new governance arrangements and associated technology will require market participants to adapt their current compliance policies, processes and systems, or risk the wrath of enforcement.
Time to check those rules and tools.
Next Steps
Gemserv’s energy audit experts are ready to help you navigate these requirements. To learn more about our comprehensive Gemserv Energy Audit services, contact us today to discuss how we can support your audit needs and ensure your compliance with Ofgem’s requirements.
