RECCo plays a crucial role in the energy sector by working closely with REC Parties and stakeholders to ensure the retail energy market runs efficiently and effectively. To achieve this goal, we are transparent in our budget process, allowing stakeholders to clearly understand RECCo’s policies and expenditures. We are continuously striving to improve this process to ensure that stakeholders can see that they, and ultimately consumers, are receiving value for money. Following the latest budget-setting process, we’re committing to making a range of key improvements to further increase transparency in the future.
Background
We collaborate with REC Parties and wider stakeholders each year to develop our Strategy and Forward Work Plan, which outlines our workstreams, priorities and financial projections for the next three years. When we develop the plan, we aim to provide transparent insight and give stakeholders the opportunity to shape how we can best fulfil our objectives and mission statement.
In January 2024, we published our latest (2024-27) Forward Work Plan and three-year financial projections for stakeholder consultation. After this consultation closed and having considered comments received during this process, the RECCo Board published the 2024/25 Budget in February 2024.
Responding to feedback
REC Parties are given the opportunity to review the Budget and, if necessary, have the right to appeal specific line items to Ofgem. In the latest budget process, one appeal was raised by Smart DCC who referred a budget line item (CRS Project of £420k) to Ofgem. We are awaiting the outcome of Ofgem’s determination.
We also received some direct feedback and greatly appreciate the industry’s suggestions on how we can enhance our future budget development and consultation process. The REC Board fully supports these suggestions, and we are dedicated to implementing them in the upcoming 2025/26 budget cycle.
Key changes
Much of the feedback we received aligned with key themes that are likely to be adopted into future Code Manager licence arrangements, and we’re pleased to move towards early adoption of key budget process principles. Our enhancements will provide information to support and justify planned activities and expenditures. We will demonstrate the use of effective bid processes to secure value throughout the supply chain, ultimately delivering economic benefits for all consumers.
The four key areas of change are set out in full below.
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The Budget will be presented in context with information available in one place.
We received feedback that our most recent budget document presented some information without context. For example, we presented the total Budget 2024/25 figure without providing the 2023/24 figure alongside. In the future, we will include key contextual information for readers so it is easy to assess the information we provide. We are committed to:
- Consolidating budget information in one accessible location;
- Providing an analysis between proposed and prior-year budgets, explaining key variances and distinguishing between timing issues and realisable cost fluctuations.
- Offering insights into potential rebates stemming from prior-year underspends, ensuring transparency regarding financial management.
Feedback also suggested that industry parties would welcome earlier sight of the value of any projected underspend of prior year budgets and the rationale for such underspend. We commit to including this information in future budgets. In addition, where our in-year financial forecasting identifies that we will likely end the year with a realisable underspend against the Budget, we will reduce the REC Charges for the remainder of the year accordingly. This will ensure that any forecast underspend is returned to the industry as soon as possible. Any reduction will reflect the need for RECCo to retain sufficient reserves to ensure we can meet our liabilities and operating and investment requirements.
A key theme of the future Code Manager licence will be greater transparency of third-party service providers’ costs. Currently, our service provider contracts do not contain clauses that facilitate the broad sharing of information beyond the contracting parties. However, we are entering a period in our procurement cycle where we have a window of opportunity to renegotiate existing contracts and procure future services using the latest exemplar of good contracting practice, the Model Services Contract v2.3, as published by the Government in 2023. This contract includes a greater obligation on service providers to allow the sharing of information with stakeholders. We will endeavour to adopt these practices in our new contracts and share information with parties to the extent our contracts allow.
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Analysis of development in resources, specifically headcount
RECCo recognises the need to demonstrate value for money in both externally procured costs and internal costs. In both cases, the costs incurred must be economical and efficient. As the scope of RECCo’s obligations grows, we have a commensurate need for increases in the capability and capacity of our resources with an impact on our internal cost profile. In the 2024/25 Budget, we noted a modest increase (n=8) in our overall headcount (n=43). This increase was due to:
- Economic drivers (transition away from use of contractors to employees, n=2);
- Expanding delivery obligations introduced into the REC (Tariff Levelisation Scheme, n=2), ;
- The need to drive greater value from our service providers (n=3), and;
- A strengthening of our stakeholder engagement team (n=1).
In future budgets, we will provide an analysis of headcount utilisation, drawing on good disclosure examples of other central body budgets.
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We will refine our Contingency and Change Allowances
Historically, our contingency has been set at a prudent level to mitigate against risks arising from the establishment of RECCo, market instability, and uncertainty and the increased scope of delivery obligations placed upon us by Ofgem, such as the Market Stabilisation Charge (MSC), supporting the switching programme etc. In our 2024/25 Budget, we changed our approach. We removed contingency from individual budgets and project allowances, instead adopting a single company-wide contingency budget line in light of our plan’s reduced level of uncertainty and risk of delivery. This was set at the modest level of c4% of our overall Budget – a lower level than in previous years. Recognizing the changing market landscape and our improved collaboration with Ofgem, we are dedicated to enhancing our estimation of future contingency allowances.
Our previous Change Allowance budgets, recognising the REC’s newness and the carryover of a backlog of change from the earlier codes it superseded, were set at a level to ensure that change would not be delayed and that funds would be available. This approach also mitigated against the potential for changes to industry-support services such as the REC Code Manager, the emergent CSS, and enhanced enquiry services in 2022. In practice, these services have required a lower level of change than originally envisaged.
Feedback has suggested that a more refined approach is required to determine Change Allowance. Therefore, the Change Allowance included in future Budgets will be tailored to historical spending, anticipated future expenses, and a reasonable allowance for unforeseen changes throughout the fiscal year. We note that the proposals for the Code Manager licence include a requirement on the Board to issue a Certificate of Adequacy confirming that the appropriate resources are in place to carry out the Code Manager role for the following 12 months. We consider that this obligation will ensure a proper degree of prudence.
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We will make our Business Cases more transparent
Industry stakeholders have expressed the need for clearer justification and improved communication for future investment projects. We have been asked to share more information as far as confidentiality allows, including, as a minimum, an explanation of the requirement, an assessment of options to meet that requirement, a cost-benefit analysis and an order of magnitude of spending plans per project throughout its investment cycle. Recognising that we are spending industry money with an ultimate end-consumer impact, RECCo already uses a structured and balanced approach to investment decisions. We will demonstrate that in future business cases and business plans. Our internal governance uses a standard approach and recognisable process for investment decisions: explore options, develop a case for change, create a business case to support the case for change, carry out investment appraisal, approve in accordance with the scheme of delegated authority, etc. All of these activities are overseen and scrutinised by the executive team, and in turn, they are accountable to the RECCo Board.
We have listened and recognised the need for greater transparency and better communication with all parties. Going forward, we will publish the justification for investment projects, including the assessment of options to meet that requirement, a cost-benefit analysis and an order of magnitude of spending plans per project across its investment cycle. We will establish stakeholder advisory groups where necessary and, using non-disclosure arrangements, allow greater scrutiny to satisfy funding parties. We will also draw on best practices in existing arrangements elsewhere in the industry for developing cases for change/business cases. We hope that this approach will increase transparency and trust in what we are doing and the budgets we are setting, recognising that the ultimate decision on budgets and investment decisions remains with the RECCo Board (subject to any individual appeals process which may be in place) which was the rationale for RECCo’s new governance model.
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How we leverage Contract Mechanisms for Value
Feedback has suggested that the industry would welcome a greater understanding of the contract levers that are deployed to drive improved performance and value for money. Our procurement principles, outlined in Appendix 1, prioritise openness, fairness, and value for money. Alongside these, we enforce rigorous service and commercial management practices, ensuring adherence to contractual obligations and driving service provider accountability. Service credits are levied for underperformance, and we leverage both hard and soft levers to optimise service delivery and efficiency. In the financial year 2023/24, the value of service credits recovered was c£450k across all the REC Services, with a significantly higher value recovered in the prior year. The performance regimes flow from the service definition requirements set out in the REC and reflect those areas of service which are important to REC Parties. They reflect a combination of quantitative, qualitative and stakeholder satisfaction components and provide the right incentives for service providers to deliver on their service performance obligations.
Other hard levers include no evergreen contracts, certainty on contract costs (e.g. the limitation of Time and Material contracts, volume-driven components) and contractual obligations for service improvement and efficiency.
In addition, we have several service and contract soft levers we can deploy, including an enhanced RECCo service management function, restructuring of the RECCo team, defined change control processes, and an ability to partially terminate underperforming elements.
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We will clarify the Budget Development Process
We are committed to enhancing budget disclosure and engagement with industry stakeholders in alignment with the proposed future Code Manager Licence obligations. In our response to the DESNZ and Ofgem consultation, we supported several proposed initiatives but did not support the removal of Code Parties’ right to appeal budget line items to Ofgem. We also expressed concern about the timetable for the development of Budgets, including resource implications for ourselves, stakeholders, and Ofgem, and the need for an element of tailoring Budgets to reflect the nature of individual codes.
Whilst we will continue to engage constructively with Ofgem, REC Parties, and other Code Bodies on the practical implications of the licence proposals, we recognise and are committed to delivering on the intent of those proposals, including the need for a greater level of disclosure in budgets for non-confidential elements, headcount, prior year adjustments, etc.
For the 2025/26 Budget cycle, we will solicit proactive input during the Strategy development phase and treat financial projections as an explicit “draft budget,” inviting industry feedback and scrutiny. This will include asking industry proactive questions on our proposed work plan and soliciting scrutiny of our financial projections, and we will signpost where we have incorporated feedback and, if not, why in the document.
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Further feedback
We welcome industry stakeholders to provide feedback on our budget process enhancements; your continued input is invaluable in ensuring we meet industry needs effectively. Please reach out to Brian O’Shea at brian@retailenergycode.co.uk with any suggestions or queries.
