On 21 January, Ofgem announced that it was rejecting a modification that would have introduced the concept of derogations into the gas Uniform Network Code (UNC). Since then, a new proposal has been raised, with the intention of addressing the regulator’s concerns around safety aspects and the approval process.
Derogations provide a temporary and specific relaxation of the code rules for a particular party, and the concept already exists within some of the electricity codes including the BSC and the DCUSA. However, if a party wishes to bring forward a demonstration trial or project with elements outside of the current UNC code rules, the only options are to raise a modification proposal to try and change the rules on an enduring basis, or scale back the parameters of the project to align with the current code arrangements. This can substantially slow down the progress of innovation projects and add cost to planning.
UNC760 Introducing the Concept of a Derogation Framework into Uniform Network Code (UNC) was raised in March 2021 and suggested that the lack of derogation arrangements were inhibiting the industry’s ability to carry out innovation in gas networks. Under the proposal, derogation applications would need to meet a ‘use case’, with innovation projects needing to meet certain requirements in order to justify a relaxation of rules. The first of the use cases to be introduced by the modification was ‘net zero innovation’, allowing relaxations for projects which seek to demonstrate new ways to reduce the carbon emissions associated with any aspect of the gas networks. The proposer suggested that this supports the use of net zero innovation funding provided under the RIIO-2 price control. There would also be an opportunity for new use cases to be introduced through further modification proposals.
The UNC Panel recommended approval of the modification on 21 October, but after careful consideration it was rejected by Ofgem. The regulator found that obligations relating to safety might not be fully considered within derogation proposals. Specifically, the wording would feasibly allow derogation requests for a trial to be approved by the UNC Panel without the prior granting of other non-UNC derogations such as derogations from Health and Safety Executive (HSE) requirements. Ofgem said that health and safety is paramount for gas, and that a derogation to the UNC should not be approved until derogations for all relevant non-UNC documents had also been granted.
Ofgem also said that the 16-day window for Ofgem to overrule a derogation would impede the ability to fully assess the impacts on the energy market, and that its default position would be to overrule if an assessment was not possible.
Following Ofgem’s rejection, a new modification, UNC800 Introducing the Concept of a Derogation Framework into Uniform Network Code (UNC) (Authority Direction) was raised. The proposal noted that Ofgem backed the principal of derogations, and that it would have preferred to send back the proposal, but that following legal advice the only option was to reject it. UNC800 is therefore effectively the same as UNC760, but with changes to address the regulator’s concerns. It would clarify that applications for derogations relating to the Health and Safety Executive or other safety standards would need to be approved ahead of a Panel recommendation on the UNC derogation, and that evidence of safety impacts would also need to be provided. The modification would also see the Panel making recommendations on derogations rather than decisions, with Ofgem to make the final approval or rejection without time constraints.
Although efforts to introduce derogation arrangements have hit a setback, the new modification should be progressed relatively quickly, with the Panel hoping to make a decision in April once the necessary consultations have been undertaken. This will be welcome news for innovation projects. SGN had been planning to utilise the derogation provisions to enable its H100 Fife hydrogen project. The UNC currently only permits hydrocarbon gas primarily consisting of methane to flow on the gas grid, and the project requires an exemption in order to supply 100% hydrogen gas on its purpose-built distribution infrastructure to 300 domestic customers in Fife, Scotland. When it became uncertain that UNC760 would be approved and implemented, SGN raised UNC799 UNC Arrangements for the H100 Fife Project (100% Hydrogen). This would introduce hydrogen to the definition of gas in the UNC, ringfenced to the relevant supply meter points and time-limited to the duration of the project – effectively a derogation in modification form.
It is likely that as the energy transition progresses and more net zero innovation projects are designed and proposed, the demand for a relaxation of code rules will increase. With UNC800, there is a more rigorous assessment process and greater ability for Ofgem to consider the impacts, and this may be more suitable to the gas industry given the need for strong safety considerations. Ultimately, the aim will be to allow new approaches to gas supply to be explored, while ensuring that the impacts of any trials are adequately assessed.
Cornwall Insight offers UNC modification tracking and impact analysis as part of our regulatory service. For more information, please contact firstname.lastname@example.org