AI in the energy sector guidance consultation

Introduction

1.1 Great Britain’s energy sector is governed by a layered regulatory framework with components that reside in binding legislation, regulations, licences and energy industry codes. Complementing these are codes of practice and guidance documents. Currently, we consider the existing regulatory framework to be adequate to govern the use of AI, complemented and supported by this guidance document, which sets out good practice expectations for stakeholders to consider when deploying or procuring AI.  

1.2 There are competition law risks associated with the deployment of AI and stakeholders are responsible for ensuring their use of AI complies with the Competition Act 1998.   

1.3 Our regulatory toolkit includes various enforcement powers and actions where the use of AI breaches relevant licence conditions and other relevant requirements, and the competition rules.  

Our remit 

1.4 Ofgem’s key statutory functions are underpinned by: 

a. Gas Act 1986 

b. Electricity Act 1989 

c. Competition Act 1998 

d. Utilities Act 2000 

e. Enterprise Act 2002 

f. Energy Acts of 2004, 2008, 2010, 2011, 2013, 2016 and 2023 

g. Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013, known as REMIT – the Regulation on Wholesale Energy Market Integrity and Transparency 

h. Network and Information Systems Regulations 2018 

i. The Gas and Electricity (Consumer Complaints Handling Standards) Regulations 2008 

j. Domestic Gas and Electricity (Tariff Cap) Act 2018 

1.5 Stakeholders are also required to comply with other areas of legislation that apply to the energy sector and AI use, including data protection, equality, human rights, and health and safety.

Regulatory framework components

1.6 Certain activities within the energy sector cannot be carried out unless a person has a licence and Ofgem has powers to grant those licences. Licences may be granted to suitably qualified operators for the purposes of engaging in specified activities within the energy sector, such as supply, smart meter communication, distribution, transportation, transmission, generation and interconnection. The licences list the conditions that all licensees must abide by to engage in the specified activities. Licence conditions can be prescriptive or principles-based and licences may contain both. Prescriptive conditions tend to be detailed and specific, identifying how licensees must achieve a certain outcome. Principles-based conditions have more general requirements, such as ‘to treat customers fairly’, which places the onus on licensees to determine how compliance should be achieved. This approach also provides opportunities for the licensee to innovate so long as the risks are appropriately managed. 

1.7 Under REMIT, which is a regulatory framework specific to wholesale energy markets, market participants are not required to be licensed but are required to register before trading wholesale energy products. 

1.8 Under their respective licences, licensees are required to maintain, become party to, and, or comply with energy industry codes. These are detailed multilateral agreements that define the terms under which licensees can access the electricity and gas networks, and the rules for operating in energy markets. 

1.9 We also publish other information to help licensees understand and comply with their obligations. This includes guidance documents and decisions from investigations. 

1.10 This guidance acts as a roadmap to the existing regulatory framework, and licensees and regulated persons are reminded that they are required to comply with their standard licence conditions (SLCs), energy industry codes and other obligations. For licensees this includes Treating Consumers Fairly (for example SLCs 0 and 0A of the supply licence, SLC 10AA of the distribution licence) and Operational Capability (for example, SLC 4A of the supply licence). Similarly, market participants are required to comply with their REMIT obligations and designated operators of essential services are required to comply with their obligations under the Network and Information System Regulations 2018. 

Competition law

1.11 Ofgem is a competition authority, and the use of AI has the potential to adversely impact competition. Ofgem is required to act in a manner we consider will best further our principal objective of protecting consumers’ interests by promoting effective competition in the activities we regulate wherever appropriate. Ofgem also has Competition Act 1998 duties and powers including the power to conduct dawn raids and to issue notices requiring the recipient to provide specific documents or information.  

1.12 The Competition Act 1998 contains two prohibitions: the Chapter I prohibition relates to anti-competitive agreements such as price fixing, bid rigging or market sharing. The Chapter II prohibition relates to the abuse of a dominant market position. The inappropriate use of AI may breach the Chapter I prohibition if the effect of the AI programme is to fix bids or prices or margins or to exchange commercially sensitive information, particularly pricing information. The inappropriate use of AI may, in certain circumstances, also breach the Chapter II prohibition. 

1.13 It is stakeholders’ responsibility to ensure that their use of AI technology complies with the Competition Act 1998. Stakeholders are responsible for the AI tools they choose to deploy or procure. Stakeholders, including IT Directors and IT Managers, can bear personal responsibility for a breach of competition law and will therefore need to ensure that their AI system cannot produce anti-competitive effects. Stakeholders are required to have an appropriate audit trail in place confirming that they have checked their use of AI for compliance with competition law. In this context it is vital stakeholders can explain how they have minimised the likelihood of the system containing the AI resulting in an adverse impact on competition. In addition, stakeholders shall be able to assure themselves, and competition authorities, that the system containing AI is not operating in an anti-competitive manner. 

Enforcement powers

1.14 This guidance has been developed to enable stakeholders to use AI in an appropriate and risk informed manner. However, under existing enforcement powers Ofgem can impose financial penalties of up to 10% of a regulated person’s turnover in sectoral matters. Ofgem can also make consumer redress orders and issue provisional and final orders, where appropriate, for breaches of relevant licence conditions and other relevant requirements (and certain other provisions) under the Gas Act 1986, the Electricity Act 1989 and certain other regulations or legislation with which licensees or other regulated persons must comply. 

1.15 Under the Competition Act 1998 we can impose penalties up to 10% of global turnover on companies for competition law infringements. We can also apply to the court to disqualify directors for a maximum of 15 years who are involved in breaches of competition law where their conduct would make them unfit to be a director in a company. 

1.16 There should be nothing in the guidance to excuse or prevent licensees or other regulated persons from complying with their obligations under licence conditions and other rules. Where they use AI, they must nevertheless comply with these obligations. Any breach of those obligations derived from the use of AI does not excuse or mitigate breach. Therefore, licensees or other regulated persons must ensure they have and maintain appropriate processes, systems and governance to ensure AI does not cause them to breach their regulatory obligations. 

1.17 Further details on our enforcement policies and processes are set out in our Enforcement Guidelines. 

Conflict and hierarchy

1.18 In the event of any conflict between this guidance and: 

a. Ofgem’s statutory remit 

b. regulatory framework components 

c. Ofgem’s competition law powers

the legal framework referred to above shall prevail in the order of precedence noted. Also, it is important to note that this guidance does not constitute legal advice, and therefore stakeholders are assumed to seek their own advice as required.