Ofgem has opened a new consultation into potential regulatory changes to the National Energy System Operator (NESO).
The UK’s energy regulator has proposed a number of changes to the way in which the NESO is organised and operated, which it will implement from 1 April 2026.
These proposed changes focus on eight key areas: performance incentives, business plans and plan assessments, cost regulation, stakeholder mechanisms and feedback, license obligations and enforcement, staff level incentives, regulatory finance, and innovation.
Under the proposed rule changes, NESO will be required to submit detailed business plans that lay out the organisation’s key objectives, commitments, and spending every two years from 1 April 2026.
Furthermore, Ofgem is proposing that a new, consolidated independent stakeholder panel to be known as the Independent Challenge Panel be established, in order to hold NESO to high performance standards and ensure that stakeholder feedback is integrated into the future operations of NESO.
In regards to cost regulation, Ofgem is suggesting that the current pass-through model for NESO costs continues in the same manner as it has done so far, and also notes that there is “significant opportunity to review how cost information is reported and monitored” and suggests that this funding approach will incentivise NESO to deliver the best overall outcomes for the energy system while achieving value for money.
Additionally, the regulator has proposed that NESO’s performance should be taken into account when agreeing pay rises and bonuses for senior executives. Under Ofgem’s proposal, NESO will be required to clearly and transparently explain its decisions on granting bonuses, and if Ofgem perceives that NESO has not sufficiently taken into account its regulatory obligations and achievements when awarding bonuses, the regulator will have the power to limit or halt bonus payments to senior executives.
Furthermore, Ofgem is suggesting that NESO continues to have access to innovation funding through the same innovation funding mechanisms as it currently has, including the NIA and Strategic Innovation Fund (SIF).
Ofgem states that this system allows for a “clear distinction between the regulatory treatment of NESO’s business-as-usual expenditure and expenditure on more innovative initiatives”. The regulator states that this will enable it to fund more high-risk innovation initiatives that could have longer term benefits to consumers.
The consultation will remain open until 8 July, and Ofgem is calling upon stakeholders who are impacted by NESO to submit their feedback on the regulator’s proposals.
