Ofgem: ‘Strong case’ for ISO to replace National Grid

The chief executive of Ofgem has said there is a “strong case” to create an independent system operator (ISO) to replace National Grid in operating the energy transmission network.

Giving evidence to the Energy and Climate Change select committee (ECCC) Dermot Nolan said that Ofgem is working with the Department of Energy and Climate Change (Decc) in considering establishing an ISO and breaking up National Grid’s remit as transmission operator and asset holder.

He said that creating an ISO would “kill the incentives” that may exist for the current transmission and distribution operators have in recommending a bigger network, which in turn increases their revenue returns.

Nolan made it clear there is “no evidence that [National] Grid or any of the transmission companies are engaging in inappropriate behaviour” but said that creating an ISO would “remove the appearance of any favouritism”.

He told MPs: “The appearance of something is as bad as the actuality of it.”

Nolan told the committee that an ISO would make sure the network develops in the most efficient fashion “unencumbered by incentives of saying I own this and want to build this myself”.

He did admit that there are problems with an ISO – “it is difficult to incentivise such entities” – but added that “I see a strong case for it”.

The Ofgem chief executive also stated that the regulator is working with the government on the potential to include interconnectors in the next capacity market auction.

Nolan said that interconnectors’ effectiveness as a capacity source are “reasonably conservative” and do not give “enough merits to the genuine capacity benefits the interconnectors can bring”.

He said they are not perfect and are less reliable than an equivalently sized power station but that “in average they still bring considerable security of supply benefits”.