Phased implementation of independent system operator proposed

As part of a flurry of energy policy announcements, the government and Ofgem have outlined their initial views on the responsibilities, ownership and structure of an independent system operator for electricity and gas.

The consultation on what is termed a future system operator (FSO) for energy comes ahead of publication of two other joint government/Ofgem documents today (20 July) – a smart systems & flexibility plan and an energy digitalisation strategy. A call for evidence on vehicle-to-grid plus large-scale and long-duration electricity storage is also due as well as a consultation on energy code governance reform.

While these much-anticipated energy policy announcements are all being made just days before Parliament rises for recess, it is understood both the heat and buildings and hydrogen strategies will now not be released until the autumn.

Future System Operator

The joint consultation from the Department for Business, Energy & Industrial Strategy and the energy regulator sets out a number of preferred options for the FSO, many of which resonate with independent expert views set out in a recent report, published by Utility Week in association with engineering consultancy Mott MacDonald, which explores the possible form and function of a “net zero-ready future system operator”.

BEIS and Ofgem’s consultation proposes transferring all roles currently undertaken by National Grid Electricity System Operator (ESO) because of the “synergies between balancing the electricity system and analysing its future needs”.

However, it suggests these synergies are “weaker” for gas and that the potential cost and risk of separating real-time operation from gas asset ownership is greater. It cites significant safety case implications as a result of system and physical asset operation being performed by separate organisations.

The document therefore proposes that the FSO should take on strategic network planning, long-term forecasting, and market strategy functions for gas but that real-time system operation should remain the responsibility of National Grid Gas.

It is also envisaged that the FSO would advise Ofgem and government on the impact of different potential decisions on the energy system.

The document also sets out areas where “new or enhanced roles and functions are being developed for National Grid ESO or could be developed for the FSO in future”.

These include:

• system planning and network development
• driving competition in energy networks
• energy market design
• coordination with distribution networks
• heat and transport decarbonisation
• energy data
• engineering standards and energy code development
• hydrogen
• CCUS

The consultation also suggests the FSO could have a role in dispute resolution, including a potential role in determining disputes between industry parties.

BEIS and Ofgem have set out two potential ownership models for the FSO, having discounted others mentioned in the regulator’s review of energy system operation from January. The consultation gauges views on either a standalone privately-owned model, independent of energy sector interests, or a “highly independent corporate body model”, classified within the public sector, but with operational independence from government.

The document lists five high-level characteristics for the FSO. “It will need to be technically expert; operationally excellent; accountable to consumers and able to support the delivery of net zero on behalf of the public; independently minded; and operationally and financially resilient.”

The consultation proposes a phased implementation of the FSO, which would first take on all the existing capabilities and functions of the ESO before looking at further functions.

It sets out the expectation that in the meantime, the ESO’s role would continue to evolve to include some of the proposed functions of the FSO.

BEIS and Ofgem also note that any decision on changes to the ownership of ESO will impact on Elexon and Xoserve, which are owned respectively by ESO and jointly by National Grid Gas and the gas distribution networks.

The consultation will run until 28 September.

In response to the publication National Grid issued a statement saying: “National Grid operates one of the safest, most efficient and reliable energy networks in the world, and has a critical role to play in the decarbonisation of the economy to reach net zero.  An industry structure that enables long-term, holistic thinking and allows the Electricity 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 the clean energy transition in a timely, fair and affordable way.

“We therefore welcome the consultation from BEIS and will continue to work closely with BEIS and Ofgem on the role of a Future System Operator, the most appropriate ownership model and any future related sale.”

Meanwhile, an ESO spokesperson said: “As Britain’s electricity system operator, we’re at the heart of our country’s energy transition, operating one of the safest, most reliable and fastest decarbonising networks in the world.

“We’re driven by a shared goal to help Britain reach net zero by 2050, and that remains our long-term priority as we work towards being able to operate this country’s electricity system with zero carbon by 2025.

“We welcome the ambition set out in the government’s consultation on energy system operation, and we look forward to exploring how those future roles and functions needed to deliver net zero are best organised and delivered to help accelerate Britain’s journey to a sustainable energy system.

“We’ll continue to work closely with BEIS, Ofgem and industry to provide our expertise on decarbonising the country’s energy networks, while making sure consumers’ best interests are foremost in that transition.”