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16 | 5TH - 11TH SEPTEMBER 2014 | UTILITY WEEK Policy & Regulation Market view T he European Union's third energy package came into force in 2011, with the purpose of developing a more har- monised European energy market. One of the areas singled out for attention was the network codes that govern physical energy transportation networks. Historically, each transmission system operator (TSO) developed its own code, along broadly national lines, resulting in potential issues with physical flows from one country to another. Industry has developed various trading strategies to get around this and the EU and national regulators have additionally come up with initiatives to facilitate cross-border flows. However, without harmonisation of the code principles themselves, there is a limit as to what can be achieved. Therefore, the third package required that European TSOs, acting together as ENTSOE (in the case of the electricity) and ENTSOG (in the case of the gas) develop binding net- work codes to be applied across Europe. The process of creating a network code starts with the European Commission, Acer (the Agency for Co-operation of Energy Regu- lators) and ENTSOG or ENTSOE identifying which of the areas identified in the third package legislation as requiring a network code should be prioritised. The Commission then sends a formal request to Acer requiring the development of a code on a particular area of priority. Acer develops a non-binding framework guideline with input from ENTSOE or ENTSOG, includ- ing extensive public consultation and the resulting dra code goes through the EU leg- islative process, eventually becoming a bind- ing network code. Once a network code becomes binding, it has the status of an EU regulation and becomes directly effective under EU law. Broadly speaking this means that it becomes legally binding in each member state, giving rise to rights and obligations that can be enforced in accordance with its terms. Each member state therefore needs to make sure, preferably before the relevant network code becomes binding, that its existing arrangements do not conflict with the terms of the new code. In the event of a conflict, the terms of the EU network code will prevail. ENTSOG and ENTSOE identified priority areas for development some time ago. In the case of ENTSOG the key areas are: • gas balancing; • capacity allocation; • congestion management, • tariffs and interoperability. In the case of ENTSOE there are nine codes divided into: • connection; requirements for generators, demand connection and high-voltage direct connection); • operational; security, planning and scheduling and load frequency control and reserves; • market; capacity allocation and conges- tion management, forward capacity allo- cation and balancing. Some of the EU network codes are already finalised, but the bulk of them, particu- larly on the electricity side, are still under development. National Grid is the designated TSO for both gas and elec- tricity, so as well as developing codes at EU level in its capacity as a mem- ber of ENTSOG and ENTSOE it has responsibilities at a national level for imple- menting the EU codes. Ofgem is also a key player because it is responsible for modifica- tions to existing licences. National Grid says implementing the EU network codes "is going to be one of the big- gest challenges facing the industry over the next decade". It adds: "Successful implementation will require collaboration, co-operation and transparency between all industry partici- pants on a national level, along with cross- border dialogue and European co-ordination between TSOs and regulators." While member states are obliged to ensure the EU network codes and domestic rules are compatible, by identifying areas of conflict and dealing with them, they are also afforded a degree of flexibility as to how they group implementation measures together to achieve compliance. National Grid has therefore set out a time- table outlining its proposals for the imple- mentation of the gas codes into the uniform network code in implementation phases, rather than on a code-by-code basis. Most of the changes currently envisaged arise under the capacity allocation and con- gestion management codes and affect areas such as capacity auctions. As further developments occur at EU level we can expect to see further changes in the uniform network code. National Grid will also see its own licence conditions change. The first set of amendments relating to the implementation of the capacity allocation code was consulted on earlier this year and the resulting licence condition changes should be in place by the end of the year. Development of the electricity codes is not as advanced. This is unsurprising because the process in electricity at the EU level is some way behind gas. ENTSOE envis- ages that the first of the codes should be through the EU legislation process by the end of Q1 2015. National Grid expects that there will be changes to the grid code, CUSC, BSC, STC, SQSS, distribution level codes and potentially transmission and other licences. National Grid's gas code implementation timeline already runs out to 2018, and there will be further developments arising as the tariff, interoperability and any further codes are developed. Given the additional complexity involved in the electricity sector, we can expect an implementation period for the electricity codes that extends well into the next decade. In short, it looks National Grid's summary of the situation is spot on. Lis Blunsdon, of counsel, Hogan Lovells Cracking the codes European industry bodies are developing a series of network codes to ensure interoperability between national systems. In the UK, it will be National Grid's job to implement them, says Lis Blunsdon. Once a network code becomes binding, it has the status of an EU regulation and therefore becomes directly effective under EU law.