“Evolution not Revolution”: Ofgem launches consultation on proposals for a Future System Operator role

 

On 20 July 2021, the Department for Business, Energy & Industrial Strategy (BEIS) and Ofgem launched a much-anticipated consultation (open until 28 September 2021) looking at proposals for a new expert, impartial Future System Operator (FSO) with responsibilities across the energy system. The FSO would be responsible for driving progress towards net zero, whilst maintaining energy security, and minimising costs for end-consumers.

 Background

This consultation builds on the Government’s Energy White Paper (published in December 2020) and reports from Ofgem (in January 2021), and Elexon (in February 2021), which reaffirmed support for a new independent body to carry out the Electricity System Operator (ESO) role and certain elements of the Gas System Operator (GSO) role. 

Consultation themes

The latest consultation looks at the full gamut of questions and implications around creation of the FSO role, from whether the role is required, and, if so, whether the FSO should be fully-independent, through to more specific questions around how the FSO would be established, and the roles and responsibilities that the FSO would take on. Below, we consider some of the key themes outlined in the consultation.

Net zero focus

The key driver for the consultation is the UK’s commitment to reach net zero carbon emissions no later than 2050. To achieve this, significant changes are required in the energy sector, which will facilitate further decarbonisation across the economy. The scale required to reach net zero necessitates full use of the existing capabilities of the transmission and distribution networks. This will include building new networks and require deployment of alternatives. It is envisaged that this will lead to more decentralised, integrated, and flexible systems, that utilise and optimise clean technologies effectively. These challenges will create new roles and functions for those responsible for managing the GB energy systems.

“Whole system” approach

 

The preferred approach of BEIS and Ofgem is to create a single FSO covering the ESO and much of the GSO role, rather than sustain two separate independent SOs, which may not take a “whole system” approach to operations and network planning. This will help deal with a number of challenges that may arise as the GB energy system is expected to become more integrated, and operational and planning challenges are expected to become more complex. In particular, having a single point of contact for industry stakeholders, which will use its technical expertise to take a holistic view of the energy system, will increase efficiency when dealing with these challenges.

Maintaining resilience and technical expertise

The usefulness of a net zero energy system is diminished if there are issues with continuity of supply or reliance on unsophisticated stakeholders. To maintain system resilience, the consultation stipulates that that the FSO will need to have technical and operational expertise in relation to the GB energy systems. Unsurprisingly, the consultation proposes carrying across into the FSO all of the ESO functions (from National Grid Electricity System Operator, NGESO), along with a number of functions including strategic network planning, long-term forecasting, and market strategy from the GSO (National Grid Gas, NGG).

Limiting conflicts

The consultation proposes creating an independent FSO across both energy systems to remove risk of conflicts of interest. Whilst BEIS and Ofgem repeatedly explain that there has been no evidence of NGESO or NGG acting upon potential conflicts despite sitting within the National Grid group, this conflicts risk exists given National Grid’s wider commercial interests in the energy system. This risk increases with the forecasted increased coalescence of the GB energy systems. The consultation explains that even now these potential conflicts can lead to inefficiencies. The creation of a completely separate FSO across both energy systems should alleviate these concerns.

FSO organisation

The consultation considers two possible organisation models for the FSO:

• a wholly-independent privately-owned entity that is independent of energy sector interests; or
• a highly independent corporate model within the public sector, but acting with operational independence from the Government.

Whilst the regulatory framework for delivering either model will have many similarities, the way this is achieved will differ depending on the model. Whichever model is employed, the FSO will need to demonstrate some core characteristic - technical expertise, operational excellence, consumer accountability, support for delivering net zero ambitions, independence, and resilience.

FSO functions

As mentioned above, the FSO is expected to assume all of the existing ESO functions and some of the existing GSO functions. Whilst there are good reasons for the FSO not assuming the full GSO role given certain differences between the current ESO and GSO roles, BEIS and Ofgem have included the option of the FSO taking responsibility for the ESO and GSO roles in full. This second option would require the FSO to take on additional responsibilities, including gas system control room operations, system balancing, and the customer connections process. Whilst this would remove the perceived risk of conflicts, there is a risk that day-to-day operational efficiencies could also be lost.Additionally, the consultation indicates additional functions that the FSO may assume in the future, including:

• roles in relation to regulation and infrastructure for new technology (e.g. hydrogen, carbon capture usage and storage), and heat and transport decarbonisation;
• an advisory role to other industry stakeholders as the GB energy industry develops further; and
• more prominent roles in hosting competitions for the delivery of energy networks (including allowing parties other than the usual network companies to compete for network solution build, ownership, and operation), market design, and future code developments.

Implementation

As the FSO role is expected to evolve as the GB energy system develops, it is unsurprising that the preferred approach is one of phased implementation. The aim would be to transfer to FSO the existing ESO capabilities, followed by the proposed GSO capabilities, and add additional capabilities, roles, and functions when required to help facilitate the transformation of the GB energy system. However, the scale of the implementation will require significant changes to legislation, licences, and codes to help facilitate each of the phases of implementation. As a result, no clear timeframe is given, although it appears unlikely that any functioning FSO (even just assuming the existing ESO role) would be in place earlier than 2023.

Conclusions

As Ofgem recognised in January 2021, the move towards net zero needs a systematic step-change in the way industry stakeholders think about the GB energy systems. The current consultation marks the next step on that roadmap to achieving this. Whilst the coming decades will need to be full of ambition and radical changes across the energy sector, the proposals set out in the consultation are measured and consider the next evolution of the operation of the GB energy systems without proposing an immediate change in approach. The preference to create the FSO based on existing capabilities and to add additional functionality as and when required is clearly the only way forward; there are still too many variables to define with any certainty what will be the FSO’s future role. Whilst there is continued public pressure to make better progress towards the Government’s net zero targets, industry stakeholders are acutely aware that the race is a marathon, that the changes required are complex, and need to come from evolving current practices, rather than a radical overhaul.

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Please contact Freeths' expert Energy Lawyers Clare King or Liam O'Flynn with queries on the article and the topics discussed.