One of the primary objectives of the UK’s utility market reforms is to encourage the entry of new parties. The aim is to promote competition, diversify the energy mix, and drive innovation in the industry.
Moreover, new entrants often bring fresh perspectives and innovative technologies to the market. They can introduce cutting-edge solutions that can enhance the quality and reliability of utility services. For instance, renewable energy startups have played a significant role in expanding the availability of clean energy sources in the UK.
However, new market entrants often face challenges related to access, financing, and market knowledge.
Assurance Mechanisms for New Market Entrants
To address these challenges and ensure that new market entrants can participate in the electricity market on equal terms, several assurance mechanisms have been established:
Licensing and Registration
New parties are required to obtain licenses or registration from the Office of Gas and Electricity Markets (Ofgem): the industry regulator in the UK. The same is true of those wanting to operate in Northern Ireland and Ireland (both have their own industry regulators). These licenses are legal obligations that ensure compliance with technical, safety, and environmental standards.
Industry Codes
Industry codes underpin the energy markets and licensees are required to maintain, become party to or comply with the industry codes in accordance with the conditions of their licence, as approved by Ofgem.
Industry codes such as1:
- The Balancing and Settlement Code (BSC)
The Balancing and Settlement Code contains the rules and governance arrangements for electricity balancing and settlement in Great Britain.
- The Distribution Use of System Agreement (DCUSA)
The Distribution Connection and Use of System Agreement (DCUSA) was established in October 2006 as a multi-party contract between the licensed electricity Distributors, Suppliers and Generators of Great Britain.
- The Retail Energy Code (REC)
The Retail Energy Code (or REC) is a set of obligations governing market participants operating in the retail energy market within Great Britain.
- The Smart Energy Code (SEC)
The Smart Energy Code (SEC) is a multi-Party agreement which defines the rights and obligations of energy suppliers, network operators and other relevant parties involved in the end to end management of smart metering in Great Britain.
- The Uniform Network Code (UNC)
The Uniform Network Code (UNC) is competitive gas industry’s legal and contractual framework for the transportation and supply of gas. It has a common set of rules which ensure that competition can take place on equal terms.
- The independent Gas Transporter UNC (iGT UNC)
Independent Gas Transporters (IGTs) develop, operate and maintain local gas transportation networks. IGT networks are directly connected to the Gas Distribution Network (GDN) via a Connected System Entry Point or indirectly to the GDN via another IGT.
These codes set out the rules and procedures governing the energy markets in the UK. Ofgem oversees these codes to ensure fairness and transparency in delivery adherence, and change. Again, the industry regulators in other industries, countries and/or regions operate the same or similar codes and requirements.
Market Communications
For parties to communicate reliably, consistently, securely, and efficiently with each other to enable market operations to take place, the energy markets infrastructure and systems are designed, managed, and controlled by the industry itself. The system consists of a market message transfer interface, a data item and field catalogue and prescribed use. These communications allow for data security, data accuracy, interoperability, and real time monitoring of industry processes. All new market entrants must be able to adhere to the data transfer arrangements.
Market Entry Support
Ofgem provides guidance and support to new market entrants when they apply to them for the appropriate licences, helping them navigate the complex regulatory landscape and understand their rights and responsibilities. In addition to this, each of the individual codes or agreements also have accession processes. Each administrator of the codes and agreements also support new entrants to follow a specific pathway to prove their capability to interoperate with the market, in line with the rules and regulations set out for the particular area that they want to operate in.
Gemserv assists and / or provides market entry services to new entrants in the various industries that we operate. We do this providing assurance services related to market entry, compliance, data security and protection and risk management. We help organisations navigate the complexities of entering regulated markets and provide the assurance mechanisms to do so. Gemserv has been there since the beginning in both the UK and Ireland in the creation of a competitive retail market for consumers. We were there, and have been key contributors, at the introduction of assurance services in the UK and Ireland energy markets and have proven experience of supporting new market participants into both markets, collaborating with other code administrators to provide a smooth, economical, efficient, and effective entry to the retail markets. We have also had a hand in the evolution of these markets, seeing changes in the market design, driving innovation in technology and changes to and consolidation of industry codes, along with the nuances that these bring. Overall, this has led to Gemserv being able to guide other markets such as Gas and Water in preparing for market competition and performance monitoring and market readiness and assurance.
Common pitfalls
New Market Entry processes can run smoothly, or not. This is highly dependent on:
- The knowledge of the New Entrant, and indeed the willingness to learn about the markets it is entering.
- The preparation in advance of starting the New Entrant processes:
- Preparing systems, resources, understanding timescales, expectations for standards of proof, business objectives et al.
- Misjudging the time it can take from start to go live, including the obtaining of a licence from the regulator.
- A lack of engagement with industry bodies, who can support, educate, and help set expectations.
- Some businesses choose to engage a consultancy to guide them through the processes, and this can be very helpful. Support can vary from light touch to taking project managing the entire process on behalf of the new entrant. This is a highly effective way to enter a new market, if this aligns with the requirements of the new entrant.
The time it takes to typically progress from obtaining the appropriate licence through to go live as a new entrant in the market of their choosing varies greatly and should not be misjudged. There is no one size fits all and by managing the many areas that can cause ‘stickiness’ the process will run smoother and therefore complete quicker. Gemserv has seen new entrants take over 12 months to go live and has also seen new entrants take 3 months to go live post initial engagement with the market they wish to operate in.
So , I’m a Supplier2 and I’d like to enter the UK electricity market, what do I need to do?
A business, let’s call them Shine Bright, has applied for and been given a Supply licence by Ofgem and they want to operate in the GB electricity retail market suppling domestic and non-domestic customers. Ofgem has directed them to the specific central market bodies that Shine Bright will need to engage with to continue their journey to being able to operate in the market.
Shine Bright has developed a business model that best supports its objectives, one of which is to supply electricity (and gas, in the future) to GB retail customers.
Shine Bright contacts with the various central bodies and accedes to a number of industry codes (including and not limited to: the Balancing and Settlement Code, the Retail Energy Code, the Smart Energy Code and the Data Communications Company (DCC) processes).
The thing about each of these codes is that they are designed to provide a high level of confidence that the electricity market will operate efficiently economically and effectively on behalf of the consumer. With that in mind, these codes need to assure that Shine Bright will not introduce risk or disruption to the marketplace, and this is done using a number of assurance processes which collectively are referred to as New Market Entrant Assurance.
Shine Bright undertake the following assurance techniques / mechanisms..
Education
Ofgem and other central bodies and industry code managers supporting new entrants by sharing knowledge and expertise about market processes, data requirements, and system requirements. Clarifying the complexities of the marketplace, helping them understand the communications methods, timescales, and engagement with the rest of the market for them. Essentially provide them with every opportunity to be successful in their endeavour at the same time as being complaint with the markets, the designs, and technical specifications to cause zero disruption.
Risk Assessments
Shine Bright will be risk assessed using a range of detective techniques to ascertain:
How much risk does Shine Bright’s business model pose to the market?
e.g. Finding out how many metering points may be registered for Supply by Shine Bright, the complexity of the business systems and solution, the volume of energy to be supplied et al.
How does Shine Bright’s business model pose a risk to the market?
e.g. The more metering points registered by Shine Bright that may be done so incorrectly, the more chance this will have a direct impact on the Consumer and other market participants. If a systems solution is hardcoded incorrectly, this would impact all the processes related to that coding, whereas if a process is predominantly manual there is a high chance of human error being introduced on a small scale.
Identifying how Shine Bright could introduce the risk is key.
What actions are in place to mitigate the risk posed by Shine Bright?
e.g. Systems have been tested and proven or are to be done so. Processes are standardised, documented and controlled. Staff and resources have been or are to be trained to manage the processes and systems.
What is the impact if the risk posed is brought forth and becomes disruptive?
e.g. Poor quality of data and communication leading to consumer receiving poor services and inaccurate bills or unable to switch suppliers. Missing or inaccurate data entered into settlement. Reputational impact, financial impact and potential rescindment of licence/s.
How likely is this to happen?
e.g. Based on what is known about the business model, objective for the future, previous history and experience allows the assurer to produce an informed answer to this question.
The output of the risk assessment allows for a bespoke plan of assurance activities to be developed ranging from ‘big’ assurance to ‘small’ assurance.
That is to say big assurance may look like a full compliance check, balances and audit supported by full empirical evidence or small assurance may look a lite touch, perhaps including self-declaration and some evidence of internal assurance applied.
Business Solution Assessments
Shine Bright will be expected to undergo the Business Solution Assessment.
This refers to an evaluation and analysis of a business’ operating model, its processes and procedures, systems, and resources.
The assessment considers regulatory and compliance requirements in the market, ensuring that the business’ proposed solutions meet all necessary standards.
Shine Bright will be expected to prove that:
- Information security and Data Protection has been considered and managed (this may be addresses through a separate assessment entirely, though it MUST be addressed and evidenced).
- Their business solution covers all applicable obligation and requirements.
- Their business solution is rational, intelligible, and unambiguous.
- There are management processes in place e.g. change management, quality control et al.
- All prerequisites for these assurance processes are complete.
Testing
Shine Bright will need to go through the following assessments in regard to their Business Solution as declared in the Business Solution Assessment.
- Internal Testing Assessment – Specific ‘market scenarios’ are tested internally, there is no interaction external to the business.
- Internal testing has taken place and empirical evidence provided for review.
- To prove the business solution can meet the market design and requirements and that the systems and staff operating the processes can do so under live operational conditions.
- External Testing Assessment – Specific ‘market scenarios’ to prove capability that the business can a) successfully exchange market messages and communications, b) do so appropriately and in accordance with the market design and processes and c) confirm that the interfaces between the business and the central systems and routing channels are working.
- External testing has taken place and empirical evidence provided for review.
So now, ‘Shine Bright’, have spent time, effort and attention going through the assurance techniques / mechanisms collectively known as New Market Entrant Assurance. They are successful and are now considered qualified to operate in the market.
Hurrah you may say, and indeed, this is a time to celebrate! But wait, there is also a process that they now need to follow as a New Supplier in the UK Electricity retail market, and it’s called Controlled Market Entry.
Controlled Market Entry & Exit
As a new Supplier (or other applicable market participant roles), Shine Bright will be subject to quite specific conditions and restrictions when they are first qualified to operate in the market. It’s designed this way to ensure that the integrity of the market is closely monitored in respect to the new supplier and to catch any issues as they may arise.
Shine Bright will be expected to report regularly on progress and will be actively engaged by central bodies to support them through the initial period of operations. Once the conditions of their controlled market entry have been met, they can request an exit from these restrictions. As is the running theme, this must be done with empirical evidence, a director declaration of compliance and potentially an on site audit before being set free without any restrictions to operate freely and in compliance with the market design.
In Conclusion….
Entering a new energy market, either as a new supplier or indeed as an existing supplier adding new strings to its bow, the assurance processes should not be underestimated. The energy industry is complex and requires a very high level of quality, accuracy and adherence to market design. Gemserv can help, support and advise throughout the market entry process, reach out to us if you would like to learn more, we’re more than happy to help.
Footnotes
1 This list is not exhaustive
Balancing Settlement Code (BSC) | The Distribution Use of System Agreement (DCUSA) | The Retail Energy Code (REC) | The Smart Energy Code (SEC) | The Uniform Network Code (UNC) | The independent Gas Transporter UNC (iGT UNC)
2 NB The business could be a Gas and / or Electricity Supplier, Distribution Network Operator, Gas Transporter or Metering Equipment Manager (MEM) et al.
