2021/22 Budget Analysis

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REC Services

Code Manager mobilisation and operational costs have not been disclosed by function to ensure commercially confidential information is protected. The values shown reflect the aggregate payable, as defined in their respective contracts, to the three service providers. The Budget allowance reflects the mobilisation costs which fall due in the period April – August 2021 with operational costs crystallising from RCC go-live date (01 September 2021). The Code Manager contracts include detailed quantitative, qualitative and stakeholder satisfaction survey KPIs with resulting service credits being payable where targets are not met. The contract costs can be predicted with a high degree of certainty, and alongside the detailed service specification requirements included in the original procurement documentation, meaning the likelihood of RECCo requiring changes to the service is low. Consequently, a low contingency value (5%) has been attached to this budget allowance. Any changes to the contracts arising from industry-driven change, see Change Allowance section later, would be funded from the Change Allowance.

Code Manager Mobilisation and Transition Projects reflect the costs required to ensure the successful management and delivery of the Code Manager mobilisation and the transition of services currently delivered under SPAA, MRA, SMICoP etc governance. The allowance assumes a relatively short early life support timescale post RCC date. During 2020, RECCo secured dedicated contractor resource, supported by Subject Matter Experts, to support these projects and, to mitigate risk and preserve knowledge, RECCo will extend these contracts through to project conclusion.

The mobilisation project assumes a full-time project manager, PMO function and test analyst with support from Subject Matter Experts on a part time basis as required. The key role of the Code Manager mobilisation project is to ensure the Code Managers deliver an integrated and complete “One Code Manager” ready for RCC which meets RECCo’s service requirements and quality standards.

The transition project assumes a full-time transition manager with appropriate commercial and Subject Matter Expert support. The objective of the transition project is to ensure that all existing service delivered under existing governance ae transferred to RECCo by RCC and that such services fully meet any enhanced governance and service obligations required under the REC.

Theft Services Procurement: RECCo is required to develop a Theft Reduction Strategy that will better facilitate the discharge of REC Parties licence obligations to prevent, detect and investigate gas and electricity theft. The current theft arrangements, comprising the Energy Theft Tip Off Service (ETTOS), the Theft Detection Incentive Schemes and the Theft Risk Assessment Service (TRAS), are set out in the Supply Point Administration Agreement (SPAA) and the Distribution Connection and Use of Systems Agreement (DCUSA). These arrangements will migrate to the REC as part of Retail Code Consolidation.

To inform its approach to the Theft Reduction Strategy, RECCo will commission a robust methodology for quantifying the scale and nature of the issue. As noted by Ofgem in its consultation on REC v1.1, the Impact Assessment on which many industry estimates of the extent of energy theft are now several years old. We consider that a robust methodology upon which stakeholders can agree, will help inform thinking, both on whether the efforts made to mitigate energy theft are proportionate and subsequently, whether they are having any effect.

The current contract for the Theft Risk Assessment Service (TRAS) will expire in March 2021. However, rather than immediately procure a like-for-like data analytics services, RECCo will conduct a review of stakeholder requirements, including any lessons learnt from the operation of the TRAS, and identify all available options. In some cases, RECCo would expect these options to be complementary and reinforce the efficacy of wider elements of the theft strategy. For instance, RECCo will examine whether the current theft detection incentive schemes are fulfilling their objectives, or whether they could be developed in such a way that they are better targeted and/or help to reinforce other aspects of the theft strategy.

The budget allowance will allow RECCo to undertake this project, with appropriate validation points, to determine the best solution for meeting the TRAS requirement as defined in Supplier licences. The proposed approach is to complete a Strategic Outline Case by June 21, followed by the development of procurement documentation (ITT and requirements specification) by September 21 with the service then procured in the period October – March 2022. Mobilisation would take place in the 2022/23 budget year with the associated service provider mobilisation costs being incurred in that year.

Metering Codes Auditor Procurement: there are currently five metering codes of practice which will transition to the REC. In the Budget year, these metering Codes of Practices will be simplified and consolidated within the REC as part of the Retail Code Consolidation. Ofgem confirmed in its recent decision on REC v1.1 that the Metering Equipment Managers would be Parties to the REC, allowing for more effective assurance over the metering arrangements, and ensuring that the Metering Equipment Managers would be fully enfranchised in the governance and decision-making of the REC.

Metering auditor services are provided to these codes by four different organisations. RECCo does not consider this to be an efficient delivery model and will therefore carry out a project to procure a single metering auditor. The procurement project will cover three stages: defining requirements, procurement phase and service mobilisation with the go-live of a single audit function planned by January 2023. This timescale is determined by RECCo’s current obligation to comply with Public Contracting Regulations 2015.

Other projects: in recognition of the changing and evolving environment in which RECCo will operate over the Budget year, the Board has included a £250k allowance to fund projects which are either unknown at this time or in very early stages of development, e.g. Ofgem’s ‘Open Data’ programme, mandatory non-half hourly settlement, and consumer matters. The use of this project fund will be subject to Board level approval.

Transitioned services reflect the cost of services which are currently delivered to the industry under existing governance arrangements, primarily SPAA and MRA. Liability for these services will be taken on by RECCo, from April 2021 for the Energy Theft Tip Off Service (ETTOS) or from RCC for ECOES and Green Deal Central Charging database (GDCC) and a number of smaller nonmaterial services such as gas market data reporting (CDSP reporting), theft calculator etc.

These are not new industry costs and industry should see a corresponding reduction in existing code charges on the transition to RECCo.

Transitioned Services

ETTOS: RECCo considers that the energy theft-tip off service currently operated by Crimestoppers is delivering value for money, insofar as the monetary value of the instances of theft identified through the scheme outweigh the cost of its operation. RECCo will take over responsibility for the contract management of that service from 01 April 2021, and RECCo will not be looking to make any substantive changes other than to increase the marketing budget, to raise public awareness of the scheme and it is hoped, further improve its efficacy. The budget allowance reflects the expected contractual service costs plus the marketing budget. The latter will be agreed on an annual basis and there is no contractual commitment further than each such agreed budget. The costs shown are for a full year. These costs can be determined with a reasonable degree of certainty, but owning to a volume-driven element of the service the contingency has been set at 10%.

ECOES and GDCC will become REC services from RCC go live and the costs shown reflect a part-year only (September 21 – March 22). The budget allowance reflects the current known contractual service delivery costs for the two services plus allowances for costs of testing and production environments to support the Switching Programme. Some elements of the ECOES contract are volume-driven e.g. Microsoft licences and as such cannot be estimated with a high degree of certainty. To reflect this, a contingency allowance of 10% for ECOES and 5% for GDCC has been set.

Other services: these include sundry services which individually or joint are not of material value. They include Central Data Service Provider (CDSP) gas market reporting by Xoserve, management of the ‘theft calculator’ and a data analytics service in support of PAB. These are part-year costs for the period after RCC.

RECCo Operations

These budget allowances reflect the costs of strengthening the RECCo team and Board to deliver its strategic objectives. The RECCo Board will be an independent Board charged with the discharge of RECCo obligations under the REC. RECCo will appoint Non-Executive Directors (NEDs) with backgrounds in digital transformation and consumer affairs, adding important elements of independence and external perspective to a Board that has a deep collective knowledge of and expertise in the energy industry. During the 2021/22 Budget year, this expertise will be supplemented with further NEDs with the appropriate skills, experience and knowledge to enable a fully independent Board who can support the CEO and RECCo operational team in delivering the strategic objectives. Because of the evolving and changing environment over the coming year and the ensuing level of uncertainty, the Board has considered a 10% contingency allowance to be appropriate for RECCo operational costs.

Directors Fees: the budget assumes the appointment of five (5) NEDS and the continuation of an independent Chair during the year and the associated fees payable to such persons.

RECCo Operational Team: as detailed earlier, during the Budget year RECCo will move from a project-based operating environment to an operational delivery environment. At RCC date, RECCo will have responsibility for the delivery of 17 out-source services to industry and the associated service management of those service providers to ensure they deliver the service obligations, value for money and continual improvement. Alongside this, RECCo as an entity will continue to have responsibility for strategy development, more refined charging mechanisms and an enduring requirement for stakeholder engagement broader than “day to day code matters”.

Recruitment will be carried out only where operational requirements demonstrate a business case for doing so. The RECCo CEO, along with the Board, will validate the resource model for 2021/22.

The budget assumes a phased transition from the current project model, which is ideally suited to a contractor led model, to an employee model. This approach is designed to reduce manpower costs and develop an enduring knowledge base within the organisation. RECCo will seek to recruit talented people with strong regulatory and governance knowledge, supplemented with expertise in key areas such as theft, metering and policy development. Alongside these RECCo will recruit individuals with strong corporate skills across stakeholder engagement, communications, finance and commercial management. The organisation will be developed to ensure it is fit for purpose and can deliver the key role of “intelligent customer” on behalf of REC Parties. The budget allowance also includes an estimation of likely recruitment costs.

Service Management: at RCC date RECCo will be responsible for delivering 17 out-sourced services, alongside carrying out two major procurements for theft and metering services. A key learning from the Code Manager procurement project was that it is crucial that RECCo has an infrastructure in place which allows it to deliver an “intelligent customer” role on behalf of the industry and to ensure that all the services provided to industry align with the REC vision and strategy. This function will ensure that service providers meet their contracted service obligation and deliver value for money, continuous improvement and performance excellence and manage business change. In 2022/23, the services will expand to include CSS, TRAS and GES. It is worth noting that while CSS total charging allowance will be subject to price control through the DCC licencing arrangements, its service performance metrics, change control process and obligation to be subject to performance assurance will sit within REC.

Corporate Services, Stakeholder Engagement and Communications: alongside the requirements for the Code Managers to engage with stakeholders at an operational level, there will be a requirement for RECCo to engage with its stakeholders at a macro and strategic level. This will be symbiotic with RECCo’s ongoing policy and strategy development function.

Strategy and Policy Development: RECCo is required under the REC to develop a REC strategy, which in turn will comprise several sub-strategies associated with policy development, consumers, digitalisation, theft, metering etc. With the support of the Code Manager, RECCo will seek to anticipate, engage with, and influence any policy development, which will impact the retail energy arrangements. We will aim to facilitate strategic policies such as the transition to net-zero carbon emissions, whilst also furthering the interests of REC Parties and ultimately, energy consumers. RECCo’s own strategic direction will be developed by the Board in full consultation with REC Parties and other stakeholders, wherever possible seeking a strategic consensus.

Commercial and Finance: as REC develops, both the quantum and complexity of its finances will increase both with taking on responsibility for meter auditor billing but, significantly with a step change at CSS go live. It is likely, as exists within existing codes, that a more refined charging process associated with the allocation of costs to specific sub-sets of REC Parties will need to be developed. RECCo will also need a commercial function to support the service management function in the management of the RECCo service providers.

Infrastructure Costs: includes allowances for infrastructure costs including, but not limited to, insurance costs, professional fees, HR support and stakeholder engagement.

REC Development Costs: reflects the estimated costs of supporting the development of the REC to RCC and the enduring costs associated with continued development of strategy and policy. Allowances have been included to fund REC drafting support, metering and theft reviews as well as supporting the development of the RECCo theft, digitisation, consumer and data strategies. Allowances have also been made to enable the development of a TPI Code of Practice and work on Price Comparison Websites and Consumer Journey Forum support. Other costs include remuneration of Performance Assurance Board members and the potential to develop an interface between CSS and RECCo for data exchange.

Switching Programme Support

Programme Coordination and Licenced Party Assurance: RECCo will continue to provide support and resource to the Ofgem Switching Programme through funding the costs for Programme Coordinator and Licence Party Assurance (LPA) in readiness of CSS go live. The Programme Coordinator assists Ofgem in navigating the complex delivery arrangements and is an integral party to the delivery of the new E2E Switching Arrangements providing Ofgem with industry coordination, assurance and advisory services. The LPA provider is fundamental to the programmes ability to drive progress and make decisions and is critical to giving Ofgem confidence in industry’s progress and an understanding of the risks to industry delivery.

The Programme Coordination and Licenced Party Assurance costs make up a material component of the RECCo Budget (16%) and the allowances have been reviewed and validated by Ofgem. Given the significant period of activity the project is entering into the Budget and the associated uncertainty the Board has determined that a 10% contingency is appropriate. This contingency is in addition to any risk priced into the Budget estimates by Ofgem and their delivery partners.

Alongside Ofgem reporting Budget utilisation at Switching Programme industry steering group level, the RECCo Board is provided with a monthly commercial report of budget utilisation.

Switching Programme Engagement: RECCo will take on a greater level of involvement in the Switching programme including the assumption of Party Under Integration obligations from RCC. These activities are currently funded through MRASCo and industry should witness an associated reduction in MRA costs from RCC. The cost allowances reflect RECCo direct involvement in the Switching Programme as well as funding involvement of the ECOES service delivery organisation.

RECCo is currently carrying out a bottom-up analysis of the Switching Programme eco-system to best determine where to deploy resource to targeted Switching Programme meetings and forums where it feels its attendance can deliver the best value both as a contributor and recipient of information. RECCo will ensure there is a cross-pollination of information from the Switching programme with its Code Managers and appropriate service providers to ensure it services will, in due course, deliver on any CSS requirements cascaded down to RECCo.

Given the historical involvement of MRASCo, and its technology delivery partner, the potential costs for this activity can be assessed with a reasonable degree of accuracy and consequentially the Board consider a 10% contingency to be appropriate for this budget allowance.

Change and Contingency Allowances

The Change Allowance and Contingency are non-committed Budget values. The Change Allowance will only be used where an industry-driven change is approved through formal change control processes. The Contingency Allowance will require Board approval and be subject to provision of a robust business case to support its use.

Change Allowance: as noted earlier, the Change Allowance is to fund the consequential impact on REC service provider contracts due to industry-driven change. For the avoidance of doubt, the Change Allowance will not be used to fund the management of change by the Code Managers post RCC. Their contracts include an annual allowance for managing an agreed volume of changes and where actual change volumes are below expectations such unused capacity is rolled over and can be used in the following year without charge. Excess change volumes are subject to agreed charges.

RECCo considered the potential sources of change in the Budget year which may impact the scope of services provided by RECCo service providers. Changes could arise from:

a) the Switching Programme, either new requirements or system changes arising from UEPT;

b) policy changes from Ofgem or BEIS or Ofgem placing new obligations on RECCo during mobilisation;

c) policy changes originating from industry response to Ofgem consultations;

d) back-log of changes being progressed under existing codes post-February 2021 code freeze;

e) changes to Code Manager contracts arising from transitioned services;

f) REC changes raised after RCC; and

g) RECCo requirement to provide specialist Subject Matter Expert resource to support the progression of change.

Switching Programme: Ofgem has indicated that the Switching Programme is seeking to enter a period of “design stability” and therefore the potential from switching programme driven discretionary change may be reduced. However, UEPT will allow the industry to identify changes they consider necessary to the CSS services, ECOES, Gas Enquiry Service (GES) etc. The requirement to fund the cost of these changes may cascade down to RECCo.

Existing Codes: Ofgem has written to each of the Codes affected by RCC confirming the arrangements for progressing change under existing codes in 2021. In summary, any changes agreed before February 2021 can have an implementation date after February 2021, changes after February can still be progressed if they are exceptional or urgent or, importantly for RECCo, where it is thought that work that is undertaken now will be capable of being handed over to the REC Manager for implementation. This process may result in a backlog of changes being progressed through the REC Change process from RCC date.

Policy Changes: Ofgem wrote to RECCo in December 2020 confirming that it anticipates that there will be several issues identified in the period to RCC, which cannot be solved in the current code arrangements, and will need to be transitioned to REC. These may give rise to an amendment to Code Manager contracts.

Contingency Allowance: a Contingency Allowance has been included in the Budget to cover potential events that are not specifically accounted for elsewhere. The purpose is to compensate for the uncertainty inherent in cost and time estimates, as well as unpredictable risk exposure. has been included to reflect the uncertainty of the operational environment. In accordance with the obligation for bottom-up budgeting, each budget allowance has been assessed to understand the degree of certainty of the budget cost estimates and an appropriate contingency allowance has been set. These are detailed earlier. The rates applied to budget allowances ranged from 0% - 10%.

The total Contingency Allowance included is 6.6% of the total Budget and this is a reduction on prior years (2020/21: 10%, 2019/20: 10%). As services mature in the coming years it is hoped that the value of the contingency allowance will reduce.

Transitioned Services: as part of its Transition project, RECCo will need to align the current service specifications with the corresponding REC service requirement. In some cases, the REC will require an enhanced service requirement to that currently in place and this will, in turn, require a change to the service provider contracts. Further, the REC requires enhanced service management obligations e.g. performance assurance to be placed on REC service providers.

REC Changes from RCC: from September 2021 all REC Changes will be progressed and managed in accordance with the REC change process. This process allows for prioritisation of change but does not place a limit on the volume of change or the complexity of such change or profile of when changes can be raised. The impact in the Budget year will somewhat be mitigated by the natural time limitation of REC Change process being operational for only 7 months.

Subject Matter Expertise: it is recognised that in some instances specialist Subject Matter Expertise may be required to progress complex or specialist changes and the obligation is on RECCo to provide such expertise. For the avoidance of doubt, such SME support is that which RECCo reasonably considers being both specialised and infrequent, therefore being outside of the core skills expected of, or cost-efficient to include within the Code Manager delivery teams. All such specialised SME support will be procured on a competitive basis.

In the period to RCC on 01 September 2021, RECCo will work closely with existing code organisations to ensure there is no unnecessary duplication of effort or cost incurred, resources are utilised in an efficient manner and best value is achieved for the industry.

From Retail Code Consolidation (RCC) on 01 September 2021, several existing codes, notably SPAA and MRA, will be consolidated into the REC and the funding of services provided to the industry under that existing governance will transition to RECCo. Existing codes will retain responsibility for funding their operations, including service providers, to REC go-live. Thereafter their budgets will reduce and reflect the costs of sun-setting those organisations.

2021/22 Budget Analysis

Table 2 below shows a breakdown of the 2021/22 Budget with a supporting narrative for each budget allowance.

The REC requires the Board to prepare an annual budget on a bottom-up basis. Because of the fundamentally different nature of RECCo operations for the coming year compared to the prior year, the comparative 2019/20 Budget has not been shown. For future years, a comparison will be provided.