UK's National Grid Electricity Transmission (NGET) has notified energy regulatory Ofgem that it has rejected its proposed System Operator external costs incentive. It has accepted the proposed internal cost scheme.

NGET operates the high-voltage network and blances the electricity system to ensure that supply meets demand. Ofgem sets an incentive scheme to encourage NGET to carry out its balancing more efficiently.

Ofgem's governing authority will make a decision in April to either refer the matter to the Competition Commission or to regulate NGET's costs in line with its existing powers for the next year. In the intervening period, from April 1 to the authority meeting later that month, Ofgem will regulate NGET's external costs.

On Feb. 1, Ofgem set out two external targets for NGET's costs for consultation. However, there have been some potentially significant developments since its proposeals were published that may need to be taken into account when deciding whether or not to refer this matter:

  • NGET has incurred some high costs in operating its tranmsission system during a cold spell when conditions were tight in both the gas and electricity markets.
  • The authority decided to approve a modification proposal to introduce a significant change to the industry rules. This rule change will provide incentives on generators and suppliers to balance themselves, which will reduce the need for the system operator to take as many actions.
  • Ofgem is therefore inviting views from interested parties ahead of the authority's decision whether or not to refer to the Competition Commission and in respect of the recent market developments.

    Because of NGET's response, no direct incentive scheme will be in place for its external cotsts for 2006-2007. Pending the authority's decision, Ofgem will use its existing powers to regulate NGET's external system operator costs.

    Ofgem had put forward two options for cost external targets of either £390 million or £410 million, NGET wants a higher target. Ofgem said it is disappointed that NGET could not agree to either of these options as it believes they provide a fair balance of risk and reward between customers and NGET.