Generally each year we develop System Operator (SO) incentive schemes that are designed to encourage National Grid Electricity Transmission (NGET) and National Grid Gas (NGG) to operate the electricity and gas transmission system respectively in an efficient and economic manner, and to effectively manage the costs of operating each system.
This is done through extensive consultation with the SO and other industry parties, in order to develop a fair and efficient set of incentives. The SO incentive schemes establish cost targets that NGET and NGG are expected to achieve in performing their SO roles. If actual costs are below the relevant target, NGET and NGG are permitted to receive an incentive payment, and similarly if actual costs exceed the target, each faces an incentive penalty.
The size of this payment or penalty is determined by the relevant sharing factors that are agreed as part of the overall incentive schemes. The sharing factors are in place to strike a fair balance between the risks and rewards faced by the SOs and customers. The maximum payment an SO can receive under the incentive scheme framework is subject to an upper cap, and similarly the maximum penalty it can be liable for is bounded by a lower collar.