New system operator to be set up within National Grid group

A new company is to be set up to take on the system operator (SO) duties of National Grid, separating it from the transmission operator (TO) in an effort to address perceived conflicts of interest and prepare for future changes in the UK’s energy system.

However, the new SO will be formed within the National Grid group with the government and regulator Ofgem claiming the plans will result in a ‘more independent’ SO despite remaining under the control of the TO.

In a joint statement released today by Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS), the new SO is intended to address concerns over conflicts of interest within the National Grid in its current form.

A new governance structure will be implemented to mitigate any potential conflicts, with measures such as separate transmission licence; its own Board with three independent directors; a sub-committee, chaired by an independent director; separate payment structures, staff and offices from the wider group’s performance; and other ring-fencing measures.

Greater separation is also intended to allow the new SO to play a more proactive role in managing the rapidly changing flexibility of the energy system. It will have clearly defined licence objectives to address the growth of low carbon, distributed energy while being compelled to embrace new opportunities to benefit consumers by enabling “a secure, competitive and flexible system”.

Ofgem’s consultation adds that a more independent SO will work more closely with DNOs to create a whole system view that can identify and help speed up connections for low carbon generation.

Released on the day that the BEIS smart energy system consultation closed, the joint statement claims the new SO will improve markets for improve markets for balancing and ancillary services, promote whole system, smart solutions and work closely with industry to develop new services and approaches to a smarter energy system.

Dermot Nolan, chief executive of Ofgem, said: “We need a more flexible energy system so that we can make the transition to a lower carbon future. Having a legally separate system operator will allow it to take on a more proactive role in managing the system and working with others, while mitigating any conflicts of interest.”

The restructuring is expected to cost National Grid £46.5 million with annual costs of £6.5 million and could see some costs passed to industry.

Pressure has built on government to address the perceived conflicts of interest within the National Grid for some time, particularly following a report by the former energy and climate change select committee released in June 2016.

It called for the creation of an independent SO to limit what was described as “intractable and growing” conflicts of interest which could “dilute the impact of other efforts to develop low-carbon network infrastructure”.

However, the same investigation interviewed Maxine Frerk who at the time was acting senior partner of networks at Ofgem who said the regulator was confident it was “able to manage those conflicts, and that there are not any issues”.

She also added that the importance of any future independent SO “is that it is independent of Government, as well as independent of National Grid”. This is firmly at odds with the current proposals to see the new company set up with the auspices of National Grid.

However, Ofgem’s consultation does include the provision for a fully Independent System Operator in the future should the need arise, stating: “The additional separation within NG Group that is proposed now will deliver benefits in the short to medium term whilst retaining the option to move to a full ISO later should it become clear that it would better serve consumers’ interests.”

The consultation will remain open until 10 March and if pursued, progress towards the transition within the National Grid will be reviewed in April 2018 with the process complete by April 2019.