System Operator to have legal separation, specific licence, new incentive scheme

National Grid’s System Operator (SO) role should be clearly separated from its other activities over the next two years and become a legally separated entity, with its own licence and a different incentive framework, by 2019, according to new proposals. The plans will allow the separate organisation to be spun off as a fully independent system operator (ISO) at a later stage.

Ofgem and BEIS have been re-examining how National Grid’s various functions as a transmission network owner and the GB System Operator are aligned, because the role of the SO is growing and has raised questions over how far the company can avoid conflicts of interest.  In a consultation on the proposals, Ofgem said it wanted to expand the SO role across four areas of activity:

  • Acting as a residual balancer.
  • Facilitating competitive markets.
  • Facilitating a whole system view.
  • Supporting competition in networks.

In all four, Ofgem wants the SO to have a more active role, to be more innovative, and to have a ‘whole system’ view. 
It also said “the SO will need to consider how to ensure it has a mind-set and culture which is focussed on performing these roles in a way which maximises benefits for customers. We intend to consider whether a more principle-based approach to regulation of the SO will help achieve this, as well as fundamentally reviewing the incentive framework for the SO.”

The regulator said  separation from National Grid’s other businesses would include SO governance, employee and physical separation, and information ring-fencing. It added, “We also see the need for the SO to maintain a set of credit-worthiness and financial ring-fencing obligations similar to NGET today, so that the companies it contracts with are not materially affected by the change.”

In a June 2016 survey, a majority of New Power’s Expert Forum said GB’s high-voltage electricity network should have an independent system operator (ISO) instead of leaving the responsibility with a ring-fenced part of National Grid.

The ISO model would provide more freedom to act and to direct the system, Forum members thought, and there was a “need to have a totally impartial, accountable system operator”. They raised the growing risk of conflicts of interest between National Grid’s roles.

But Forum members sounded a note of ­caution about the change. It should happen “as long as National Grid’s expertise as system operator [SO] is not lost”, one said, and another noted that “it needs to be closely aligned with National Grid”. Clearly, the current SO’s role could change to that of ISO. In that case, “some disposals may be needed, especially of interconnectors”.

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Further debate: Exeter University’s Catherine Mitchell argues in an interview with New Power that the system operator role to be taken from National Grid. She says, “We have to separate it out and give it new incentives. It needs a not for profit state-owned company. National Grid would be required to disinvest.”

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Ofgem’s consultation closes on 10 March, more details here

 

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