Independent System Operators

The discussion of the current system operation practice challenges in Europe can be divided into two key issues: functional separation of tasks and the governance level of system operation.

System operators in Europe are for the most part for-profit entities that also own the transmission network; with the exception of the UK where NESO is a public entity that only operates the electricity (and gas) transmission system. As a result of the strong drive to increase shareholder value, today’s system operators have a strong incentive to favour new build as a solution to congestioncongestion Whenever a particular element on the transmission or distribution network reaches its limit and cannot carry any more electricity. Also a situation where trade between two bidding zones cannot be fully accommodated because it would significantly affect the physical flows on network elements that cannot accommodate those flows. problems. CAPEXCAPEX Capital expenditures are investments into long-term physical assets to acquire, upgrade, or maintain them. is often explicitly or at least implicitly better remunerated in regulation and takes up a much larger share of the annual turnover, compared to system operation This leads to investment decisions that could otherwise be addressed more economically and is a barrier to non-wire solutionsnon-wire solutions Any action, strategy, program, or technology intended to defer or remove the need to construct or upgrade physical components of a distribution and/or transmission system, or “wires investment”. and results in avoidable cost to consumers. This is a problem as Europe needs to multiply annual investment rates in electricity grids (see Accelerating Transmission Network Development factsheet).

Solutions to the conflict-of-interest issue is better regulatory oversight on network planning including extended public consultation processes on scenarios and assumptions, and/or reforming the revenue regulation (see Incentivising Network Innovation factsheet). Moving to an independent system operator (ISO) model, that separates system operation and planning from asset ownership, offers a better, structural solution. The independent system operator should be subject to economic incentives that support cost-efficient operation of the existing infrastructure. Only when this independent operator indicates that the operational measures are not sufficient to manage the foreseeable congestion in a sustainable and cost-optimised manner will the capital-intensive solution of network investments be used.

The second problem addressed by an independent system operator is the inefficiency of system operation organised at national level in an integrated European market. This impedes transparency and efficient management of cross-border and internal congestions (see Locational Marginal Pricing factsheet). A European ISO operating transmission grids with location marginal prices hence co-optimising markets and grid constraints can maximise system benefits. Enhancing the mandate of regional coordination centres from the current limited mandates to system operation by midterm is desirable. The development and operation of common offshore wind resources would be a prime regulatory sandbox to test the ISO concept in Europe (see Coordinated Offshore Build factsheet).

Finally, in a world of national ISOs, cooperation based on transparent rules and regulation is needed. This applies to horizontal cooperation at the transmission network level as well as vertical cooperation between transmission and distribution systems. Whereas ISOs today govern transmission grids only, independent operation at distribution level is becoming increasingly relevant since distribution grids require the biggest upgrading to facilitate electrification, and limited unbundlingunbundling Breaking down vertically integrated monopolies into separate legal entities (legal unbundling), or prohibiting ownership within the same corporate group (legal unbunbundling), to avoid conflicts of interest. For example, under the Electricity Directive, for power generation and retail supply are legally unbundled from distribution and ownership unbundled from transmission, subject to limited exceptions. and lower level of transparency present barriers.