On pies, fingers and National Grid

This piece originally appeared in BusinessGreen on 1st February 2017.

I see that Ofgem has finally taken a deep breath and launched a consultation on whether the System Operator (SO) functions of the National Grid should be separated out from its overall business activities: and has concluded that, ‘well, yes – to a point it perhaps should, and well, we might think about the SO becoming a more independent company within the National Grid group, perhaps with its own licence, and that might be achieved by something like 2019’. All of which means that if we all respond positively to the consultation, some Chinese walls within National Grid might be on their way within a couple of years.

It is not that National Grid does a bad job of running the System Operator: on the contrary, it does rather well, I think. I wonder though, if this rather tepid approach really is good enough to oversee the transformation of how the grid will work over the next 20 years as it transforms (or rather it completes the transformation – it already is transforming).

We are moving from a centralised system conveying the output of known large power plants across the country, hooking up with lower voltage district systems and finally into your household, office, or factory, into a decentralised system with inputs to the grid at all levels of operation, and with substantial elements of customers effectively going off grid to all intents and purposes.

National Grid is already managing some interesting possible conflicts of interest – it is the regulator, effectively, for the development of interconnectors, whilst having a substantial interest in an interconnector business. It effectively takes decisions about what to construct through the SO and then constructs what it has decided to construct for the good of the system itself. The system operator uses transmission connected generation and demand to support its management of system frequency, and then charges for those decisions and levies charges on imbalances subsequently. More recently the SO became the delivery body for the Capacity Market and for Contracts for Difference for renewable power. The SO has also now got responsibility to identify investment needs and to coordinate and develop investment options.

All of this screams out ‘conflict of interest’ in principle, since National Grid is a very successful publicly quoted company with responsibilities to its shareholders, and indeed has substantial business outside its role as SO to look after, not only in the UK but in North America. The fact that it has done well in operating the system without too many apparent clashes with its wider remit in the world is good news to date, but looks increasingly difficult to maintain as the system transforms.

How will such a company manage the inherent difficulties involved with the complex interactions of demand side reduction, system fragmentation and more than possibly finding itself in the role, in the end, of a periodically-used back-up system for a decentralised ‘grid’ that mostly will get along without it? As that possible outcome looms, will simple defence of its own interests as transmission owner conflict with this movement and perhaps, even with the best of intentions, distort or impede it?

And it is this latter prospect, at the end of the transformation process, that ought to give some pause for thought. For at that point, it is very likely that a residual National Grid will simply not be profitable, and will need to be maintained as a public good, rather like we maintain roads for public use and (mostly) don’t try to make them pay their way.

So I suppose government has two options for the long term future of National Grid. One would be to keep all the SO functions in-house and tied to an otherwise profitable and expanding company, in the hope that they will continue to keep a decreasingly viable high level system under their wing, even if that means those conflicts become very unmanageable. The other would be, for the sake of a better and more effective transition, to bite the bullet and effectively set up a SO that is fully separate, not-for-profit and is not tied to anyone else’s company decisions.

I know which route I’d choose: and I can’t help worrying that the Ofgem consultation, thoughtful though it is in some ways, doesn’t even start properly to address that choice.


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