The GB electricity system is extremely complex.
There needs to be a constant balance between electricity supply and demand and it is National Grid ESO's responsibility to ensure this. National Grid ESO became a legally separate function within National Grid plc on 01 April 2019. For background on this, see our article Separation of National Grid's System Operator Role.
Ofgem had committed to reviewing the effectiveness of this legal separation during the course of 2020/21. However, in June 2019, the UK Parliament legislated a target of net zero emissions by 2050 (“net zero”). This challenging target is likely to require fundamental change to how the GB gas and electricity networks are built and operated and whether existing system operation arrangements can meet the challenge of delivering net zero in the gas and electricity network sector at lowest cost to consumers.
In addition, there was a power outage on Friday 9 August 2019 and the ensuing investigation into its causes, whilst finding no fault by National Grid ESO, has in Ofgem's opinion underlined the importance of having a proactive System Operator that is able to adapt to the complex and changing world it operates in.
In light of these developments, Ofgem has decided to accelerate its planned review of the ESO governance framework and broaden the scope of this review to cover a full assessment of not only electricity System Operation but also gas.
Ofgem's Decarbonisation Plan
Just before this review was announced, but clearly linked to it, Ofgem published a Decarbonisation Action Plan. This acknowledges the challenges the GB energy system faces if it is to meet the legal net zero emissions target by 2050 – challenges such as how to increase the amount of energy generated by intermittent renewables such as offshore wind; how we will heat our homes (electric heat pumps and/or hydrogen); the huge increase in electric vehicles needed to decarbonise transport; and how to do all this without overloading the grid but instead encouraging consumers to use energy at different times of day so that demand follows supply.
The Action Plan sets out nine actions that Ofgem intends to take over the next 18 months, one of which is to prepare system operators for a net zero future. Ofgem points out that as well as managing the increasing challenges of maintaining a secure and reliable energy system, system operators will need to promote greater strategic planning of investment and improved coordination across transmission and distribution, and across electricity and gas, so now is a good time to review the core roles of the system operators.
Aim of review
The aim of the review is to consider the current and future challenges facing GB System Operation and assess whether Ofgem has the right governance framework in place to deliver the UK’s net zero emissions target at lowest cost to consumers. The review will provide the government with an objective and evidence-based assessment of GB System Operation, in the context of decarbonisation.
Scope of review
According to the Terms of Reference, the System Operator Review will:
- Set out the roles, functions and capabilities System Operators will need to perform to respond to the challenges of the net zero target at least cost to consumers.
- Review the effectiveness of current arrangements for System Operation including functions, ownership and governance and assess the case for change.
- If appropriate, identify a range of alternative options to current arrangements, including combined gas and electricity models, by reviewing international models and relevant learning from other sectors.
- Provide an assessment of the suitability of the options identified and, if appropriate, routes for implementation.
- Explore the potential risks and benefits of key options and what, if any, incremental steps may be required were they to be implemented.
Ofgem will use the ESO Future Energy Scenarios and Committee on Climate Change emissions scenarios, and other reputable sources, to identify likely changes to the gas and electricity systems, such as decarbonisation and will use these changes to determine the roles, functions and capabilities of efficient System Operators and identify any gaps with current arrangements.
Ofgem will look at alternative options for System Operation arrangements, including interviewing international System Operators and key stakeholders to see if their models could apply to the GB system. The gas and electricity ESOs could be combined if appropriate.
There will not be a formal consultation, instead Ofgem will gather insight on current and future System Operation requirements from key stakeholders by way of targeted questions.
Outputs and Timing
The review will end up as a report to assist the government by setting out Ofgem's views and findings on System Operation arrangements capable of delivering net zero. Ofgem expects to publish this report in late spring 2020.
National Grid ESO has already committed to being capable of operating a zero-carbon electricity system by 2025 and is implementing the changes needed to realise this. Ofgem should take these into account when carrying out its review.
The suggestion that the gas and electricity system operator functions could be combined is interesting and would need further structural change within National Grid, presumably by separating the system operator functions of National Grid Gas and combining them with the ESO to form an "Energy System Operator". This does reflect recent thinking by both Ofgem and National Grid (in the Future Energy Scenarios) which increasingly take a whole system view of energy rather than look at electricity and gas in isolation.