Energy regulator Ofgem has opened a consultation into proposals for cost recovery mechanisms when the Future System Operator (FSO) launches.
In April 2022, Ofgem and the Department for Energy Security and Net Zero (DESNZ) confirmed its intention to proceed with the development of the FSO, which will see a new system operator launched to operate National Grid.
This would take a whole-system approach, working across electricity, gas and emerging markets like hydrogen and carbon capture, utilisation and storage (CCUS). It is hoped the FSO will be operational in 2024.
It is suggested that there was a potential conflict of interest given National Grid’s ownership of the transmission network and how that is linked to National Grid ESO’s development of the system and its services, which could lead to bias in its role.
Ofgem stated that the FSO implementation could create transition costs for ESO, National Grid and National Gas Transmission that would not be incurred otherwise.
In a statement the organisation said that “we consider that these companies should be able to recover through price controls economic and efficient costs associated with separating the ESO from National Grid, transforming the ESO into the FSO, and establishing the FSO’s gas activities”.
By Day One, the FSO will be established outside of National Grid, with the majority of the property, rights and liabilities it needs to discharge its statutory functions, and owned by government, but it will hold agreements with National Grid for the continued use of key business services.
On Day Two, the FSO is expected to have exited these agreements and will have its own standalone capability to perform all its functions.
Day One is forecast to cost between £180 million and £210 million whereas Day Two will cost between £300 million and £390 million.
The consultation will now see Ofgem seek views on a set of funding proposals for cost recovery mechanisms to enable National Grid and National Gas Transmission to recover economic costs incurred as part of the separation of activities on Day One.
Ofgem is also seeking views on its proposals for a reporting framework to ensure ongoing transparency over the delivery of separation plans and the actual cost. This consultation process will last for six weeks until 02 August.
