This month the Government and Ofgem have announced the creation of a new system operator to manage both the gas and electricity transmission systems in Great Britain. Dubbed the “Future System Operator”, the organisation will be publicly owned and involves the nationalisation of National Grid ESO and the system operation business of National Grid Gas. At the same time, there are further signs of the transformation that needs to occur in the electricity system, with the completion of the Stability Pathfinder Phase 2 auction and the procurement of both synchronous condensers and grid forming technology.
A radical change as gas and electricity transmission system operation is nationalised
The status of National Grid as the owner and operator of the British high voltage transmission system has been in question since 2016, when the first serious discussions over the creation of an independent system operator were launched in response to concerns over conflicts of interest. The initial solution was to create a structure similar to that which National Grid had operated for its gas storage business: a fully arm’s length subsidiary with a separate board of directors for the system operation business separating it structurally if not legally from the network ownership business. This subsidiary was named NG ESO (Electricity System Operator).
But the issue has never fully gone away, and last year, in recognition of this, National Grid re-structured its operations, selling a majority stake in its gas transmission business (“NGG”) and buying Western Power Distribution, one of the largest Distribution Network Operators in the country. In March of this year, National Grid announced it had sold a 60% stake in NGG, which both owns and operates the gas transmission system, to a consortium of buyers including Macquarie Asset Management and British Colombia Investment Management Corporation, with an option for the consortium to buy the remaining 40% during the first half of 2023.
This month, following a consultation, the Government and Ofgem have jointly announced the creation of an independent “Future System Operator (“FSO”)”, which effectively nationalises both the gas and electricity system operation businesses of National Grid plc. The FSO will take on all the main existing roles and responsibilities of NG ESO and the longer-term planning, forecasting and market strategy functions in respect of gas (but not real-time gas system operation or Network Emergency Coordinator functions).
The FSO will have a statutory advisory duty to provide expert advice, analysis and information to Ofgem and the Government, when requested, to inform key policy decisions. The organisation will take an increasingly significant role in shaping the energy system and driving forward competition, taking a whole system approach considering interactions across electricity, gas and other emerging markets (such as hydrogen and Carbon Capture and Storage), both on and off-shore, and between transmission and distribution systems. The FSO’s role will kept under review and may extend into other areas including distribution networks, heat and transport.
The FSO will have 3 statutory objectives:
achieving net zero
ensuring security of supply of electricity and gas
ensuring an efficient, co-ordinated and economical electricity and gas system
With an obligation to take account of:
the need to facilitate competition
the need to facilitate innovation
impacts on consumers, and consumer behaviour
whole system impacts
The FSO will act independently, and is expected to have a high level of operational independence, but will need to operate in the context of wider energy sector policy meeting the Government’s strategic objectives. To support this, a Strategy and Policy Statement (“SPS”) will be developed for the organisation (although the timing of this is unclear since the long-promised SPS for Ofgem has yet to materialise). To supplement this, the FSO will have a statutory duty to keep developments in the energy sector under review (including relevant policy initiatives) that may be relevant to the delivery of its functions.
In order to ensure that the FSO is free from actual or perceived conflicts of interest and also be free from day-to-day operational control from the government, it will be established as a public corporation, subject to an ultimate decision on classification by the Office of National Statistics. (Public corporations are organisations established by an Act of Parliament and typically funded by taxpayers. For example, the BBC, which was founded by the 1922 Broadcasting Act, and is funded by the TV licence fee. The BBC is not directly run by the UK Government.) The FSO will be licensed and regulated by Ofgem, and funded by consumers through price control arrangements. Two new categories of licence will be established within the legislation: an Electricity System Operator licence and a Gas System Planner licence. The FSO will hold both licences with the potential to hold additional licences in future, if necessary.
The Government intends to complete the process of establishing FSO, including all the necessary legislation by the end of 2024.
“Our energy system is at a transformative moment. We need fundamental change to ensure we match the scale of our net zero ambitions, set out in our recent Net Zero Strategy, but also to implement this change efficiently so that consumer bill payments are kept as low as possible. This requires a shift to a more ‘whole system’ approach, coordinating the ever more integrated electricity and gas systems, both onshore and offshore, while looking ahead to the emerging markets of hydrogen and Carbon Capture and Storage. And it is necessary that the rules and governing institutions of the system adapt and evolve to support and enable this transition,” – Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy
This approach will require transactions between government and National Grid plc and any other relevant parties, with the parties being appropriately compensated for the elements of their businesses that are transferred into the FSO. To facilitate these transactions, the Government intends to create transfer schemes in legislation to ensure that the transfers include all the relevant capabilities needed by the FSO to perform its proposed functions
No changes to the ownership structures of Xoserve or Elexon are proposed at this time, although, since Elexon is a subsidiary of NG ESO, a subsequent consultation on its future ownership will be held. Interestingly, Xoserve describes itself as being owned by the gas industry – Xoserve Limited’s main shareholder with a stake between 25-50% is Cadent Gas, which is majority owned by Macquarie through various intermediate companies. Macquarie was also part of the consortium that bought the NGG stake earlier this year. Elexon manages the settlement process for the electricity market and also administers the Balancing and Settlement Code. Xoserve manages the settlement process for the gas market, but the Uniform Network Code which governs the gas market is administered by the Joint Office of Gas Transporters.
This move has been generally well received by the industry which has long expressed concerns over conflicts of interest, and more recently over the lack of a whole system approach across gas and electricity markets as the energy transition progresses. The process of creating the FSO will be complex, but the end result should be a degree of simplification and harmonisation. How the sale of the NGG stake and potential sale of the remainder of the business will effect this process is unclear. The Government also intends to end the existing system of self-governance in the industry by giving Ofgem responsibility for energy codes alongside one or more licensed code managers. There is no firm timetable for this move, but the necessary legislation could be passed next year.
New grid stabilisation services procured for Scotland
A week after the FSO announcement, NG ESO announced the results of its Stability Pathfinder 2 tender. NG ESO is actively monitoring inertia on the transmission system and evaluating ways to maintain stability through the procurement of inertia services, as part of the Stability Pathfinder project. Phase 2 of the Pathfinder focuses on increasing the short circuit level (“SCL”) in Scotland, while Phase 3 is aimed at increasing inertia and SCL in England and Wales. Inertia is the mass of the system used to control frequency, while short circuit level is the amount of current that flows on the system during a fault.
The inertia of the GB electricity system has fallen by 40% in the past decade, and continues to decline as conventional synchronous generation is replaced by non-synchronous, intermittent renewable generation. This, combined with increased variation in demand, is making system frequency increasingly volatile and unpredictable. In addition, new capacity being added to the system is increasingly large (1.4 GW interconnectors have been opened, while Hinkley Point C will be 1.8 GW) increasing the size of the potential single largest infeed loss. A loss of this magnitude combined with lower inertia makes the Rate of Change of Frequency high, and requires a step change in how frequency is managed through response and reserve services.
“Operating the system with low inertia will continue to represent a key operational challenge into the future and we will need to ensure we improve our understanding of the challenges this will bring,” – National Grid ESO
The Phase 2 tender was recently completed, with ten contracts being awarded to four companies, with a total value of £323 million. The contracts will run from April 2024.
Five of the successful solutions are synchronous condensers including flywheels. They are described as being “green”, drawing electricity from the grid in order to operate (hydro-powered synchronous condensers are also being deployed in Scotland). The other five solutions comprise what NG ESO believes to be a world-first use of new grid forming converters. Grid forming converters allow for a non-synchronous technology, such as batteries, wind, and solar to connect to the system, and mimic the effect of a power station but without using fossil fuels to provide inertia and SCL.
“We believe this is the first time in the world where grid forming inverters have been used in multiple locations across a region to provide a system-wide solution to short circuit levels and inertia. These zero-carbon stability-improving devices will enable more green electricity to run, are cheaper for consumers, and will allow the market to deliver as much wind generation as possible. This technology will help to future-proof Scotland’s wind generation success story, help us continue to operate the fastest decarbonising electricity network in the world and achieve our plans to be able to operate a zero-carbon grid by 2025,” – Julian Leslie, Head of Networks at National Grid ESO
The use of synchronous condensers is likely to grow in the coming years, both in Britain and around the world, as conventional sources of inertia are replaced with non-synchronous intermittent renewable generation.