What are Network Codes?

1. What is a network code?

A network code is a set of rights and obligations that apply to parties operating in the European energy sector.  Currently at the drafting and scrutiny phase of the legislative process, the codes will eventually apply directly across Europe in the same way as an EU Regulation.  By creating standard rules for the operation of the gas and electricity sector, the network codes will provide the foundation for a reliable, sustainable and connected pan-European energy market.

2. What is the legal basis for network codes?

The Third Energy Package, specifically Regulation (EC) 714/2009, creates the legal basis for electricity network codes (developed by ENTSO-E) and gas network codes (developed by ENTSO-E’s sister organisation ENTSOG) and outlines the process to be followed in developing them.

The Third Energy Package is a legislative package designed to create an internal gas and electricity market in the European Union and participating countries. Its purpose is to further open up the gas and electricity markets in Europe to competition and promote the liberalisation of both markets.

The package was proposed by the European Commission in September 2007, and adopted by the European Parliament and the Council of the European Union in July 2009. It entered into force on 3 September 2009.

Core elements of the Third Package include ownership unbundling, which stipulates the separation of companies’ generation and supply operations from their transmission networks, and the establishment of a national regulatory authority (NRA) for each Member State as well as the Agency for the Cooperation of Energy Regulators (ACER).

The Third Energy Package consists of two Directives and three Regulations:

  • Directive 2009/72/EC concerning common rules for the internal market in electricity;
  • Directive 2009/73/EC concerning common rules for the internal market in natural gas;
  • Regulation (EC) No 714/2009 on conditions for access to the network for cross-border exchanges in electricity (and thus governing ENTSO-E);
  • Regulation (EC) No 715/2009 on conditions for access to the natural gas transmission networks (and thus governing ENTSOG);
  • Regulation (EC) No 713/2009 establishing an Agency for the Cooperation of Energy Regulators (ACER).
3. Why are network codes needed now?

The majority of European countries have their own rules to regulate the operation of the electricity transmission network (and sometimes, as in the Nordic region, these have been applied to several countries). Until now, these national rules were adequate, as links between countries were not as extensive as they are today.

However, as the system becomes more interlinked through shared European energy goals, a single set of rules is required to ensure the safe, secure supply of energy to homes and businesses across Europe. The network codes are a crucial enabler for promoting the integration of renewable generation (in particular wind and photovoltaic power) and ensuring security of supply.

4. What do network codes do?

Network codes set rules.  Those rules cover the different parts of the electricity sector and apply to the parties who are active in it.  The codes’ objective is to move from a position in which each country has a specific set of rules, which are not always compatible with those of their neighbours, to a situation in which Europe applies a coherent set of rules.  In doing so, the network codes aim to:

  • Promote increased trading across Europe;
  • Make it easier for companies to enter the market;
  • Enhance cooperation and security of supply; and
  • Allow more renewable generation to be safely integrated into the energy mix.

In short, they are the cornerstone of a secure, competitive, low-carbon European power sector.

5. In which areas are network codes needed?

The European Commission decides the areas where network codes are required.  It was decided that the first rules would deal with connection to transmission systems, coordination between Europe’s grid operators and the design of a harmonised European market.  ENTSO-E is currently working on nine separate, but closely related, network codes.  These nine codes can be broken into three “families”, with three codes in each family.

  • The connection related codes cover the connection of generators to the transmission grid (Requirements for Generators) and create rules for taking power from the transmission grid (the Demand Connection Code).  They also cover connections using Direct Current technology; which is becoming a more integral part of the power system.
  • The system operation related network codes focus on ensuring there are coordinated processes which allow grid companies to work together to ensure security of supply. They cover the way system availability is planned and scheduled, the way analysis of system conditions is carried out and the way in which the system operator ensures that the system can be kept balanced at all times.
  • The market related network codes translate the vision of having a market in which power can be traded anywhere in Europe, in much the same way as most goods and services, into a reality.  The market related network codes cover all the timescales in which power is traded – starting from forward markets which take place a year or more before the energy is actually delivered, moving through the day ahead market, where power for the next day is traded, and the intraday markets, which operate closer to the time when energy will be delivered.  Finally, they cover the balancing markets – in which the TSO is the sole buyer and acts to ensure that demand and supply can be balanced.  In all cases, they seek to move from national or regional markets to a single European market.

The nine codes are closely related and reinforce each other.  Clear connection rules are needed for the system to be planned and operated efficiently and securely.  A secure operational system is the foundation of a competitive market.  Well-designed markets create the signals that encourage market actors to contribute to system security and reduce the need for TSOs to act.  Hence, the whole is greater than the sum of its parts.

6. Who needs to comply with network codes?

Network codes need to be complied with by anyone to whom they are addressed.  Most obligations concern grid companies (both transmission and distribution companies), although generators, consumers (of different types) and other market players (such as power exchanges) are also concerned, depending on the code.

7. Are the network codes legally binding?

Once the network codes become law, they will have the same legal standing as European Regulations, with direct effect in each European Union Member State.  Alternatively, various other countries have concluded agreements with the European Union in the field of energy and they will adopt the codes too (though the legislative routes differ slightly).

8. What happens if the codes are not complied with?

To not comply with a network code, once it becomes law, would be a breach of European law.  The European Commission could then take action against a Member State or the national regulatory authority in a country could take enforcement action against the party which had failed to comply.

9. When will the network codes become law?

The implementation date depends on the length of the procedure through which Member States agree on the proposed text, known as Comitology. It is estimated that all codes should enter into force by 2015.