Establishing independent FSO could cost up to £185m

The full separation of the Electricity System Operator (ESO) from the rest of National Grid and its transformation into the Future System Operator (FSO) could potentially cost it as much as £185 million, the ESO has estimated.

The body gave this as the top end of its estimated price range in the final submission of its second RIIO2 business plan covering the third and fourth years of the five-year price control period, which began in April 2021.

The government and Ofgem confirmed plans in April this year to establish a fully independent FSO as a publicly owned corporation by 2024. The FSO will take on all of the main roles of the ESO as well as the planning, long-term forecasting and market strategy functions currently fulfilled by the system operator for gas.

The ESO estimated the one-off costs of this transformation at between £105 million and £145 million, including IT costs of between £38 million and £54 million. Given the programme’s early stage of development, it has additionally applied a 30% uplift to cover variation in costs to give a final range of £135 million to £185 million.

The organisation forecast the standalone operating costs for the FSO during the financial year ending in 2024 at £210 million to £223 million. For comparison, the ESO calculated the operating costs for the year if it remained part of National Grid at £189 million.

Following its legal separation from National Grid Electricity Transmission in April 2019, the ESO has been subject to a separate price control for the RIIO2 period, with a shorter two-year business planning cycle.

Unlike other network companies, the ESO does not receive total expenditure (totex) allowances and is not subject to the totex incentive mechanism, whereby over or underspends are shared. Instead, all efficiently incurred costs are passed through to consumers.

The ESO is also subject to a single, evaluative incentive scheme, rather than a series of discrete, mechanistic incentives.

In its second business plan, the ESO proposed total expenditure of £1,516 million over the five years of its RIIO2 price control, comprising £583 million of capital expenditure (capex) and £933 million of operational expenditure (opex).

This figure – equating to a yearly average of £303 million – is up from £1,292 million sought in its first business plan for the regulatory period.

The ESO said the £224 million increase – £135 million of capex and £89 million of opex – is primarily driven by £181 million of additional investment in IT systems, partly in relation to its balancing programme, for which proposed costs have increased by £110 million.

It said this additional spending will enable it to deliver net benefits to consumers of £2.8 billion over the RIIO2 period.

“The scale of change we need to deliver will demand a step change in our own business,” said ESO executive director Fintan Slye in the foreword to the document.

“Stakeholders agree that we must adapt to further embed digital, data and technology capability, become the net zero employer of choice, drive rigour in our delivery approach and maintain the agility and flexibility to adapt as the energy system continues to change at pace.

“A big part of this step change will be our growth into the Future System Operator for GB, transitioning out of National Grid plc, accelerating the evolution and expansion of our role within the industry, and establishing a new relationship with government.”

Note: All figures quoted in 2018/19 prices