Independent system operator needed to address UK energy 'conflicts of interest, say MPs

In a new report, the Energy and Climate Change Committee said that the risks of such conflicts seemed "intractable and growing", despite "strong efforts" by market regulator Ofgem and the system operator itself to put processes in place to prevent these arising. It urged the government to put in place plans for a fully independent system operator as soon as possible, but to do so in a way that "retains National Grid's considerable technical expertise".

The committee has also recommended better oversight of electricity transmission at a regional, rather than national, level; which the MPs said would better reflect the fact that more and more electricity generation is now taking place on a regional basis through smaller scale renewable energy generation projects. The existing distribution network operators (DNOs) responsible for regional electricity distribution should be reconstituted as regional 'Distribution System Operators' (DSOs), with powers to balance and control their local grids, the MPs said.

"National Grid's technical expertise in operating the national energy system must be weighed against its potential conflicts of interest," said Angus MacNeil, chair of the committee. "The Independent System Operator model has worked in the USA. It is time for it to be brought to these shores."

"Local energy is here, with astonishing growth in generation connected directly to regional networks. DNOs remain somewhat blind to their energy flows and passive in managing them. DNOs must transition to a more active role as Distribution System Operators so that they can use smart technologies to manage ever-more complicated energy flows," he said.

The committee heard from the government's Department of Energy and Climate Change (DECC) on its plans for a 'reset' of UK energy policy, as indicated by energy secretary Amber Rudd in a speech last November. Since then, the government has consulted on ways to reform the current system operator model in order to make it "more flexible and independent". It is currently considering the feedback from that consultation along with options for reform, according to the committee's report.

National Grid currently owns and maintains the electricity and transmission network in England and Wales as National Grid Electricity Transmission (NGET), as well as the gas transmission network across Great Britain as National Grid Gas Transmission (NGGT). It also operates and balances both of these transmission networks in its role as transmission system operator (TSO). The committee heard that this gave the company the "power and incentive to encourage physical infrastructure development and then profit from it", according to its report.

The committee also examined the importance of energy storage, demand-side response (DSR), interconnection and other 'smart grid' technologies as methods of balancing supply and demand during the UK's transition to low carbon energy generation technologies, which tend to be more variable than traditional fossil fuel generation. It found that "archaic" regulation and comparatively high transmission charges were hindering the development of many of these projects at the scale needed to meet the UK's decarbonisation targets.

"Innovative solutions – like storage and DSR – to 21st century energy problems have been held back by legislative and regulatory inertia," said committee chair Angus MacNeill. "The government has committed to addressing these issues, and we will hold them to account on making good on this promise."

"The UK needs clean, renewable power, but it won't be built if it's too costly or difficult for generators to connect to the electricity grid," he said.

In one of its early reports, the UK's new National Infrastructure Commission (NIC) suggested that a combination of better energy demand flexibility, innovative storage solutions and building additional interconnectors to green power sources on mainland Europe could ultimately cut the costs of delivering low carbon power to consumers by as much as £8 billion a year. The government also intends to consult on new measures to reduce regulatory 'red tape' and clarify the legal status of energy storage technologies later this year.

Energy and projects expert Fraser Janeczko of Pinsent Masons, the law firm behind Out-Law.com, said that the report "raises important questions about the future shape of the UK's energy infrastructure".

"The recommendation regarding the creation of an independent system operator contributes to the ongoing debate on the best way to develop our network infrastructure," he said. "We await the UK government's response to the report and its recommendations with interest."