Ofgem Review of GB System Operation – Terms of Reference

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Context

On 01 April 2019, the Electricity System Operator (ESO) became a legally separate function within National Grid plc. The aim of legal separation was to minimise and mitigate conflicts of interest and better position the ESO to respond to and help facilitate the electricity system’s development and transformation. We had committed to reviewing the effectiveness of legal separation during the course of 2020/21.

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 our gas and electricity networks are built and operated. This suggests a need to explore 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. Further to this, our investigation into the power outage of Friday 9 August 2019 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, we have decided to accelerate our review of the ESO governance framework and broaden the scope of this review to cover a full assessment of both gas and electricity System Operation.

Objective

The aim of the review is to consider the current and future challenges facing GB System Operation and assess whether we have 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

  • 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.

Approach

We 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. We will use these changes to determine the roles, functions and capabilities of efficient System Operators and identify any gaps with current arrangements. We will gather insight on current and future System Operation requirements from key stakeholders. While we do not intend to issue a formal consultation, we may publish short, focused questions to gather industry views.

We will examine the current system operation model and assess whether the existing framework needs to change to meet future challenges. We will also aim to analyse the potential value at stake in terms of the network changes required to achieve net zero.

We will identify alternative options for System Operation arrangements, including through a review of international System Operator models and other relevant sectors. We will interview international System Operators and key stakeholders to assess the applicability of different models to the GB system.

We will develop an approach to assessing the different options and identify the key principles for designing an amended System Operator(s), if appropriate. We will analyse how changes to the current framework could be practically implemented and, if required, suggest a road map for change.

Outputs and Timing

The review will produce a report to assist the government by setting out our views and findings on System Operation arrangements capable of delivering net zero. We expect to publish our report in late Spring 2020.

Feedback

We are keen to hear feedback on System Operation and receive input from interested parties. If you are interested in providing feedback or would like to discuss the review, please contact the team at SOreview@ofgem.gov.uk.