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Response to the Electricity System Operator (ESO) Forward Plan from April 2018

7 March 2018

We have issued a response to National Grid’s Electricity System Operator (ESO) Forward Plan from April 2018.

In our response [ 260 kb], we considered a number of principles when reviewing the ESO’s first Forward Plan, which were:

  • Controllable: The ESO should have a reasonable ability to control or influence whether the stated outcome is met. Any scope for windfall gains or losses driven by other actors or external factors should be nil, or very limited.

  • Stretching: the ESO is already remunerated for providing a good service under its baseline RIIO settlement. Any rewards on top of that need to reflect genuine excellence. Where an incentive rolls over from year to year, historic performance should be set out and contextualised so that the degree of stretch can be gauged.

  • Bankable: as the ESO improves its performance over time, the targets should move to ‘bank’ past gains. It shouldn’t be able to be rewarded for hitting the same unchanging target every year.

  • Proportionate: the ESO should prioritise bigger wins over smaller ones. To do this, the ESO needs to understand and demonstrate the wider costs and benefits of its work, and the incentive regime itself needs to be proportionate - i.e. bigger wins/losses should come with more cash attached to them.

  • Measurable: objective targets that can be operationalised and will give clear and stable signals. We recognise that the ESO may have a limited ability to reliably understand/forecast whether it will be rewarded or not until the new incentive and regulatory regime from April 2018 has bedded in.

This response focuses on the detail contained in the technical annexe. We have categorised the performance metrics into three ‘pots’ - ‘right incentive, right target’, ‘right incentive, wrong or insufficiently evidenced target’ and ‘wrong incentive’.