System Operator ‘should be part of National Energy Agency’

The Independent System Operator (ISO) proposed by Ofgem should form part of a National Energy Agency tasked with overseeing the wider transition to net zero emissions, a senior figure at KPMG has argued.

Simon Virley, a partner at the firm and its head of energy and natural resources, said there are “plenty of precedents” for such an agency, both in Britain and overseas.

Following a review of energy system operation in Great Britain, Ofgem published proposals this morning (25 January) to fully separate the system operators for both gas and electricity from the rest of the National Grid Group and combine them in a single independent body. It said this complete separation is necessary to enable them to take a greater role in the transition to net zero emissions, whilst avoiding any real or perceived conflicts of interest.

“This might look like technocratic tinkering,” Virley responded. “Far from it. Net zero changes everything. It will change the cars we drive, how we heat our homes, the way the whole economy works. So, we need to use this moment, ahead of COP26, to think about how we are going to deliver on our commitment to reach net zero.

He continued: “We need to think holistically about the delivery mechanisms and new functions that need to be carried out and which organisation is best placed to deliver them.”

“There are significant new roles that getting to net zero creates, like planning a future hydrogen grid or the offshore network for 40 plus gigawatts of offshore wind or providing expertise to local authorities on heat decarbonisation and assessing whether the local area energy plans currently being developed add up to what we need at a national level.

“These functions should, in my view, sit in the National Energy Agency alongside the functions carried out by the ISO.

“There are plenty of precedents for independent, expert bodies carrying out complex, system management functions on behalf of government, both here in the UK and abroad.  Examples in the UK include: NATS, which runs our air traffic control system; the Bank of England, which runs monetary policy; and Transport for London, which runs the multi-modal transport system in London.”

“Reforms to the governance of the system operator need to be considered in that wider context,” he added.

Ofgem’s proposals were welcomed by Citizens Advice, whose acting chief executive, Alistair Cromwell, said: “The introduction of a separate body to run the electricity and gas systems should give consumers more confidence that the advice given, and decisions taken, will be in their interests.

“This should lead to lower bills and an efficient transition to net zero. But the new Independent System Operator – as advocated by Ofgem – needs to have the right structure, responsibilities and capabilities to enable it to make the best decisions for all of us.”

The Electricity System Operator completed its legal separation from the rest of National Grid in April 2019 and will be subject to its own price controls for the RIIO2 period beginning in April this year. Ofgem has also floated the possibility of separating system operation functions from distribution network operators as part of its consultation on the sector-specific methodology for electricity distribution.