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Reform Of National Grid

Dr John Constable: GWPF Energy Editor

Rumoured reforms of National Grid’s role in the UK electricity market are long overdue, and could benefit consumers by removing the conflicts of interest that result from a company simultaneously owning the grid and also acting as the Transmission System Operator (TSO).

This might also address the current and surprising lack of any party responsible for security of supply, as well as the fact that current market structures do not recognize ‘power capacity’ as a separate commodity, which many regard as a defect.The realization of these benefits will depend in large part on the liberation of the regulator, Ofgem, from the obligation in the Energy Act of 2010 to have regard to the interests of current and future consumers in the light of climate change, a burden that in effect makes the regulator an agent of climate policy delivery rather than a consumer champion.

Since the United Kingdom is widely perceived as having been in the vanguard of moves towards a liberal market in electricity, beginning with Nigel Lawson’s reforms in the 1990s, there is some international interest in the current policy direction, insofar as it reflects on liberalization in principle. In Japan, for example, government remains ostensibly committed to deeper liberalization, and is anxiously watching the UK for signs of stable progress that will underwrite its own case. On the other hand, the Japanese electricity sector itself is broadly hostile to liberalization, and finds comfort in any hints of failure or backtracking.

However, since the sector history is poorly understood even within the UK, the straws in the wind are more confusing than informative. While it is correct to see the Lawson reforms as reversing the nationalisations of the Attlee government, 1945 to 1951, it is less widely understood that Attlee’s policies were in many respects only forceful extensions of underlying trends towards state direction and state ownership  that extended back to the very beginnings of the sector in the 1880s, in municipal trading for example. In other words, the Lawson privatizations of the 1990s represented not only a radical break with the recent past, but with the entire history of the electricity sector, and they consequently faced great inherent resistance and inertia. Thus, it is less surprising that they were incompletely realised, and that even at the very moment of maximum liberalization, with the New Electricity Trading Arrangements (NETA) of 2001, and before the reforms had been fully tested, the process had begun to go into reverse. This appears to have been largely the result of the Royal Commission on Environmental Pollution report, The Changing Climate (2000), which heralded the introduction of major market distortions such as the Renewables Obligation, and informed the Blair government’s White Paper of 2003, Our energy future: creating a low-carbon economy. In other words, any current reforms should be seen as responses to the outcomes of a steady trend away from liberal markets over the last fifteen years or so, and not as a response to the earlier liberalization.

The Secretary of State’s ‘reset’ speech in November 2015 is an extremely important indication of the desired direction of travel, and there is much to applaud, but details have been subsequently thin on the ground. However, The Times this week obtained sight of a DECC document proposing significant changes to the business operations of National Grid  (NG), the United Kingdom’s Transmission System Operator (TSO). (“Ministers ready to pull plug on National Grid”)

The proposal is only sketched but its outlines are clear enough. While NG’s shareholders would retain ownership of the grid cables and associated infrastructure, system operation would be transferred to a new body with responsibility for securing electricity supply, a responsibility that, curiously enough, does not currently apply to National Grid. This new body would be a not-for-profit organisation, overseen by the current regulator, Ofgem.

This is promising, and could address several of the fundamental problems that have been highlighted over the last decade. For example, in evidence presented last year to the House of Lords inquiry on Resilience of Electricity Infrastructure, Colin Gibson, a former Power Networks Director, a main board position at National Grid, and one of the most practically experienced and respected power systems engineers in the United Kingdom, noted not only the absence of any responsibility for security of supply, but also that his old company had a serious conflict of interest, since it was not only System (operator and) Designer, but also owner of any new grid infrastructure for which the consumer would be charged. The conflict is obvious: “National Grid as the plant owner receives a return on its Regulatory Asset Base and thus has an interest in expanding it” (p. 526).

Gibson’s proposed reforms, which prefigure the current proposals insofar as they are known, include the creation of a new Commission to set the security of supply standard, and oversee system design and operation. Ownership of the network would remain with National Grid.

Government’s version of this scheme appears to give Ofgem a significant role in providing general oversight. Unfortunately, this is a cause for concern, since it is difficult to see that the reforms, well-intentioned though they clearly are, can deliver real benefits to the consumer unless Parliament reviews the changes made to Ofgem’s powers and instructions in the Electricity Act of 2010. This legislation, introduced by Ed Miliband, then Secretary of State at the Department of Energy and Climate Change, amended the Electricity Act of 1989 to the effect that, when considering the interests of consumers, Ofgem must view these as the “interests of existing and future consumers” (my emphasis). Furthermore, the 2010 act notes that these interests consist not only of “security of supply” but also “the reduction of electricity-supply emissions of targeted greenhouse gases” (See 17.3.1a). In effect, this amendment has made it all but impossible for Ofgem to protect the consumer against climate policy cost or even to offer more than the most muted of criticisms. The interests of an unspecified number of future consumers always outweigh present harms.

Consequently, unless Ofgem is re-empowered by corrective amendments to the Electricity Act it is likely that the changes proposed for National Grid will be in practice less significant and beneficial than they might otherwise be. Indeed, they could actually be a further and undesirable further step away from competition and liberal markets, which after over a decade of misconceive state mandates is the last thing the UK electricity sector needs.