An independent body will be needed to take over from National Grid to run the electricity system to avoid any perceived conflicts of interest within the industry.
The Department of Business, Energy and Industrial Strategy (BEIS) is set to issue the consultation on the establishment of a Future System Operator today (20 July) as part of wider plans to overhaul the energy system. This looks at the challenges of meeting commitments to tackle climate change, and how these are shaping the need for new technical roles and responsibilities in the electricity and gas systems.
Net zero is an “unprecedented challenge for our economy and society” with the energy system at its heart. In order to meet this, large scale deployment of new generation and new sources of demand will require Britain to both make full use of the existing transmission and distribution system and embrace network expansion, alternatives to new build out, new generation and the introduction of new systems such as hydrogen and CCUS.
“It will require all these activities to be undertaken in a joined-up holistic way, that considers the impacts of individual decisions across the system rather than in isolation,” the consultation states.
New and enhanced roles and functions could help drive these changes at the least cost without an impact on resilience, and for this and FSO should be created it continues.
Due to the synergies between balancing the electricity system and analysing its future needs, an FSO would take over all of the current ESO’s roles and functions.
BEIS and Ofgem also propose that the new operator would take over the strategic network planning, long-term forecasting and market strategy functions of the gas operator, but leave real time system operation and its associated activities with National Grid Gas.
Additionally, the FSO would support the government, Ofgem and other organisations by providing targeted advice on the impact of potential decisions on the energy system.
It would include new and enhanced roles and functions around system planning and network development, driving competition in energy networks, energy market design, coordination with distributed networks, heat and transport decarbonisation, energy data, engineering standards and energy code development, hydrogen and CCUS.
As part of this, the FSO could take on additional duties in the Capacity Market which currently sit with the secretary of state for BEIS or Ofgem. The FSO could run tenders as part of the electricity networks competition regime, and consider a full range of commercial non-network alternative to traditional network solutions, independently considering the broadest range of options to adapt the system for net zero and driving competition.
The proposal sets out two potential models being considered for the FSO, one to set it up as a standalone privately owned model, independent of energy sector interests, and the second to set it up as a highly independent corporate body model classified as within the public sector.
Within both the fundamental element of operator’s regulatory framework would be similar said BEIS, and importantly both are based on the need for the FSO to be free of perceived or potential conflicts of interest within the energy sector.
The consultation follows Ofgem issuing a recommendation for a fully independent system operator (ISO), as part of its review of GB’s energy system operation in January. This suggested that there was a potential conflict of interest given the transmission network owner’s links to National Grid ESO, which could lead to bias in its role.
As such it suggested the creation of an ISO, despite the legal separation of National Grid and the system operator in April 2019. Separating the system operator from the transmission operators could save an additional £0.4 and £4.8 billion between 2022 and 2050 for consumers, by facilitating competition, the regulator noted.
Ofgem chief executive Jonathan Brearley assured stakeholders at the time that the recommendation was designed to support a "robust system" that can result in "billion pound" savings.
While the consultation stresses that it does not consider National Grid or the system operators to have historically acted in a way that exploits any potential conflict of interest, it states that “the perception of conflicts of interest itself creates inefficiency, even if no actual conflicts are present".
As such both models have the independence of the FSO from the energy sector and short-term operational influence from central government, instead they will focus on the need for strong relationships to energy market participants, consumers, regulators and other organisations.
As part of this Ofgem would remain the ultimate decision market on net work investment plans under the proposed development. Proposals will also need to ensure that Elexon, which manages the Balancing and Settlement codes within the electricity market, retains its operational independence.
BEIS and Ofgem are proposing a phased implementation of the FSO that capaitalises of the existing capaibility of the ESO as well as National Grid Gas where appropriate. This will allow time for the sale process required for any change in ownership of all or part of the organisations as well as discharging obligations.
The process will be managed largely by National Grid, National Grid ESO, National Grid Gas and the FSO, although BEIS and Ofgem will play a role in the overarching governance. The two bodies have urged National Grid to closely consider the needs of people in the transition process, acknowledging the uncertainty that the review may create for ESO employees.
“An industry structure that enables long-term, holistic thinking and allows the Electricity System Operator to take on new roles as part of the energy transition is an important step in the market and regulatory reform necessary to deliver the clean energy transition in a timely, fair and affordable way,” said National Grid in a statement.
“We therefore welcome the consultation and will continue to work closely with BEIS and Ofgem on the role of a Future System Operator, the most appropriate ownership model and any future related sale.”
The consultation is the core of a wider package of work to ensure the governance system needed to support net zero is in place, and should work alongside a review of strategic decision making and planning in the energy system, a draft energy sector strategy and policy statement which is in the works, and the energy white paper.
It is now open and will run until 28 September, with BEIS choosing a ten week period as it believes that stakeholders are familiar with the bulk of the broad proposals.
For more details and to respond to the consultation see here.