Blog by Isobel Annan, Emma Andrews and George Bridge

Amongst a raft of recent consultations, BEIS and Ofgem have published the much-anticipated consultation on proposals for a Future System Operator (“FSO”) with responsibilities across both the electricity and gas systems. The consultation runs until 28 September 2021, gathering opinions on the case for the change to an FSO.

The consultation follows Ofgem's finding in its review of the GB energy system of a strong case for creating a system operator independent of the transmission asset owners and combining certain responsibilities for the electricity and gas systems.

The case for a FSO

The Government's proposal marks a major change in the UK energy landscape, as all roles and functions of the current National Grid Electricity System Operator (ESO) would pass to the FSO, which would also undertake strategic network planning, long-term forecasting, and market strategy functions in gas. The independence of the FSO will be fundamental to its operation, enabling this critical entity to choose the extent of its role and avoid any perceived conflicts of interest within the industry.

Net Zero poses a huge challenge for the energy system, which must transform to balance different forms of generation and demand efficiently. The Government hopes that the creation of a FSO will drive progress towards Net Zero whilst maintaining energy security and minimising costs for consumers.

Whilst the FSO will not take over any decision making powers from Ofgem, the FSO could support decisions by Government, Ofgem and other organisations through providing targeted advice based on its technical expertise on the impact of different potential decisions on the energy system.

This consultation provides an opportunity to consider the different outcomes that can be delivered by a system operator with a wider remit and how that will affect the entire energy system. By applying 'whole system thinking', the FSO could plan and coordinate holistically across the electricity, transport, heat and gas sectors. In this future system, the electricity and transport sectors will need to begin communicating in new ways to decarbonise, innovate, digitalise and utilise data.

Which model?

Two broad models of organisational design are being considered for the FSO:

• a standalone privately owned model, independent of energy sector interests;
• a highly independent corporate body model classified within the public sector, but with operational independence from Government.

A privately owned FSO, if it is profit making, would be incentivised through its profit to drive performance. The non-private FSO would not be driven by shareholder or profit interest. Players in the industry have raised concerns regarding how risks and rewards could add up in a meaningful way for a private owner and the difficulty of avoiding any conflict of interest. While some have voiced that a public owner would be best placed to serve customers, others in the industry have questioned how a public owner could manage incentives and respond to the challenges facing the energy system with the necessary agility and flexibility. The ownership structure is a key choice within the consultation.

Whichever structure is chosen, the FSO will need to enable both rapid and holistic change at the national and local levels for the UK to achieve its Net Zero target.