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Ofgem proposes new incentive scheme for National Grid Company

18 October 2002 – UK power and gas regulator Ofgem has set out details of a new incentive scheme for system operator National Grid Company (NGC) which it says will encourage network investment in response to market signals for the first time

The scheme is intended to enhance security of supply and reduce costs and Ofgem claim that customers, the electricity industry and the NGC will all benefit under enhanced system operator incentive arrangements.

In addition to improving NGC’s incentives to control day-to-day operating costs, the incentives will, for the first time, encourage NGC to respond to signals from the market when planning network investments. This will ensure that NGC can respond to changing demand for transmission capacity on a long-term basis and deal with any potential ‘bottlenecks’ on the system.

In order to provide appropriate market signals, NGC will be required to allow market players to buy financially firm, long-term transmission access rights. By purchasing access rights players will be able to ensure that they can input electricity into or take it off the network or be entitled to receive compensation if NGC is unable to deliver the rights.

The system operator incentives will allow NGC to earn additional rewards if it invests efficiently and delivers more than the output measures agreed initially to meet customer demand. It will also give NGC incentives to reduce investment if demand is below the initially agreed levels.

Ofgem’s Managing Director, Competition and Trading Arrangements, Dr Eileen Marshall, said: “These proposals will incentives NGC to make transmission capacity available in response to actual changing market signals rather than, at present, as a result of planning based on forecasts of future needs.”

“This approach will enhance security of supply because it will encourage NGC to concentrate on strengthening the system where it is most urgently needed and, at the same time, reduce its overall costs, which is good news for customers.”

The new scheme will bring NGC’s incentives in line with those that exist for the Transco, which runs the national gas pipelines.

NGC’s existing incentive scheme which was introduced in April is designed to run until the end of next March. The proposed new scheme will run for three years from April 2003 to provide an enduring framework for NGC’s incentives.