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Energy Bill update

Conflicts of interest and contingency arrangements

In short

Using the National Grid as System Operator was identified in December 2011 as the Government's choice for delivering both the Feed-in-Tariff Contracts for Differences and Capacity Mechanism.  Their role was identified as being to provide expert independent advice to Government on key rules and parameters and administer the FiT CfD and Capacity Market.

However, in conferring the EMR functions on the System Operator, a private company, there is a potential risk of conflicts of interest arising between the new EMR functions it will take on and its existing role and interests in the energy market, including its ownership of transmission infrastructure.  Chapters 4 and 5 of the draft Energy Bill contain the framework for mechanisms to manage these conflicts interest should they materialise and justify action.

Power to Transfer EMR delivery functions

The Secretary of State is given power under Chapter 5 of the draft to transfer the EMR functions carried out by the system operator to an alternative delivery body. 

Restrictions have been placed on the ability of the Secretary of State to issue such an order.  However, there is a wide catch all provision enabling the Secretary of State to issue an order where it appears necessary or desirable to do so in connection with furthering the purposes of the regulations issued for Feed-in-Tariff Contracts for Differences under section 1(1) of the Bill or for the purposes of the regulations issued for thee purposes of the capacity mechanism issued under section 20(1) of the Bill.

Orders may be made for all of part of the EMR delivery functions and the Bill grants the Secretary of State the power to make a statutory transfer scheme to transfer the designated property, rights or liabilities to the alternative delivery body.

Conflicts of Interest

The approach to the resolution of conflicts of interest looks to functional and potentially business separation between the system operator function exercised by National Grid Electricity Transmission as GBSO and NGET's position as a licensed transmission owner.

Chapter 4 gives the Secretary of State the power to amend section 6 of the Electricity Act 1989 to include a new licensable activity of system operation: that is co-ordinating and directing the flow of electricity onto and over a transmission system by means of which the transmission of electricity takes place.  Such an order may include a requirement that the same person cannot be the holder of both a system operation licence and one or more of the other types of electricity licence as well as make provision for the modification of any licence.

The Secretary of State is also given separate powers to modify a generation, transmission, distribution, supply and interconnection licence for the purpose of imposing measures for or in connection with securing an appropriate degree of business separation between the functions of system operation and any other functions.

A range of options

In effect, these powers give the Secretary of State the ability to choose from a menu of options from minor licence modifications to implement EMR and facilitate its administration to more major interventions and modifications to overcome conflicts of interest or other failings in the administration to the radical step of requiring full business separation between National Grid's system operation business and its network ownership business.

Return to our Energy Bill update.