Ofgem has started a consultation on how to cover the costs of separating the Electricity System Operator (ESO) from the National Grid (NG).
This follows a decision in April 2022 by Ofgem and the Department for Energy Security and Net Zero (DESNZ) to create a new, independent body called the National Energy System Operator (NESO).
NESO will manage both electricity and gas systems to help achieve net zero goals while ensuring energy security and keeping consumer costs low.
The separation, which involves moving the ESO from NG to government ownership, will result in costs for both the ESO and NG.
In June 2023, Ofgem consulted on a plan to recover these costs to support the work needed to launch NESO as a separate entity.
The consultation notes that NG could face extra costs as the ESO will no longer use its shared services.
The energy regulator suggests funding these costs by adjusting National Grid Electricity Transmission’s (NGET) totex allowance for the rest of the RIIO-2 period.
The current proposal involves changing NGET’s total expenditure allowance, using a formula with fixed and variable elements to ensure accurate cost recovery and encourage cost reduction.
The formula would use 2023/24 actual costs for ESO’s shared services as a baseline.
The plan also looks at reducing the financial impact on NG, such as recovering costs for services still used by NESO and transferring staff to NESO.
Ofgem may also adjust future funding if the ESO leaves any services early under the existing agreements.
National Grid estimates the additional costs could be around £25 million for the rest of the RIIO-2 period.
Depending on the consultation outcome, Ofgem may suggest changes to NGET’s licence later this year.
