On 12 October 2012 the UK Government's energy regulator, the Office for Gas and Electricity Markets (Ofgem) published its final decision announcing a change to the licensing policy for gas traders.
- Requirement for gas traders to hold gas shipper licences removed
On 12 October 2012 the UK Government's energy regulator, Ofgem, published its final decision announcing a change to the licensing policy for gas traders1.
Ofgem has decided that gas traders will no longer be required to hold a gas shipper licence and this will result in the removal of the relevant requirement under the Uniform Network Code (UNC) effective from 1 January 2013.
- Background and rationale
Under the Gas Act 1986 (Gas Act), it is an offence to carry out gas shipping activities without a licence or an exemption. Shipping activities include arranging the physical conveyance of gas from one point to another. As the Gas Act refers only to gas shipping and not to trading activities, Ofgem decided it would not be appropriate to continue to issue licences to gas traders that are not involved in the physical conveyance of gas.
Avoiding the issuance of unnecessary licences to traders is in line with Ofgem's principle of "better regulation".
Ofgem believes that although the fee for a shipper licence is minimal, requiring a non-physical trader to have a shipper licence may represent an administrative burden, especially for small parties and parties based abroad. In their view, removing this unecessary and unjustified barrier to entry could encourage additional parties to participate in the gas market. This could result in more effective competition and have a positive impact on the industry.
- Revocation of existing licences
Generally, Ofgem's understanding is that the companies themselves are better positioned to determine whether or not their specific activity requires a gas shipper licence. Although a timeframe for gas traders to revoke their shipping licences is not provided, if they fail to do so Ofgem is empowered to revoke a licence if the licensee has ceased to carry on the licensed activity.4
- What is changing
With the removal of the requirement for a gas trader to hold a gas shipper licence, a new type of UNC "User" will be created, called a Trader User. This new type of "User" has been created to differentiate between those involved in the physical conveyance of gas, or arranging for the conveyance of gas (Shipper User) and those not involved, but whose activities are directly related to the registration of trade nominations (Trader User).
The main difference is that Trader Users will be allowed to sign up to the UNC without holding a gas shipper licence, whereas Shipper Users will need a licence in order to do so.
Certain consequential changes will be made to the UNC's operational balancing and trading arrangements (see links below).
- New and residual enforcement powers in relation to gas trading
One of the industry's concerns addressed in the consultation stage that took place in January 2012 was that the removal of the requirement to hold a gas shipper licence for gas traders could cause a regulatory gap, as licence conditions would no longer apply to gas traders in the UK.
Ofgem did not accept that a gap in regulation will be created on the basis that most conditions in the gas shipper licences relate to physical conveyance of gas and are therefore not relevant to gas traders.
Ofgem confirmed that their initial view is that once the licence requirement is removed, the Financial Services and Markets Act (FSMA) exemption for holders of a gas shipper licence ceases to apply to gas traders. The affected licencees will therefore need to determine whether trading activities covered by the exemption (principally trading in certain gas futures and contracts for differences for the purpose of participating in the balancing market) require authorisation from the Financial Services Authority (FSA) once their shipper licence is revoked.
Ofgem also noted that new investigatory and enforcement powers will be given to Ofgem under the Regulation on Wholesale Energy Markets Integrity and Transparency - REMIT (including regulations on insider trading and market manipulation). Ofgem also intends to keep monitoring REMIT's implementation in the UK with the aim of avoiding any gaps or double regulation in relation to gas traders.
- Next steps
To provide sufficient lead time to allow industry participants to adjust, Ofgem has stated that the licensing change will be effective from 1 January 2013.
Ofgem will also proceed to update the Guidance for Gas and Electricity and Licence Applications with the approved text, as per the consultation and final decision documents.
- Further information
Please click on the links below to access useful related documents: