1 Feb 2002 – UK electricity market regulator Ofgem today set out its proposals under which the UK transmission grid should be operated by the National Grid Company (NGC) for the next twelve months which reduces the target cost down to £460m ($650m).

In a statement, Ofgem said that its final proposals for enhancing existing System Operator incentives will encourage the NGC to operate the electricity transmission system efficiently and economically by providing it with an appropriate balance of risk and reward.

Pending agreement from NGC, the current scheme, which came into operation when the new electricity trading arrangements (Neta) were introduced in March 2001 and which expires in March 2002, will be rolled over for one year from 1 April 2002 to 31 March 2003, with some specific adjustments.

In December 2001, Ofgem made initial proposals for the new incentive scheme based on two options; one with a target cost of £481m, the other with a target cost of £460m. The two options also amended the potential rewards and the downside risk to sharpen the incentive further.

Under Ofgem’s final proposals NGC will be set a single cost target of £460m for one year, rather than the deadband of £481m to £511m, which is currently in place. “Compared with the present scheme, the company stands to gain greater financial rewards if it reduces its costs below the target, but faces greater losses if the costs are higher than the target,” said Ofgem’s Managing Director for Competition and Trading Arrangements, Eileen Marshall.

“NGC still face uncertainties with regard to the costs and operation of the system under NETA, especially since it has not yet experienced operation over a full winter period, ” said Marshall. “We therefore consider it appropriate that the current scheme be rolled-over substantially in its present form.”

Ofgem hopes that the introduction of the revised proposals will eventually lead to reduced prices to consumers.

NGC is being asked to respond to the final proposals by 7 February 2002