The Future System Operator – a vital ‘whole energy system’ role

Background

It is well documented that very significant investment in our energy infrastructure will be required over the coming years to meet the forecast increase in electricity demand associated with the transition from fossil fuel sources of energy to low-carbon generation, as necessary if the target for decarbonisation of the power sector by 2035 (subject to security of supply) is to be satisfied.¹ Achieving this transformation will naturally require great application and teamwork by the government, the regulator, system operators, energy code administrators, the network owners, and all other market participants (including generators, suppliers and the operators of standard and multi-purpose interconnectors and offshore hybrid assets).

 

The purpose of this article

One of the constituent parts of the energy sector in Great Britain (GB) is, as noted above, that of system operation - this is the subject matter of this article, which aims to summarise the government’s and regulator’s plans for future energy system operation in GB (both electricity and aspects of gas operation), and to highlight some of the key milestones that have been passed already on the journey to implementing those plans. First, however, a few words on the extant position regarding operation of the electricity system.

 

Electricity System Operator

Responsibility, within the National Grid (NG) group of companies, for electricity system operation in GB was transferred in April 2019 (as required by the government and Ofgem)² to National Grid Electricity System Operator Limited (NGESO), a regulated private sector company which operates independently from but is still part of the NG group. This effected the legal separation of system operation from NG’s network (transmission) business, but was not reflected in statutory reform.

 

Reform - consulting on and effecting change

In the Energy White Paper of December 2020, the government commented that the existing method of system operation (for both electricity and gas) reflected the model of 30 years ago, and that there was, in the current era of energy decarbonisation, a need for system operators to take on new responsibilities. The White Paper announced that this – ie system operation modification - would be the subject of a consultation in 2021.³ This put us on the path to a Future System Operator (FSO) for the energy system in GB.

Considerable activity followed in 2021 and 2022 in respect of the FSO, including:

• Ofgem’s report entitled ‘Review of GB energy system operation’, 25 January 2021;
• the first joint FSO consultation by the government and Ofgem in the document ‘Energy Future System Operator Consultation’, 20 July 2021 (closing date 28 September 2021);
• the outcome of the above consultation – this was announced on 6 April 2022 and is set out in the document ‘Future System Operator: Government and Ofgem’s response to consultation’. In this, the government committed to proceed with the creation of the FSO, which will take on and build on all of the main existing roles of NGESO, as well as strategic, longer-term gas forecasting, market and planning roles, enabling more coordinated, strategic and whole systems planning. On the same day, a ‘Joint Statement on the Future System Operator’ was published by the government, Ofgem, National Grid Plc and NGESO, all committing to work together in creating the FSO;
• the government’s consultation on ‘The future ownership of Elexon’, as launched on 14 July 2022 to ascertain the best ownership model for Elexon (a ‘not for profit’ company owned by NGESO) (the outcome of the consultation was published on 23 March 2023, and a further consultation has followed this, as noted later in this article);
• the introduction to Parliament, in the House of Lords, of the Energy Bill on 6 July 2022. As discussed below, the Bill provides for the FSO;
• the publication on 6 July 2022 by the Department for Business, Energy & Industrial Strategy (BEIS) (as it then was) of the ‘Energy Security Bill factsheet: Future System Operator’ (a link to an updated version of this is provided in the next section of this article); and
• the publication by BEIS of the ‘Energy Security Bill Policy Statement: Independent System Operator and Planner’, 26 August 2022 - this discusses the FSO in the context of the Energy Bill (see below), noting that it will have “responsibilities for planning the development of the electricity and gas transmission systems and operation of the electricity transmission system” and “will also take on a range of additional net zero focused roles, helping drive a more open, flexible and efficient system, and is expected to result in a net saving on energy bills”.

 

The FSO under the Energy Bill

The relevant provisions for the FSO are to be found in Part 5 (Independent System Operator and Planner) of the Energy Bill, at clauses 158 to 178 - the link given is to the version of the Bill as amended in Public Bill Committee and published on the Energy Bill pages of the Parliament site on 11 July 2023 (the ‘Independent System Operator and Planner’ (ISOP) is the name used in the Bill for the FSO as consulted on in 2021).

Part 5 of the Energy Bill makes provision in respect of:

• the functions of the ISOP (clause 158) - these include co-ordinating and directing the flow of electricity onto and over transmission systems, and carrying out strategic planning and forecasting in connection with the development of transmission systems;
• the designation by the Secretary of State of a (legal) person as the ISOP (clause 159);
• the duties of the ISOP in carrying out its functions (clauses 160 to 162 and clause 170) - the duties focus on the exercise of the ISOP’s functions in a way that it considers is best calculated to promote three defined objectives in respect of net zero, security of supply, and efficiency and economy;
• licensing of electricity system operator activity and gas system planning activity and licence modification (clauses 163 to 167) - these clauses make amendments to the licensing provisions of the Electricity Act 1989 and the Gas Act 1986 to create two new ISOP licences called the ‘electricity system operator’ licence and the ‘gas system planner’ licence. The energy regulator, Ofgem, will monitor and regulate these licences (see below on Ofgem’s consultation of 19 September 2023);
• a duty for the ISOP to provide to the government and Ofgem⁴ advice, analysis and information when requested, and a power for the ISOP to obtain information from a wide range of regulated energy businesses (clauses 168 and 169);
• transfer schemes and pension arrangements and financial assistance from the Secretary of State, as relating to the ISOP (clauses 171 to 173) - these clauses (and the Schedules to the Bill which they refer to) provide the Secretary of State with the power to make provision for the ISOP to have the funding, property, rights, liabilities and staff it requires to perform its functions. In relation to staff transferred to the ISOP, the above also address the transfer of pension schemes, and the protection of certain rights and entitlements connected to those pensions;⁵
• cross-sectoral funding issues (clause 174);
• the principal objective and general duties of the Secretary of State and the Gas and Electricity Markets Authority under Part 5 (clause 175);
• minor and consequential amendments to the Electricity Act 1989 and the Gas Act 1986 (clause 176);
• the interpretation of Part 5 (clause 177); and
• the making of regulations under Part 5 (clause 178).

As for the timeline for the creation (designation) of the ISOP, the Energy Security Bill factsheet: Future System Operator, updated version dated 1 September 2023 published by the Department for Energy Security and Net Zero (DESNZ), states that: “Depending on several factors, including timings of legislation, and discussing timelines with key parties, the FSO could be established by, or in, 2024”.

All of DESNZ’s factsheets and policy statements on the Energy Bill are available on its ‘Collection’ page.

 

Further consultations and developments

May, June and July 2023:

On 10 May 2023, DESNZ announced the launch of an open consultation entitled ‘Strategy and Policy Statement for Energy Policy in Great Britain: Consultation’ – this contains commentary on the ‘Energy System: Roles and Responsibilities’ (the FSO / ISOP is discussed there); and on 21 June and 28 July 2023 respectively, Ofgem opened a consultation entitled ‘Funding the transition to a Future System Operator’ (setting out proposals for funding the work needed to enable the creation and implementation of the FSO / ISOP) and another with the title ‘Centralised Strategic Network Plan: Consultation on framework for identifying and assessing transmission investment options’ (this considers how the FSO / ISOP, when designated, may identify and assess a range of options to address electricity transmission network investment needs).

August 2023:

The above were followed on 4 August 2023 with news of two related developments regarding the FSO / ISOP.

First, DESNZ announced a further consultation (conducted jointly by DESNZ and Ofgem) and an update on the FSO, all as set out in a document entitled ‘Future System Operator – Second Policy Consultation and Update’. The document describes two new policy areas for the FSO / ISOP intended to be addressed in its licence conditions – these are: (i) system resilience and security roles; and (ii) powers for the Secretary of State to give directions to the FSO / ISOP in certain limited circumstances relating to national security (see Chapter 2 of the document for the detail). The “new powers could be deployed if a company, contracting with the FSO, is found to threaten the resilience, safety or security of the UK’s energy system, such as through cyber-attacks and supply chain vulnerabilities. // These actions could include removing or preventing certain suppliers’ involvement or equipment in our energy supply chain, such as by directing FSO to not contract with third party suppliers to ensure the security of the system. // The new powers would be used as a last resort option and are in addition to the 2021 National Security and Investment Act, which gives the government the power to address investment and ownership risks to national security. // They also come on top of a new role for the FSO to use its expertise to plan for certain events that could harm the country’s energy resilience – such as extreme weather or flooding”.⁶ The closing date for responding to the consultation is 20 October 2023.

The above document also provides an update and summary in respect of: the status of the system operator reform project (the aim continues to be for the FSO / ISOP to be operational in 2024); the ‘day one’ roles for the FSO / ISOP (when designated); and potential future roles (including in respect of system planning and markets, digitalisation, and hydrogen production allocation) which the FSO / ISOP could take on in the longer term (see Chapters 1 (Strategic context) and 3 (FSO roles and update)). ‘Next steps’ are set out in Chapter 4, which concludes with the following: “DESNZ and Ofgem will engage wider industry stakeholders on FSO implementation plans as appropriate. We will establish an Industry Readiness Group (IRG) to provide a view of wider industry readiness for the transition to the FSO. Where appropriate, the IRG will engage with industry representatives to track and assess preparations and inform our wider implementation approach”.

The second development of 4 August 2023 was DESNZ’s announcement of the publication of a report by the UK Electricity Networks Commissioner, Nick Winser (appointed in July 2022 by the government) - the ‘Electricity Networks Commissioner - Companion Report Findings and Recommendations’, dated June 2023. The focus of the report is on accelerating the deployment of electricity transmission infrastructure, but (given the relevance of system operation to this aim) the report includes discussion on the FSO / ISOP and its responsibilities. Figure 7.1 in Chapter 7 (Call for Action) of the report sets out an operational structure for the electricity system, including the FSO / ISOP, and shows key functions for the FSO / ISOP (i.e. analysis, strategic planning, change management, and delivery planning and assurance). The Secretary of State for Energy Security and Net Zero’s letter in response to the report was also published on 4 August (available on the page reached using the first link given in this paragraph).

September 2023:

A month later, on 5 September 2023 Ofgem published a ‘Consultation on supply and generation licence conditions to implement the new ownership arrangements for Elexon’. This is the first part of a two-stage consultation relating to the proposed new electricity supply licence and generation licence conditions to give effect to the decision on the future ownership of Elexon (ie in consequence of the proposed establishment of the FSO / ISOP) and to provide for the Secretary of State and Ofgem to direct relevant electricity supply and generation licensees to hold a share in Elexon in implementation of the new ownership arrangements (as decided upon in March 2023 - see above). The consultation document includes draft licence condition text for electricity supply and generation licences.

The next day, on 6 September Ofgem announced on its ‘Consultations’ page the publication of a couple of consultations relating to NGESO, one of which is entitled ‘Statutory consultation on a proposal to modify the Special Conditions of the Electricity Transmission licence held by National Grid Electricity System Operator Limited - September 2023’. In addition to the notice of this statutory consultation, there are two consultation documents, namely: (i) ‘Statutory consultation on the Electricity System Operator licence drafting modifications - reasons and effect’; and (ii) ‘FSO Transition Funding Governance Document (Draft)’. The consultation, which closes for responses on 4 October 2023, relates to modifications proposed to be made to NGESO’s electricity transmission special licence conditions in order to implement funding arrangements as required for the transition to the FSO / ISOP. The transition entails activities to separate NGESO’s business from its holding company, National Grid Holdings One plc, and transform it so that it has the capabilities it needs to perform the roles and responsibilities of the FSO / ISOP (including with respect to gas). The effect of one of the proposed licence changes is to enable the licensee (NGESO) to recover efficient and economic costs relating to ‘FSO Transition Activities’ (as defined in the consultation documentation), this being relevant to the making by it of payments to National Grid Holdings One plc in connection with the transition. The FSO Transition Funding Governance Document (with which NGESO will have to comply when effective) is to be established by way of a new special condition - it relates to the arrangements for funding NGESO and National Grid Holdings One plc to recover relevant costs associated with the FSO Transition Activities (a draft version of the governance document comprises the second of the two consultation documents named above).

The most recent consultation regarding the FSO / ISOP, at the time of completing this article, was published by Ofgem on 19 September 2023 under the heading ‘Future System Operator (FSO) draft licences consultation’ - the closing date is 20 October 2023. The consultation relates to the electricity system operator (ESO) licence and gas system planner (GSP) licence to be created under the Energy Bill (see above) and held by the FSO / ISOP once it has been designated by the Secretary of State. Ofgem’s consultation document explains that this is a non-statutory consultation on proposed draft licence conditions (other than financial provisions), and that there is an intention to consult later in the year on (amongst other matters) the proposed financial licence conditions, as well as an intention to undertake (ahead of the designation of the FSO / ISOP) a statutory consultation, by Ofgem and DESNZ, on the complete FSO / ISOP licence conditions (Ofgem expects this statutory consultation to take place in Spring 2024). Section 2 of the consultation document of 19 September sets out the background for the FSO / ISOP and the approach being taken to licence implementation and further policy. Section 3 covers the proposed licence structure, with sections 4 and 5 addressing the ESO and GSP licence conditions respectively. Section 6 relates to associated documents and consequential impacts on other licences.

 

Next steps

The Energy Bill, which creates the legislative framework for the FSO / ISOP, had its report stage and third reading in the House of Commons on 5 September 2023 following the summer recess, with the related Commons Amendments being published on the Energy Bill pages of the Parliament site on 6 September 2023. In advance of this, on 1 September 2023 the House of Commons Library published a detailed research briefing entitled ‘Energy Bill [HL] 2022-23 Committee stage report’ - this covers the FSO / ISOP. At the time of writing, the Energy Bill is in its final stages, ie consideration of amendments, with that to be followed in due course by Royal Assent. The date scheduled (as of 20 September) on the Energy Bill pages for consideration of Lords’ amendments is 18 October 2023.

Meanwhile, it is clear from DESNZ’s publications that a lot of work is being undertaken by the government, together with Ofgem, National Grid plc, NGESO, National Gas Transmission, Elexon and other stakeholders and groups, to realise the vision for the FSO / ISOP, which is to be a “trusted and expert body at the centre of the gas and electricity systems … able to weigh up and advise on the impacts and trade-offs across energy vectors and plan our energy system from a more strategic, whole system perspective”.⁷ The ultimate aim for the FSO / ISOP is said to be to “drive progress towards net zero while maintaining energy security and minimising costs for consumers”.⁸

As for planned consultations regarding the FSO / ISOP, these are outlined in Chapter 4 (Next Steps) of DESNZ’s update and consultation document of 4 August 2023 (the link to which is provided above).

 

Conclusion

We look forward to the enactment of the Energy Bill and the commencement and implementation of the relevant provisions within it (an obvious but crucial step in achieving the above aim) and to Ofgem’s and the government’s future consultations on (amongst other things) the two new licences to be created for the FSO / ISOP pursuant to the legislation, through which this important body will be monitored and regulated.

 

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¹Net Zero Strategy: Build Back Greener, 19 October 2021.
²The Office of Gas and Electricity Markets, the energy regulator for Great Britain.
³See the Energy White Paper: Powering our net zero future, 14 December 2020, at pages 85 to 87.
⁴Representing the Gas and Electricity Markets Authority.
⁵There is information on the transfer schemes and compensation in the government’s Policy Statement (although note that the statement in question was published in August 2022, and so it references a previous version of the Bill with different numbering to the one linked above).
⁶DESNZ’s press release of 4 August 2023.
⁷Department for Energy Security and Net Zero’s consultation announcement of 4 August 2023.
^8'Future System Operator – Second Policy Consultation and Update’, 4 August 2023, at page 10.