From National Grid To NESO: A New National Energy System Operator for Great Britain

Background: FSO to ISOP to NESO

In 2021 the UK Government and Ofgem (the energy regulator) jointly consulted on setting up a Future System Operator (FSO) to oversee the development and operation of the electricity and gas transmission networks: see our August 2021 Insight, Future System Operator Consultation. The idea was to have a body to manage the overall operation of the energy system, independent of commercial energy interests. The current structure of the energy system, based on the EU 'unbundling' requirements, meant that the gas and electricity system operators were legally separated but still both part of National Grid plc. So, it was challenging to coordinate the gas and electricity systems and there was a perceived conflict of interest with National Grid's commercial interests.

The Government responded to the consultation in April 2022 and said it would create a new, publicly owned, independent FSO.

The Energy Act 2023, passed in October 2023, gives the legal powers needed to set up this new body, referred to in the Act as the Independent System Operator and Planner, or ISOP. There also needed to be new secondary legislation (statutory instruments), changes to energy licences and industry code modifications. These have been developing over the last few months.

Earlier this year, National Grid ESO announced that the new ISOP would be known as NESO. NESO began its official role on 1 October 2024.

What is NESO?

NESO is a publicly owned company (National Energy System Operator Limited, company registration number 11014226). It was created by the Government buying all the shares in National Grid Electricity System Operator Limited. The Government now holds the shares in this company and retains ultimate responsibility, but NESO has its own board and independent directors. This gives it operational independence from government, Ofgem and industry interests. It operates on a not-for-profit basis, is licensed and regulated by Ofgem and funded through energy bills.

How did NESO transfer from NGESO?

NESO has taken over the electricity system operation from National Grid Electricity System Operator Limited (NGESO) and responsibility for gas system planning from National Gas Transmission plc (NGT). NGT is still responsible for real-time gas system operation, as this is linked to asset ownership, eg operating compressors and valves to regulate gas flow.

National Grid had already been gradually divesting its interest in NGT over the last couple of years. NGT is now wholly owned by a consortium of Macquarie Asset Management and British Columbia Investment Management Corporation.

Schedule 9 of the Energy Act 2023 sets out the mechanism of how 100% of the share capital of NGESO transfers over to NESO under a transfer scheme. Transfer schemes like this have been used before for facilitating transfers of businesses where government is involved, such as the Postal Services Act 2011, Communications Act 2003, Transport Act 2000 and the Railways Act 1993. Recently they have been used frequently to transfer passenger rail businesses (including to the public sector) when franchises terminate. In practice, NGESO and NESO are the same company, it is only the ownership that has changed. NESO also has a broader role, with new responsibilities for system planning.

The transfer to NESO took effect on 1 October 2024 with the Government paying National Grid £630 million. The Decision Notice that effects the transfer stresses that it is in the public interest that the transfer scheme does not terminate any contracts in NGESO's supply chain, so the transfer scheme prevents a right of pre-emption, right of reverter, right of forfeiture, right to compensation, right to terminate or other similar right under any contract to which NGESO is a party from arising or becoming exercisable as a result of the transfer. This protects parties that had a contract with NGESO that has transferred to NESO, and also protects NESO itself against its suppliers terminating contracts with it.

What happened to Elexon?

Elexon Limited operates as a not-for-profit entity and is funded by market participants. It is responsible, amongst other things, for managing the Balancing and Settlement Code (BSC) which matches electricity supply with demand in real time. It was a subsidiary of NGESO but when the shares in NGESO transferred to the Government, the ownership of Elexon transferred from NGESO to the 13 energy companies that contributed the most to Elexon's funding as of 1 January 2023, so that it remains a privately-owned company. But its responsibilities have not changed, just its ownership.

Regulation of NESO

NESO is responsible for electricity system operation and gas system planning, so has two separate licences: an Electricity System Operator (ESO) licence and a Gas System Planner (GSP) licence.

The ESO licence is a continuation of NGESO's Transmission Licence, with amendments to include new duties to coordinate and direct the flow of electricity onto and over transmission systems. The Secretary of State directed that this amended licence would have effect and continue in force as the ESO licence and be held by NESO, which is also referred to as the ISOP in the licence conditions.

The Gas System Planner licence is completely new. There has not really been any system wide long term gas planning (including planning for hydrogen) up to now, so this is an encouraging development. The GSP licence follows the same structure as the ESO licence, which is helpful for reading across obligations that apply to both electricity and gas.

NESO is still bound by the same electricity industry codes as NGESO was. Section E of the ESO licence deals with the electricity industry codes, including a requirement to have in place and maintain the BSC, Connection and Use of System Code (CUSC), Grid Code and System Operator-Transmission Code (STC) and comply with the Distribution Code. Section E of the GSP licence requires NESO to enter into or accede to the Uniform Network Code (UNC) for gas and comply with code modification procedures.

Both licences can only be revoked under the common grounds for revocation that are found in most licences, including insolvency-related events. The GSP licence also automatically ends if the ESO licence ends.

You can find the formal designation of NESO and the full ESO and GSP licences on the UK Government website: https://www.gov.uk/government/publications/designation-of-the-national-energy-system-operator-neso. This page also shows how the other energy industry licences have been amended to take account of these new licences.