Comment by 26 October: how should the new Electricity System Operator be funded and incentivised?

National Grid’s Electricity System Operator (ESO) is seeking comment on its funding model for the future.

The ESO is being spun out of National Grid and will have a separate regulatory framework. Unlike the remaining pipes and wires business, the new ESO will be asset-light and will not have access to National Grid’s other balance sheet to help manage and bear cashflow risks. The ESO will also have to manage new risks. “Lending rates and terms for a legally separate ESO are likely to be less favourable and, in some instances, may not be available,” said the ESO.

The ESO proposes that it should have a ‘layered’ funding model, with some activities funded by annual budgets, some with all costs passed-through, and some using other structures.  It also proposes  different types of incentive for different activities. Some would have only incentive payments for out-performance, some would have only penalties for poor performance and some would have both sticks and carrots.

The ESO wants comments by 26 October on its thought paper

  • Can a layered model meet the characteristics of a successful regulatory framework?
  • What are the pros and cons of the different funding approaches? Do you have additional funding approach suggestions?
  • How can incentives be used to drive performance and deliver outcomes that customers, stakeholders and consumers value?
  • Could asymmetric incentives be appropriate for the ESO?
  • How can the funding model and incentives work together?

Read the full thought paper here

Further reading:

The New Power Interview: Charlotte Ramsay, programme director, future role of the system operator, at National Grid