A new ‘Future System Operator’ (FSO) should take on the responsibilities of transmission network operator NGESO, BEIS and Ofgem have proposed, and add additional responsibilities for system planning in both gas and electricity transmission. The step to a fully independent operator for the GB system had been long expected and a consultation on the proposal will be open for just 10 weeks.
The consultation said there was no suggestion that conflicts of interest had arisen over NGESO’s function (National Grid interests in interconnectors, other ventures and ownership of the transmission network in England and Wales are separate) but reducing the perception of conflicts of interest in NGESO’s expert advice provided to government, Ofgem and energy participants would improving technology decisions and the level of internal scrutiny required. This would allowing for more timely decisions.
One example of how NGESO’s ownership is monitored was noted in a report by the Panel of Technical Experts, which scrutinises NGESO’s advice on how much capacity to procure in eh Capacity Market. The PTE is required to keep in mind the potential for National Grid ESO to be confronted by potential conflicts of interest and said it has, “maintained a presumption that a natural tendency for any utility or TSO would be to slightly over-secure resources. We note that National Grid ESO would bear some of the loss of reputation for any blackouts, and bears none of the costs of over-procurement, and so could be expected to weight the possible risks of procuring less capacity more than they might credit the cost-savings.” The PTE had “no evidence that would make us believe that National Grid ESO has substantially exploited its privileged position” and there had been no conflict of interest up to now.
In the government’s preferred option the FSO will also be the day-to-day operator of the electricity system and take on a bigger role in planning the electricity system and become responsible for long-term planning and forecasting for the gas National Transmission System (NTS).
BEIS and Ofgem believe this will give the new FSO a ‘whole system’ view that could reduce the future costs of the electricity system by £210-2,500M across generation, network development and system balancing. As well as removing perceived of conflicts of interest in network development it will allow for better co-ordination of investment decisions across the sector and across energy vectors.
An independent FSO is also expected to better facilitate competition, and bringing third parties into the system could save between £80-300 million compared to if the current SO-facilitated competition, BEIS says. In the longer term, the FSO could reduce the costs of future network development encompassing hydrogen or carbon dioxide by £80-600 million, due to improved ‘whole system’ decisionmaking.
BEIS and Ofgem propose to stop short of giving the new entity responsibility for day to day gas system operation. It says moving that function could cost £260-790M, and separating gas operations from the gas transmission owner would also reduce synergies, increasing the costs of balancing the gas system.
Setting up the new FSO would mean a sale process for NGESO and parts of NGG.
Options for ownership of the new FSO would be either a for-profit privately owned company, independent of energy sector interests and using market mechanisms to fund debt. The alternative would be an independent entity, operationally independent of government but classified as public sector and non-profit distributing.
BEIS says the first option would have “a fundamental drive to deliver value for its owners which may not be aligned with consumer interest” but the profit motive would be used by Ofgem to incentivise performance within the regulatory framework. The second would not be driven by shareholder or profit interest but the benefit of organisation-wide financial incentives (profit-based incentives) is less clear in this model, and they would likely not be used to drive organisational performance.
The consultation closes on 28 September, see full details here
One responsibility that BEIS does not plan to place on the new FSO is directing and managing GB’s complex array of codes, each of which governs an aspect of the energy industry. Industry participants sign up to the Balancing and Settlement Code, Smart Energy Code and any of more than a dozen others, which govern their activities. They are separately administered and their slow change processes now present a barrier to industry evolution, and a disadvantage to small companies and new entrants. This was highlighted by the Competition and Markets Authority, especially in cases – now frequent – where major change requires action across several codes.
BEIS says one option for reforming the codes is to give responsibility to the new FSO. But its preferred option is to beef up regulator Ofgem and give it responsibility to direct and manage code changes. That would add 30 people – 10% more – to the regulator’s staff and cost £30 million, it said. Day to day administration of the codes would continue to be managed by third parties who would bid for the work, it said. Placing the responsibility with Ofgem would be faster than waiting for the new FSO to be in place and would allow the regulator to direct changes to support industry change, it said.
A consultation on the code administration changes also closes on 28 September. See the consultation here