Ofgem calls for full ESO separation

Ofgem has recommended the full separation of the electricity system operator (ESO) from the National Grid.

Following a review, the regulator concluded that key gas network planning functions should also be hived off, to create a new independent energy system operator.

Ofgem envisages this new system operator having additional responsibilities, including taking a more active role in designing new grid infrastructure and advising government on the costs and trade-offs of different low-carbon pathways. It estimates this role could save consumers £0.4 – £4.8 billion on their energy bills between 2022 and 2050.

It stresses that to achieve this neutrality the body must be free from “potentially distortive commercial interests in energy assets”.

The ESO became a legally separate body from National Grid in 2019 but the debate over its future ownership structure has continued.

The Energy White Paper included a commitment to consult on system operation governance arrangements this year.

Jonathan Brearley, chief executive of Ofgem, said: “The energy system needs to go undergo the biggest transformation in over a century to meet Britain’s ambitious climate goals.

“Ofgem is recommending the creation of an independent body to help deliver the fundamental changes in how we use energy.

“This would help bring forward green economic growth, accelerate our journey towards net zero and save consumers money on their energy bills.”

Kwasi Kwarteng, business and energy secretary, said: “As the first major economy to commit in law to net zero carbon emissions by 2050, the UK is leading the green industrial revolution.

“Meeting our far-reaching targets will mean changes to how we turn the lights on, travel to work and even cook our meals. Which is why we must ensure that the energy system is designed to provide the very best for consumers and allows energy companies to keep innovating as we build back greener.

“I welcome Ofgem’s contribution to the debate over the future structure of our energy system and will consider its recommendations thoroughly.”

National Grid said in a statement: “In order to deliver the clean energy transition in a timely, fair and affordable way, we need ambitious government policy, an aligned view on the activities required from a future energy system, a clear set of principles by which they are governed, and the frameworks to support them.

“That’s why we are working closely with the government, regulator and industry to explore what changes will be needed to achieve net zero, and the role and potential divestment of the electricity system operator is an important part of that discussion.

“An industry structure that enables long-term thinking and allows the system operator to take on new roles as part of the energy transition is an important step in the market and regulatory reform necessary to deliver net zero. Significant further work is needed to determine the detail of that structure.

“We note the report that Ofgem has today submitted to BEIS as part of the government’s consultation process, and we will continue to work closely with government and with Ofgem over the coming months.”