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Energy Act 2023

Contents

Part 5: Independent System Operator and Planner

Section 161: The Independent System Operator and Planner ("the ISOP")

  1. Section 161 introduces the concept of the ISOP and describes what it will do. It includes (in subsection (3)) a representative, but not exhaustive, list of its initial functions (activities) and notes (subsection (2) that functions are (or will be) typically conferred on the ISOP by legislation (including this Act) or instruments made under legislation (for example licences or codes).
  2. The ISOP has hitherto been referred to in consultation and other documentation as the Future System Operator (FSO).

Section 162: Designation etc

  1. Section 162 empowers the Secretary of State to designate a person (likely a company) by notice as the ISOP and sets out that a notice designating a person as the ISOP must state when it comes into effect. The Secretary of State must ensure that, once the first ISOP has been designated, there is always one (and only one) person designated as the ISOP at any given time. This section also empowers the Secretary of State to revoke the ISOP designation by notice (again, stating when the notice comes into effect). The Secretary of State must publish any designation or revocation notice.

Section 163: Duty to promote particular objectives

  1. Section 163 sets out the ISOP’s main objectives. Three objectives are listed and the ISOP is required to carry out its functions in a way it considers will best achieve those objectives.
  2. In the Climate Change Act 2008 a duty is imposed on the Secretary of State to ensure that the net UK carbon account for the year 2050 is at least 100% lower than the 1990 baseline (‘net zero’). The Secretary of State also has a duty under this Act to ensure that the net UK carbon account for a budgetary period does not exceed the carbon budget. The ‘net-zero objective’ in this Act imposes a duty on the ISOP to carry out its functions in a way that it considers is best calculated to promote the net zero objective, by enabling the Secretary of State to meet net zero and to not exceed the carbon budgets. While not directly building renewable energy generation assets or making final decisions on future generation mixes, the ISOP is expected during the course of operating, planning and coordinating the system to drive net zero outcomes by proactively identifying and creating opportunities to facilitate the transition.
  3. The ‘security of supply’ objective imposes a duty on the ISOP to carry out its functions in a way that it considers best calculated to ensure the security of supply of electricity and gas to existing and future consumers. Security of supply refers to supply meeting demand and the maintaining of resilience in the system. This duty could cover putting in place and maintaining electricity system restoration plans and arrangements if security of supply is compromised. This responsibility could also involve seeking continuity of electricity to end users, through maintaining physical and cyber resilient systems, and ensuring sufficient electricity capacity to meet demand.
  4. The ‘efficiency and economy’ objective imposes a duty on the ISOP to carry out its functions in a way that it considers best calculated to promote a coordinated electricity and gas system that operates efficiently and economically. This objective must also be applied by the ISOP with regard to the activities carried out by those engaged in those ‘relevant activities’ defined in subsections (5) a, b and ba.
  5. Subsections (5), (6) and (7) define 'relevant activity' in a way that, broadly speaking, includes any activity that is licensable under the Electricity Act 1989 or Gas Act 1986, or any other business activity in the energy supply chain. Examples might include the production of hydrogen, the supply of heat, CCUS or other activities designed to reduce energy sector greenhouse gas emissions, or the provision of energy-related metering and data services but not including non-electricity or gas connected uses of hydrocarbons (e.g., in petrochemicals). Consumers passively consuming energy are not caught by this definition.
  6. Although some of the ISOP's functions may be more focused on matters relating to one or other of these three objectives, the ISOP will need to have regard to all of them wherever they are relevant – if necessary, making appropriate trade-offs where they may conflict. The balance of trade offs will be for the ISOP to determine, although it must have regard to the priorities in the Strategic Policy Statement for energy once this is designated for the ISOP (see further Section 165).

Section 164: Duty to have regard to particular matters

  1. Alongside the objectives set in the previous section, the ISOP, when carrying out its functions must have regard to the need to facilitate competition and the desirability of facilitating innovation in relation to relevant activities and to the consumer and whole system impacts of relevant activities (as defined in the previous section).
  2. As regards consumer impacts, the ISOP have regard to both to how they are affected (or are likely to be affected) by the behaviour of those engaged in relevant activities and to the impact of consumers behaviour on the carrying out of relevant activities.
  3. The ISOP will take a whole-system approach to coordinating and planning Great Britain's energy system, looking across electricity, gas and other emerging markets such as hydrogen and carbon capture usage and storage. As the system develops, each relevant activity can interact with each other relevant activity, and related consumer behaviour: the ISOP is required to have regard to these interactions.
  4. The intention is for the ISOP to be alive to the possibilities of new and better ways of doing things, and, working with industry, to facilitate innovation. Examples could include the better collection and use of data, and various digital technologies, to improve consumer experience and outcomes.

Section 165: Duty to have regard to strategy and policy statement

  1. The Government has the power, in the Energy Act 2013, to designate a Strategy and Policy Statement (SPS). Section 165 imposes a duty on the ISOP to have regard to this SPS as defined in subsection (4). An SPS is a statement prepared and designated by the Secretary of State that sets out strategic priorities and policy outcomes of the Government’s energy policy as well as the roles and responsibilities of those who are involved in implementing that policy. The SPS provides a steer to the ISOP at a strategic level, whilst maintaining day-to-day operational independence.
  2. The ISOP must notify the Secretary of State if, at any point, it thinks that a policy outcome in the SPS will not be met. The notice must include the reasons behind the conclusion and any steps the ISOP is or might take to deliver the policy outcome.
  3. Subsection (5) to subsection (11) amend Part 5 (SPS) of the Energy Act 2013 to reflect the existence of the ISOP and allow the Secretary of State to review the SPS in connection with the designation of the ISOP.

Section 166: Licensing of electricity system operator activity

  1. The Gas Act 1986 and The Electricity Act 1989 prohibit certain activities unless the person carrying on that activity is licensed, exempt from the requirement for a licence, or eligible (under the Gas Act 1986 only) for an exception to the prohibition on unlicensed activities.
  2. There is a set of standard licence conditions for most licensable activities. Licensees are obliged to comply with the licence conditions for their type of licence from the day the licence is granted. This section makes amendments to the Electricity Act 1989 to:
    1. Define the new ‘electricity system operation’ licensable activities. The definition is closely based on the ‘system operation’ aspects of transmission as currently defined in s.4(4) Electricity Act 1989, since the ISOP’s initial electricity functions will be essentially those currently carried out by National Grid Electricity System Operator.
    2. Create the new ‘electricity system operator licence’ and empower the Secretary of State to grant the first licence.
    3. Ensure that the holder of the ‘electricity system operator licence’ also holds the ‘gas system planner licence’.
    4. Ensure that if a person ceases to hold the ‘gas system planner’ licence it ceases to hold the ‘system operator’ electricity licence.

Section 167: Direction for transmission licence to have effect as electricity system operator licence

  1. Section 167 empowers the Secretary of State to direct that an existing transmission licence becomes the ISOP's electricity system operator licence. This would be an alternative to revoking the existing licence and granting a completely new electricity system operator licence. The Secretary of State is empowered to make appropriate modifications to the existing licence when making such a direction. The direction must be published.

Section 168: Licensing of gas system planning activity

  1. Section 168 makes amendments to the Gas Act 1986 that mirror the electricity licence in section 166 but in respect of a ‘gas system planner licence’. The Act provides for the ISOP to have a narrower role to gas than in relation to electricity. In relation to gas, its functions do not include day-to-day system operation or short-term planning. Instead, its functions are limited to longer-term planning and forecasting in relation to the gas network and markets (comprising a relatively small part of the current functions of National Grid Gas).

Section 169: Modification of licences etc

  1. Section 169 empowers the Secretary of State or Ofgem to make changes to licences and codes and revoke licences in preparation for or in relation to the designation of the ISOP. This power expires three years after the first designation of the ISOP.
  2. Subsection (4) extends this power to allow for licence or code modifications made in relation to a code body, in this case Elexon.

Section 170: Procedure relating to modifications under section 169

  1. Section 170 sets out procedural rules for making licence modifications under the power in section 169. These include a requirement that before making a modification to licences or codes, the Secretary of State or Ofgem must publish a notice explaining the reasons for the changes, the proposed modifications and when they will take effect. They must also notify the persons listed in this section and consider any representations made within the specified period in the notice or before the changes take effect.

Section 171: Provision of advice, analysis or information

  1. Section 171 imposes a duty on the ISOP to provide advice, analysis or information requested by the Government or Ofgem. The ISOP is required to comply with requests as and when requested, so far as reasonably practicable.

Section 172: Power to require information from regulated persons etc

  1. Section 172 empowers the ISOP to request information to help it fulfil its functions. Information can be requested from those engaged in, or whom the ISOP reasonably considers intend to engage in, relevant activities (as defined in 163(5)). The request must be responded to, as far as practicable, in the time, form and manner specified in the notice by the ISOP.
  2. The requirement to provide information is enforceable either by Ofgem (where the request is made to a person who is otherwise subject to Ofgem enforcement action under the Electricity Act 1989 or Gas Act 1986), or by the ISOP in civil proceedings.

Section 173: Duty to keep developments in energy sector under review

  1. Section 173 imposes a duty on the ISOP to monitor and review developments that may be relevant to the delivery of its functions. This could include, for example, technological changes, government policies or market shifts.

Section 174: Transfers

  1. Section 174 introduces Schedule 9, which sets out the Secretary of State’s power to make transfer schemes in connection with the designation of a person as the ISOP and connected provisions.

Section 175: Pension arrangements

  1. Section 175 introduces Schedule 10, which creates the powers to make arrangements regarding pensions in connection with the establishment of the ISOP.

Section 176: Financial assistance for the ISOP

  1. Section 176 grants the Secretary of State the power to provide financial assistance to the ISOP, and (where the Secretary of State considers this appropriate) to set conditions which this financial assistance is subject to. Subsection (2) provides an indicative list of the types of financial assistance that may be provided.

Section 177: Cross-sectoral funding

  1. The ISOP will operate across both the electricity and gas sectors and this section facilitates that work by allowing cross-sectoral funding.
  2. Currently the Electricity Act 1989 and Gas Act 1986 limit the extent to which the holders of a licence granted under one of these Acts can consider the interests of consumers of a holder of licences under the other Act.
  3. This section removes the barriers in section 7 of the 1989 Act and section 7B of the 1986 Act, so as to allow payments raised from licence holders in one sector to be paid to those in another as long as there is a benefit, or at least no detriment, to consumers in the first sector. The removal of these barriers will enable the ISOP to coordinate and ensure strategic planning across the energy sector more effectively.
  4. The section introduces a provision, in section 9 of each Act, to expand licence holders’ statutory duties and require them to have regard to the interests of consumers of the other energy sector where directed by their licence. Similar provision is not required for Ofgem who are already given in each Act discretion to have regard to the consumers of the other sector.

Section 178: Principal objective and general duties of Secretary of State and GEMA under Part 5

  1. Section 178 ensures that when carrying out various functions in relation to the ISOP, the Secretary of State and Ofgem, must have regard to the principal objective and general duties, as defined in the Electricity Act 1989 and Gas Act 1986. The principal objective of the Secretary of State and Ofgem can be characterised as protecting the interests of existing and future electricity and gas consumers. General duties include promoting effective competition in the energy sector, having regard to security of supply and securing a healthy energy market.
  2. This practice has precedents in earlier energy legislation where new functions are given to the Secretary of State or Ofgem in relation to electricity or gas that would not otherwise be subject to the principal objective and general duties (e.g., s.190 Energy Act 2004, s.102 Energy Act 2008, s.22(9) and (10) Energy Act 2011, s.39 and 53 Energy Act 2013, s.6(12) and (13) Smart Meters Act 2018).
  3. Subsection (1) states that the Secretary of State must have regard to the above principal objective and general duties, when carrying-out new functions relating to the power to designate, revoke and order that an existing transmission licence becomes the ISOP's electricity system operator licence.
  4. Subsections (2) and (3) extends the requirement to have regard to the principal objective and general duties to the power of making changes to licences and codes and revoking licences in preparation for or in relation to the designation of the ISOP, conditions to make these modifications and Ofgem’s enforcement functions in relation to information requests to regulated persons.

Section 179: Minor and consequential amendments

  1. Section 179 introduces Schedule 11, which makes minor and consequential amendments to other acts.

Section 180: Interpretation of Part 5

  1. Section 180 provides the meaning and definitions of various terms used in Part 5.

Section 181: Regulations under Part 5

  1. Section 181 states that the powers to make regulations under the Act are exercisable by statutory instrument.

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