Licence Lite: Too heavy for most?

Energy iStock 000010421988XSmall 146x219"Licence Lite" is an arrangement which can be made under an electricity supply licence condition allowing interested parties – such as local authorities – to supply electricity without having to sign up to the industry codes in full. Adam Davidson looks at what it involves, as well as other options for those organisations looking to get into the energy supply market.

In February 2009, the Office of Gas and Electricity Markets (Ofgem) released modifications to the standard conditions of electricity supply licences (SLC), to facilitate distributed energy schemes (DES) and small suppliers to become licensed suppliers in a way that is proportionate to their size and impact, while preserving consumers' rights to switch energy supplier.

Energy companies and DES with a domestic supply above 2.5 MW must obtain an electricity supply licence under the Electricity Act 1989. These licences are conditional on compliance with regulatory and industry requirements which can amount to substantial compulsory overheads and a high administrative burden. These were seen as barriers to entry for smaller schemes.

To make it easier for DES and small suppliers to operate as a licensed supplier on the public network (above the Exemption Order threshold of 2.5MW), an option for derogation has been introduced. Such persons will no longer need to be a direct party to the industry codes set out at condition 11.2 of the SLC where they have satisfactory alternative arrangements with a third party licensed supplier (TPLS) that is a signatory to the codes. In other words, the DES or small supplier can, in effect, sub-contract industry code compliance to a larger supplier.

Licence Lite

As a result of the licence modifications made by Ofgem, new paragraphs 11.3, 11.4 and 11.5 were added to the SLC. These can be summarised as follows:

  • Condition 11.3: Ofgem may give a direction to a licensee relieving it of its obligations under 11.2 (the requirement that the supplier be a signatory to the codes)
  • Condition 11.4: Ofgem may issue guidance regarding the manner in which it will exercise its powers under 11.3
  • Condition 11.5: any guidance issued by Ofgem may set out the process for requesting a direction, the type of information likely to be required by Ofgem, and the criteria for determining whether to make such a direction.

These new arrangements are commonly referred to as "Licence Lite", as any licensee with the benefit of a direction under condition 11.3 of the SLC would have less onerous obligations than a licensee without such a direction.

How it works

The way in which this Licence Lite relationship will work can be summarised as follows:

  • The small supplier or DES will contract with a TPLS for electricity conveyance services.
  • The TPLS will be responsible for the transportation of electricity from the entry point to the exit meter points, using the relevant Distribution Network Operator's (DNO) public network. Installation and administration of metering points will be carried out by the TPLS on the supplier's behalf. The TPLS will also be responsible for managing 'change of supplier' processes.
  • The small supplier or DES will have title to the electricity at the end of the chain and will 'own' the customer.

Uptake to date

Ofgem has confirmed to us that no directions have yet been made by the Authority under condition 11.3 of the SLC (and so no one is operating under the "Licence Lite" arrangements). Why is this, given that the scheme seems to remove some of the barriers to entry for DES and smaller suppliers?

The key issue seems to be that no one is quite sure what terms should appear in the contract between a small supplier or DES and a TPLS for electricity conveyance services. Likewise, there is no real obligation on existing larger suppliers to offer such services to a small supplier or DES, nor are there any provisions or restrictions on the terms they can offer. Finally, the existence of the scheme is not well known.

What options are, therefore, available to local authorities or other potential suppliers looking to become electricity suppliers?

  • Obtain a full supply licence in its own right: this brings significant overheads and administrative burdens, and requires an intimate knowledge of the energy supply sector. However, it does also provide the greatest flexibility.
  • Pursue the Licence Lite option: just because no one has done it yet does not mean it is impossible or unattractive. Early engagement with a larger supplier will be key and understanding the obligations that the larger supplier has under the agreement will help you understand what risks and obligations the larger supplier will look to pass on under any contract for electricity conveyance services.
  • Seek out a "white label" service: this would be a contract with a larger supplier, where they operate using your brand but use their own electricity supply licence to fulfil all the regulatory and industry obligations and requirements. Ultimately, the supplier would legally be the electricity supplier for any consumers that is contracted via the brand. This is how many of the supermarkets and large retailers offer energy supply to their customers. However, this option gives limited flexibility on pricing and removes some of the control from the brand being used. That said, the overhead and regulatory burden is much lower, making it possibly a more palatable option for many.

Adam Davidson is a Director in the Renewables, Energy and Resources Group at Walker Morris. He can be contacted on 0113 283 4477 or by This email address is being protected from spambots. You need JavaScript enabled to view it.. Adam regularly contributes articles and updates to reach.... ®, the free Walker Morris knowledge database and alerter service.