Proposals for a new “Future System Operator” – key takeaways

United Kingdom

Introduction

On 20 July 2021, the Department for Business, Energy & Industry Strategy (“BEIS”) and Ofgem published a joint consultation (the “Consultation”) in respect of its proposals for a Future System Operator (the “FSO”). The Consultation follows Ofgem’s review of the GB energy system operation in January 2021 (the “Review”), which considered the energy system changes associated with delivering net zero. Amongst a number of key findings, Ofgem considered that there is a strong case for creating a system operator which is independent of the transmission asset owners and combines certain responsibilities for electricity and gas net zero system roles.

The electricity and gas system operators are currently both ultimately owned by National Grid plc. The Electricity System Operator (“NGESO”) is a legally separate entity within National Grid’s wider group and the Gas System Operator (“GSO”) is integrated within the National Grid Gas business. The Consultation proposes that all the current NGESO roles and functions are to be carried out by the FSO and in respect of gas system operation, the FSO should undertake strategic network planning, long-term forecasting, and market strategy functions only.

This article provides a summary of the Consultation’s stated case for change to an FSO and the proposed roles and organisational models suggested for the FSO; and comments on what the FSO may look like.

The case for change

The Consultation notes that the transition to net-zero will increase operational complexity of the energy system and require a step-change in whole system coordination, planning and strategy. While NGESO and GSO have unparalleled insight into system operation, established engineering expertise and an understanding of the challenges and opportunities associated with different technologies and system approaches, the Consultation suggests that perceived conflicts of interest between NGESO and GSO with the wider National Grid business have made it challenging to drive a genuinely integrated approach to system operation. The Consultation considers that this in turn raises the following considerations:

  1. whether NGESO and GSO may choose not to engage in a topic, because they do not consider it would be appropriate for them to opine on an area where they may be conflicted;

  2. whether Government, Ofgem or industry may replicate work undertaken by the system operators to verify that the information or advice they received was correct rather than potentially based on conflicts of interest; or

  3. whether industry participants may change their behaviour towards the system operators due to a belief that the system operators will make decisions based on their own commercial interests rather than in a free and transparent manner.

Proposed roles and functions of the FSO

Electricity system operation

It is proposed that the FSO undertakes all the existing roles and functions of NGESO due to perceived synergies between balancing the electricity system and analysing its future needs.

Gas system operation

The Consultation notes that the considerations with gas system operation are different in that there are greater challenges with moving real time system operation away from the gas transmission owner (e.g., relating to gas safety management and lost synergies around managing network constraints). Therefore, the Consultation proposes two options for how gas system operation can be integrated within the FSO as follows:

  1. the FSO is responsible for gas strategic network planning, long-term forecasting and market strategy functions only (this is the preferred option); or

  2. the FSO is responsible for all GSO roles, including real time system operation functions.

New and enhanced FSO roles

The Consultation also anticipates that several new and enhanced roles and functions of system operation will be required to drive decarbonisation at least cost, such as network planning and development, competition to fulfil specific system needs, co-ordination (both across energy sectors and regional decarbonisation) and developing engineering and data standards. In summary, the proposed new and enhanced FSO roles are as follows:

  • Advisory role - supporting decision-making organisations on key policy and regulatory decisions across the energy system;

  • Dispute resolution – taking a role in determining disputes between industry parties;

  • System planning and network development – the proposals here are wide-ranging and include carrying out holistic and coordinated network planning and critically evaluating investment proposals as part of price controls. The Consultation expects these network planning functions to be largely advisory;

  • Driving competition in energy networks - running tenders, advising on tendering criteria, and making recommendation to Ofgem on where network competition for specific projects would be in consumers’ interests;

  • Energy market design – playing a greater role in market design, for example taking responsibility for certain Capacity Market functions that currently sit within BEIS or Ofgem;

  • Coordination with distribution networks – this largely involves working with DNOs and GDNs to enable whole system optimisation and better network processes;

  • Heat and transport decarbonisation – playing a greater role in advising and coordinating elements of heat and transport decarbonisation such as supporting with local energy mapping;

  • Data and digitalisation – taking on greater data responsibilities such as horizon scanning, monitoring data developments and coordinating and maintaining data standards across the energy sector;

  • Future system operability, engineering standards and energy code development – the roles here are wide-ranging and cover monitoring and recommending changes to codes and engineering standards and having oversight of the whole of energy code development as an Integrated Rule Making Body; and

  • Supporting hydrogen and CCUS – taking on additional functions to support the growth and diversification of hydrogen networks and the development of CCUS.

Possibility of electricity-cas control room coordination and information sharing

While not currently under consideration, with the development of hydrogen capabilities there may be scenarios where there are greater benefits in having a combined gas / hydrogen and electricity FSO control room operating the whole energy system on a daily basis. This would however be dependent on whether any hydrogen uptake is at a national level, the prevailing type of hydrogen produced and who the system operator would be. There would therefore be further consideration on the costs and benefits when there is greater clarity on this issue. This is expected to be in the late 2020s.

BEIS and Ofgem are currently considering whether information sharing between the current control rooms can be improved as well as assessing the consequences of such changes. The Review of the Impact of a Gas Supply Shortage on the Electricity Network (RIGSSE) project is also considering this issue and the RIGSSE could therefore have implications for the FSO’s information sharing arrangements when it starts to operate.

Proposed organisational models for the FSO and implementation

The Consultation considers two different organisation models for the FSO:

  1. a standalone privately owned model, independent of energy sector interests; and

  2. a highly independent corporate body model classified within the public sector, but with operational independence from government.

The models differ primarily on the basis of incentives. The first model would establish an FSO on a for-profit basis and would use market mechanisms to fund debts. The second model would be “not for profit” so its overarching objectives would structurally drive and incentivise its behaviours. For both models, the Consultation proposes the high-level functions and duties of the FSO will be set out in legislation and the FSO will be a licensed entity. Moreover, the Consultation states that Ofgem and BEIS would consider the design of one or more licences to regulate existing and additional FSO roles and functions.

BEIS and Ofgem continue to engage with stakeholders in respect of implementation of the FSO. However, the Consultation notes that the preferred approach to implementation is a phased implementation of the FSO, with the FSO taking on all the existing capabilities and functions of NGESO as a first step, followed by phased introduction of any further functions of the FSO. The consultation notes that this is expected to likely involve a sale process of NGESO and potentially of part of National Grid Gas.

Comment

Moving forward it seems likely that BEIS and Ofgem will draw inspiration from other independent system operator models around the world. Notable examples that Ofgem and BEIS are likely to draw upon include PJM (regarded as one of the best ISO models) and the Australian Energy Market Operator (AEMO).

Under PJM’s model, it is responsible for making the decisions in relation to the roles and responsibilities of the members and generators bidding in the daily energy markets, outlining the standards for the stable supply and demand of energy, and directing how the transmission system and future energy needs are planned and managed. PJM’s planning process focuses on load forecasting including analysing and co-ordinating planned upgrades, with long-range planning studies and future demand analysed by relevant studies. The cost of upgrades to the transmission system are allocated to the transmission owners following the rules in PJM’s governing documents. The transmission owners are further obligated to build the transmission projects required to maintain reliability standards that have been approved by the PJM Board.

AEMO acts as system operator and its role is to maintain system security and reliability using a projected assessment of system adequacy to assess both the short-term (6 day period) and the long term (24 month period) adequacy of supply. AEMO also undertakes forecasting and planning of the system as well as working with the Energy Security Board to design and implement the regulatory framework. Currently AEMO is reforming in line with an independent review into the future security of the National Electricity Market. This review highlights the key learnings for AEMO from the US blueprint and specifically cites PJM as an example.

Therefore, with AEMO drawing on PJM and its reputation as one of the pre-eminent ISOs, it seems likely that the FSO will be heavily influenced by the US ISO model and PJM in particular.

Next steps

The Consultation closes on 28 September 2021. Further consultations will follow in respect of the more detailed aspects of the proposals set out in the Consultation such as the FSO’s licensing and funding arrangements, mechanisms for incentivising desired outcomes and appropriate mechanisms for engaging sector participants in operation and oversight.