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17 August 2021updated 05 Nov 2021 1:31pm

Why state control of the UK power system can help drive the energy transition

Bringing the UK Electricity System Operator back under state control could help better manage the challenges of a system based largely on renewables, as well as aiding the move towards net zero.

Renationalising a key part of the UK’s National Grid, the Electricity System Operator, is being considered by the UK government’s Department for Business, Energy & Industrial Strategy as part of a consultation on reforms to the energy system. The move was signalled last month as part of a flurry of announcements aimed at moving forward the country’s net-zero strategy. 

Electricity pylons at the National Grid Barking Substation in east London. (Photo by Daniel Leal-Olivas/AFP via Getty Images)

Increasing variable renewable generation from solar and wind, and greater attention on demand-side measures are changing the energy system. “With a traditional energy system, you have a few very big fossil power plants with some nuclear energy thrown in,” says Catherine Mitchell of the University of Exeter. “It’s big, the whole system works from the top down, and all the rules about how you run the system are related to transmission.”

She adds: “But as technologies change, and you’ve got more renewables, which are variable, and things like electric vehicles coming on the system and heat pumps, and you want more demand-side response – it’s all happening at the distribution level, not at the transmission level.”

Managing the demands of a 21st century energy system “will be complex and challenging to get right,” says George Day, head of markets policy and regulation at Energy Systems Catapult. “It’s important that an independent and expert body drives this – one without a particular interest in any component of the energy system (whether transmission infrastructure or other assets).”

In the UK, the system operator sits at the heart of the electricity system. It is owned by National Grid ESO, a private company that operates under the National Grid Group, whose focus is transmission, rather than distribution.

“The system operator is just a bunch of really big computers and it’s a very small percentage of the [National Grid’s] overall business,” says Mitchell. “However, it has the ability to make the British energy system super smart and save energy left, right and centre.”

The government is proposing to integrate the electricity and gas systems under one, integrated operator. Aside from allowing for whole-system policies to aid grid balancing, and bring about cost savings, a further benefit to integration is that it will also make it easier to phase out gas, says Mitchell.

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“We’ve got to get rid of using gas broadly around 2040,” says Mitchell, if the country is to hit its climate targets. “Around 85% of [UK] homes use gas-fired central heating. The only reason why there's a lobby to keep the domestic gas network is to have hydrogen, which is unbelievably energy inefficient, and probably will keep the gas industry going.

“But if we take the gas transmission operator into public ownership, I think it's much easier for us to take the gas distribution companies into state ownership. And then we can, at the distribution level, get rid of those networks.”

Independent operator 

According to Ofgem and the UK government, the current ownership model of the ESO leads to potential conflicts of interest in terms of assets that will limit the ability of system operators to perform new roles required to meet net zero. 

For example, National Grid, which also runs the transmission network, may prefer to encourage homes to switch from gas to hydrogen, so the organisation doesn’t have to remove gas pipes, or to add more transmission lines (boosting their profit) – even if these are not optimal policies to achieve net zero.

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Some solutions to increase flexibility like demand-side response could hurt their bottom line, even if it is the best thing for the country (a separate government analysis showed that increased flexibility could save £10bn a year by 2050, by reducing the amount of generation and network we need to build to meet peak demand).

A report by Ofgem in January recommended National Grid lose its role in managing the power system because of such conflicts. “Imagine you have 10 million electric cars on the system, and lots of renewable energy," said chief executive Jonathan Brearley at the time.

He adds: "You could manage this in two ways. One way is to build a much bigger and higher capacity network. Equally, you could have a smarter and more efficient system that begins to shift the times that those different cars charge, which could be a lot cheaper overall for customers. Asking a company which builds networks to make that kind of trade-off is the sort of thing we’re concerned about in the future.”

Another concern is cost. “Independence means more transparency and less biased investment decisions," says Karim Anaya Stucchi, senior research associate in energy economics at the University of Cambridge. "This is important considering that most of the costs incurred by National Grid ESO are customer funded.”

State ownership

The government consultation on how a future system operator could look offers two potential models for a new independent body. One suggestion is to create an independent body within the public sector. The second option is a privately-owned entity with no commercial interest in the energy sector. Energy Monitor understands the UK government is close to opting for a public body.

“A private model would be an experiment and it is difficult to think of how the performance contract would work or how it would command cross-party political support,” says Michael Pollitt, professor of business economics at the University of Cambridge. “An independent body within the public sector looks more sustainable, especially politically. We need institutions of net-zero governance which are robust to changes of government out to 2050 to encourage investment.”

Professor Mitchell says: “The ESO is fine if it becomes state-owned. To then turn that into a private body causes all sorts of other issues to do with profits and interests. I think, just own it, have it owned by people and be run for the public interest. I don't think it's going to cost very much to pay the shareholders back if we just take it back into state ownership.”

Political will lacking

But changing the system operator is only part of the solution to reaching net zero.  

“It is important not to overstate the role of a single co-ordinating body, or the value added in additional co-ordination,” says Pollitt. “It is not a lack of co-ordination that threatens net zero or a lack of governance structures. It is a lack of political will to stay the course as financial and non-financial adjustment costs rise.”

He adds: “We need the system operator to be a trusted source of modelling and advice to the government. We also need the government to have somewhere to park the delivery of issues that have, until now, been settled politically.”

However, Pollitt is also clear that much more than the system operator needs to change if net zero is to become reality. “The idea that net zero can be de-politicised by new independent governance structures remains an unrealistic hope of any politician hoping to escape the inevitable political fallout of progressing with net zero, and of any environmentalist hoping to get politics out of the way of the path to net zero,” he concludes.

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