As part of a raft of consultations issued at the start of the summer holidays, BEIS and Ofgem are jointly consulting on proposals to establish an expert, impartial Future System Operator (FSO) with responsibilities across the electricity and gas systems.
This has been in the mix for a long time. First the electricity system operator role split from the rest of National Grid. See our articles Separation of National Grid's System Operator role and Separation of National Grid's System Operator role – Next Steps for background. Then last year Ofgem launched a wide-ranging review of how the GB energy system operated. See our report. Finally, the Energy White Paper suggested there should be an entirely new body to co-ordinate the different parts of the energy system, as we reported in our Insight paper.
The latest consultation is a comprehensive one, covering why BEIS and Ofgem think a FSO is needed, the FSO's roles and functions, proposed organisational models, and how to implement the changes with minimal disruption.
Why have a FSO?
Reaching net zero emissions by 2050 needs a much more integrated energy system. Electricity and gas can't be looked at in isolation, particularly with the growth of hydrogen, which can act both as a fuel in itself and also as a way of balancing electricity demand by storing excess energy as hydrogen.
There is also a risk of a perception of bias or conflict of interest if National Grid has the system operator role, even though the consultation is quick to stress that there is no evidence that this has ever been acted upon.
FSO's role and functions
The electricity side is easy: the FSO would carry out all the existing National Grid Electricity System Operator (NGESO) functions. For gas, it's more complicated. National Grid Gas (NGG) acts as the gas system operator but also owns the gas transmission network. The system operation functions are more interlinked with asset ownership, as controlling gas demand and supply involves using physical assets like compressors and valves to regulate how much gas goes on the system. There is also a safety case regime for gas that does not exist for electricity. This makes it trickier to separate out the gas system operation functions from asset ownership activities. The preferred option is for the FSO to carry out strategic gas network planning, long-term forecasting, and market strategy functions, but NGG would continue to provide real-time system operation.
BEIS and Ofgem do offer an alternative where the FSO takes on gas system operation as well. They are not in favour of this at present, but recognise that there may be future hydrogen scenarios where there would be greater benefits in having a combined gas/hydrogen and electricity FSO control room operating the whole energy system on a daily basis, due to the greater interlinkages between hydrogen and electricity. So watch this space.
Future functions for the FSO
The new or enhanced roles for the FSO are where the consultation gets really exciting. The FSO will obviously have an advisory role to the Government and Ofgem as they make important policy and regulatory decisions in areas such as heat, transport decarbonisation, and hydrogen and CCUS.
Other roles could include:
- system planning and network development, in an advisory role to begin with but with potential in the future to take on a stronger role in electricity network planning, potentially recommending network designs and tendering for and/or contracting with parties to build and operate network assets
- driving competition in energy networks (see our separate article on CATOs, where the FSO could be a strong candidate for the role of running onshore electricity network competitions)
- a greater role in the Capacity Market, taking on not only NGESO's current functions as delivery body but also other functions that currently sit with BEIS or Ofgem
- co-ordination with distribution networks: there is a suggestion that the FSO could even take on some DSO functions
- oversight of the whole of energy code development as an Integrated Rule Making Body (although this is not the preferred option set out in the joint BEIS/Ofgem Energy Code Reform consultation)
- hydrogen and CCUS (carbon capture, use and storage): the potential level of interaction between hydrogen and electricity networks could mean the gas control room is brought into the FSO in the future. CCUS is likely to be supported by government in the early deployment phase, but once we get into the 2030s, the FSO could oversee a possible network build-out and expansion of CCUS.
Two different organisational models for the FSO are proposed:
- a standalone privately owned model, independent of energy sector interests. This would be "for profit", so would operate on a commercial basis determined by its owners.
- a highly independent corporate body model classified within the public sector, but with operational independence from government. This would be "not for profit", so it would need overarching objectives set out in its articles of association, legislation and licence, and these would drive its behaviours.
The regulatory framework would be similar for both models. The FSO's high-level functions, powers and duties would be set out in legislation. The FSO would operate under a licence (or licences) enforced by Ofgem and would be funded through network charges determined by a price control mechanism.
Implementing the changes
This isn't a simple change and we can expect many further consultations along the way. There will be a phased implementation, with the FSO taking on all the existing capabilities and functions of NGESO as a first step, followed by phased introduction of any further FSO functions. It does look like there will need to be a sale of NGESO and some of NGG's functions.
This consultation closes on 28 September 2021. A government response would then be published in due course, which would include the proposed organisational model and set out the necessary legislation to achieve this.
The future is uncertain, and that is no different for the Future System Operator. What is clear is that the Government, the ESO and the sector as a whole will need to work collaboratively to ensure that the impact of a disruptive change is positive.