Regulatory finance
NESO has two licences, an Electricity System Operator Licence and a Gas System Planner Licence which establish the total revenue that may be collected relating to recovery of our internal costs.
Here, you can find out about NESO’s financial framework and the relevant licence obligations.
The licences establish requirements on us to:
- publish the Financial Model that calculates the total revenue to be collected for a Regulatory Year.
- publish the Total Cost Allocation Methodology (TCAM).
NESO is a publicly owned organisation with its own board and independent directors, set up to have operational independence from government, the regulator, and all industry interests.
With effect from 1 October 2024, the Department for Energy Security and Net Zero (DESNZ) acquired 100% of the share capital of National Grid Electricity System Operator Ltd. With the Secretary of State holding the shares and retaining ultimate responsibility, HM Government (HMG) ultimately owns NESO, but has no operational control.
How is the Company funded?
NESO operates a not-for-profit model, is licensed and regulated by the Office of Gas and Electricity Markets (Ofgem) and is funded through electricity and gas industry charges.
The regulatory model to recover NESO internal expenditure operates on a ‘100% fast money’ approach. This means NESO can seek to recover its full forecast spend within the financial year, with subsequent true ups to account for differences between revenue collected from industry parties and actual spend.
NESO, as a public corporation, is not permitted to enter into commercial overdraft arrangements. Therefore, HMG provides NESO with a working capital facility (WCF) to enable it to manage temporary cashflow requirements, for when its expenditure is made sooner than it can be recovered through industry charges.
NESO does not need or have access to borrowing from the private sector and therefore it is not required to hold a credit rating.
Is HMG obliged to provide funding to NESO?
Under section 176 of the Energy Act 2023, the Secretary of State may provide financial assistance to NESO (as the designated independent system operator and planner). This may include grants, loans, guarantees or indemnities or the acquisition of shares or any other interest in, or securities of, a body corporate. Financial assistance may be provided subject to such conditions as the Secretary of State considers appropriate.
As ultimate shareholder does HMG receive a return from NESO?
HMG does not receive an enduring financial return nor is it exposed to downside losses (including from incentives, disallowance, enforcement penalties, or damages imposed by third parties).
On inception NESO carried over a regulatory asset value (RAV) from NGESO. The RAV represents capitalised spending that NGESO had incurred on behalf of consumers, but which it had not yet recovered through charges. This RAV will be recovered through charges over a seven-year period, aligned with the NGESO regulatory depreciation period and will be returned to HMG.
The cost of providing capital to support the outstanding balance of the RAV during its depreciation period will be borne by HMG. A return will be provided to HMG for the cost of supporting NESO’s RAV while it depreciates. HMG has adopted the Social Time Preference Rate to calculate this return.
Where can I find out more?
Further details of design considerations, decisions, and details of NESO’s financial handbooks and models are publicly available on Ofgem’s website:
Consultation on the policy direction for the Future System Operator’s regulatory framework | Ofgem
National Energy System Operator Financial Handbook decision | Ofgem
The Financial Model contains NESO’s detailed calculations for its allowed revenue terms in line with the requirements in condition F1 (Expenditure and allowed revenue) of both the Electricity System Operator Licence and Gas System Planner Licence, and the Financial Handbook.
This page contains the latest and historical copies of the NESO Financial Model (together with the supporting Legacy Model if required) where the output has been used to set charges in line with the Financial Handbook.
NESO allowed revenue has four components. Three of these components are determined by the models:
- INT (internal costs) - the operating cost of the business applicable to electricity activities, recovered via BSUoS charges
- RTN (return) - the amount included in charges to reimburse DESNZ for an amount paid in purchasing the company, recovered via BSUoS charges
- ARGSP (gas costs) - the operating cost of the business applicable to gas activities, recovered via gas charges levied by National Gas Transmission
The values of these three components apply to any charges set until they are superseded by the publication of new models.
The fourth component, EXT (external costs) - third party charges incurred in balancing the system - is included in BSUoS tariffs based on the latest forecast available at the time the tariff is set. Although not determined by the Financial Model, the level of costs incurred for EXT is populated into the model once actual costs are known.
The Notice Letter for each year confirms the values of the three components determined by the models.
The TCAM sets out the principles and procedures for how we allocate our total expenditure as either Electricity Licence Expenditure or Gas Licence Expenditure, to ensure there is no double recovery of expenditure through either Balancing Services Charges or from National Gas plc respectively.