National Grid SO split: lessons for water?

Energy regulator Ofgem and the government yesterday announced plans to separate the system operator (SO) role performed by National Grid from the rest of the National Grid group. Under the proposal, by 2019 the SO should be a legally separated entity, with its own licence and a different incentive framework. The regulator said separation would include SO governance, employee and physical separation, and information ring-fencing. In time, this separate organisation could be spun off as a fully independent SO.

The plan is driven by the desire to avoid conflict of interest between Grid’s role as a transmission network owner and its system operation functions. The development should be of interest to the water industry where the concept of an SO has gained traction alongside the possibility of greater fragmentation of services as markets are reformed.

The industry and its key stakeholders are increasingly asking questions such as: if more parties are involved in performing services, who will coordinate the activity, safeguard security of supply and ensure investment is made where it is needed?

In 2015, Dieter Helm published an influential paper on an SO for water. Helm’s vision was for an SO in each catchment, with responsibility for planning and coordinating catchment functions including abstraction, discharges, flood defence and agricultural subsidies in an integrated way. These catchment system operators (CSOs) would not perform any of these functions themselves but rather tender them out to a wide range of companies and organisations, including water incumbents, new entrants, farmers, land managers, facility management firms and not-for-profit organisations.

Water stakeholders seem to remain divided on a number of key SO issues for water, including:

  • Is it better to put faith in central control administered through the SO mechanism or to trust stakeholders to coordinate their own activities?

  • Would a stand alone body, independent of any water company interests that could operate at arm’s length be better than incumbents taking on the role, or would an independent third party simply add to transactional costs and risk?

  • Would a number of local SOs be better in the water context than a single national SO?

For more details on the National Grid story, please see New Power’s coverage here: