What NESO Means for the UK Energy Landscape

Juliet Stradling, Energy Partner at TLT, considers the implications of National Grid’s system operator arm being taken into public ownership.

The completion of the acquisition of National Grid Electricity System Operator Limited (now renamed National Energy System Operator and to be known as NESO) and the associated formalities that took effect on Tuesday are important steps in the planned transformation of the UK energy system by 2030.

They could not come soon enough for the new government. As part of setting up the new ‘Mission Control’ for Clean Power by 2030 in the days following the election victory, it commissioned NESO to provide advice on how to achieve this, notwithstanding that this preceded NESO’s designation as the ISOP (Independent System Operator and Planner), when providing advice on such matters formally became part of its statutory remit.

A decade in the making

The timing of the creation of the publicly owned ISOP is very helpful to the new government’s mission for Clean Power by 2030, but it is really the culmination of a process that started over a decade ago with the Energy Act 2013.

That legislation led to the system operator taking on the quasi-public role of being the ‘delivery body’ for the newly introduced capacity market and contracts for difference. The shift from a commercial organisation to a public one then continued in 2019 with the legal and functional separation of the system operator from the rest of National Grid. In turn, that paved the way for the creation of the ISOP through the Energy Act 2023.

Role and responsibilities

As the new ISOP, NESO will play a major role in the transformation of the energy system particularly because of its role in drawing up the plan for Clean Power by 2030 and the Strategic Spatial Energy Plan for achieving Net Zero by 2050.

The significance of these plans was underlined on 16 September when a key change to the grid connections process was signalled by Ofgem, the UK gas and electricity regulator, in an open letter. Whilst grid reform was already under way as part of an industry process known as TMO4+, this letter proposed a key change to the system such that projects will be prioritised by technology and locational criteria in addition to their readiness to connect (which was the basis on which the TMO4+ reforms had been progressing since November 2023). This “project need” is likely to be assessed by reference to the new plans for the energy system.

In addition to this large role in determining who is connected to the electricity grid, NESO is also likely to have a significant impact on the entire energy system, including for example on when and where hydrogen infrastructure is developed and what the future of the gas network will be. The combination of NESO’s gas and electricity roles, which may be expanded further in the future, will enable NESO to take a holistic look at energy system needs.

NESO will carry out its role pursuant to the framework set up by the Energy Act 2023 and its two new licences: an electricity system operator licence and a gas planner licence. It will continue to be regulated by Ofgem, but as a public body, meaning the regulatory stick will largely be reputational rather than financial.

Under the Energy Act 2023, the new ISOP takes on statutory responsibility for planning Britain’s electricity and gas networks as well as for continuing to operate the electricity system, and must provide advice, analysis, and information in connection with these responsibilities at the request of the government or Ofgem.

It must carry out these functions in a way that it considers is best calculated to meet its three statutory objectives: achieving net zero, ensuring the security of supply to existing and future consumers, and ensuring efficiency and economy. It must however also have regard to other specified matters, including the strategic priorities outlined by the government in its Strategy and Policy Statement (SPS) published in May 2024. The government will consult with NESO on further revisions to the SPS, to reflect NESO’s establishment and the priorities of the new government.

NESO is unlikely to have the luxury of any settling-in period given the challenges that lie ahead. In particular, it will have to consider the 2030 target and the needs of the 2050 system. A key question is the balance between the roll out of mature technologies such as solar and wind and support to technologies such as hydrogen-2-power, combined cycle gas turbines (CCGTs) with carbon capture, and long-duration energy storage.

Review of Energy Market Arrangements

Another big question for the energy industry is what this further move towards a centrally planned system means for the Review of Energy Market Arrangements (REMA) that was kicked off in 2022. More specifically, what does it mean for the locational pricing proposals that have been the subject of such intense debate within the industry?

One of the key reasons for the proposals to introduce locational pricing is to provide a market incentive for generators – and potentially demand – to locate in the most favourable parts of the country from the perspective of system need. Will this market-based approach be superseded by this new central planning of the grid?

In accordance with the previous government’s timetable, a policy decision should be made on REMA in mid-2025. It remains to be seen whether the new government will stick to this timetable. It seems possible that there could be a ‘direction of travel’ given ahead of this but it is equally possible that the decision will be pushed back given the focus on 2030 and the time that something like locational pricing would take to implement.

The timing may partly depend on whether there is evidence that the current uncertainty is having an impact on investor confidence.

Critical decisions ahead

The establishment of NESO as the new ISOP for Great Britain is a significant milestone. But coming a matter of months after the election of a new government with ‘Clean Power by 2030’ as one of its central missions, it also means that the scene is now set for important decisions to be made that will affect the future of the energy system. Policy is likely to be formulated over the next few months as NESO works with the new government and Ofgem on strategic planning.

As well as looking out for indications of the likely direction of travel and considering how best to input into the policymaking process, investors will need to consider the potential impact of the new strategic plans on their projects, including as a result of the new proposals for grid reform.

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