A Broker’s Guide to the Energy Supply Chain and the (N)ESO

Gas supply: from beach to meter 

The gas supply network works in a similar way, albeit with much of the supply being imported from other countries (predominantly Norway (58%) and the US (26%)) via tanker or transmission lines in the first instance.  

From there, the gas mains network of pipes carries pressurised gas from the transmission system to local distribution points, where smaller distribution networks (owned and operated by gas network operators) carries the supply through to its final destination in our homes and businesses. 

Gas Transmission and Distribution Operators 

Similarly to electricity, gas supply is produced and distributed by a number of licensed operators. National Gas owns and operates the National Transmission System (NTS), a network of pipes that connect the national system with local Gas Distribution Networks (GDNs) and gas-fired powered stations. 

As with the electricity, the gas industry was privatised (as part of the 1986 Gas Act), and following a further series of mergers, acquisitions and splits, the National Grid is now responsible for the national gas distribution system as the Transmission Operator, with the local gas distribution network covered by 4 businesses that were first formed in 2005, including SGN, Wales and West Utilities, and Cadent.   

Manx Utilities (Isle of Man), and Gas Networks Ireland (Republic of Ireland) act as both Gas Transmission and Operators in their respective areas. 

When new connections are created, consumers and businesses can choose an Independent Gas Transporter (IGT) instead, but the IGT must still connect their gas distribution to a GDN. 

The use of distribution regions means that GDNs operate as monopolies – and are therefore subject to price control regulations by Ofgem, which fixes prices for 8 years. GDNs are currently operating under a price control called RIIO (revenues, incentives, innovations, outputs) which aims to ensure delivery of a sustainable energy network that offers value for money.  

Managing the UK’s energy supply 

Until recently, the UK’s electricity and gas systems have been managed by two separate entities: the ESO (Electricity System Operator), and the Gas Systems Planner (GSP). 

However, recent years have seen a change in the way energy is managed, with the electricity system operator (ESO) made fully independent from the transmission network, and the separation of key gas network planning functions from the gas transmission owner; merging the two under a new independent system operator known as the Future System Operator (FSO). 

“As a trusted and expert body at the centre of the gas and electricity systems, the FSO will play an important role in coordinating and ensuring strategic planning across the sector.”
– Ofgem

The National Energy System Operator (NESO) was established in the 2023 Energy Act to accelerate the country’s energy transition through a ‘whole system’ approach, and officially took over from the National Grid as the ESO on 1st October 2024.   

National Energy System Operator (NESO): The UK’s new Energy System Operator 

In this capacity, the new National Energy System Operator (NESO) is now responsible for ensuring there is a reliable supply of power to the homes and businesses that need it. Something that is becoming increasingly challenging as the UK nears its legally-binding 2050 emissions reduction targets and the onus to move to fully zero carbon energy supply intensifies.

Billed as “an expert, impartial body with responsibilities across both the electricity and gas systems, driving progress towards net zero while maintaining energy security and minimising costs for consumers”, the NESO’s primary focus and duties relate to: 

1. Net Zero – enabling the government to deliver its legally binding emissions targets 
2. Efficiency & Economy – Promoting efficient, coordinated and economical systems for electricity and gas 
3. Security of supply – Ensuring security of supply for current and future consumers of electricity and gasses 

It also has a leading role in coordinating and maintaining competitive energy markets and networks, understanding what changes mean for consumers, understanding linkages across systems, and creating an environment that enables others to help solve energy challenges – something that compliments GB Energy as part of the UK’s push to become a zero carbon, “clean energy superpower”. 

Funding for the NESO will come entirely from consumers, with all costs recovered through a method known as ‘fast money’, where all forecast costs are recovered through charges in the year NESO expects to incur them).   

What this means for the energy surcharges that businesses pay to fund the transmission/distribution system is not yet clear. However, Ofgem has staged that the NESO should operate under a not-for-profit regulatory model to prevent consumers from being disadvantaged by the system shift, with an objective of ‘cash neutrality’. 

Ensuring energy supply meets demand 

Managing the transmission and distribution networks are only half the battle. A balanced grid ensures power (electricity and gas) supply always meets demand, and NESO is now responsible for managing locational constraints on the whole system/both networks (gas and electric), across peaks and dips in demands. 

Energy consumption varies throughout the day due to factors like weather, time of day, and economic activity. Peaks in demand occur during periods of high usage, such as hot summer afternoons or cold winter mornings. 

• Supply management requires the use of advanced technologies, and grid operators can adjust power plant outputs and allocate resources strategically to match demand fluctuations
• Demand management requires balancing and optimising consumption, and utilities providers sometimes offer incentives to businesses for shifting energy-intensive tasks to off-peak hours.  

The integration of renewable energy, enhanced efficiency, and the use of advanced technologies are vital for a sustainable and reliable energy system. 

Balancing electricity supply and demand 

The Balancing Mechanism (BM) is the most important tool used by the NESO when it comes to maintaining the balance between electricity supply and demand in each half-hour trading period of every day.

Electricity cannot currently be stored at scale so largely needs to be generated at the time of demand. The BM enables flexible capacity, either by increasing generation or reducing consumption, minute by minute, second by second. 

A balanced grid comprises for key components:  

• Inertia – which helps maintain stability 
• Frequency – which ensures a consistent flow  
• Voltage – which regulates the level of power 
• Thermal – which manages heat generated 

It is a delicate and complex act, managed by a team of experts, but if you fancy trying your hand at it, NESO have developed a nice, interactive Balancing the Grid game to give you a feel for that it’s like trying to keep the grid stable in the face of a range of daily challenges. 

Balancing gas supply and demand 

As gas can be stored at scale (either as liquid or gas), it’s not quite so complex a task to keep the system balanced, as most of the time gas reserves can be called upon relatively quickly as/when needed.  

The residual balancing scheme incentivises National Gas to efficiently manage gas supply and demand, thereby minimising market disruption while ensuring network stability.   

Gas shippers (i.e. users of the National Transmission System) are required to manage their own supply and demand balances. If a balance is not achievable, National Gas, as the System Operator, can engage in market trades to rectify residual imbalances, with revenues (or costs) from these trades allocated to system users based on their throughput for the gas day of the trade. 

Transitioning to a Zero Carbon energy supply 

Great Britain is already the fastest decarbonising electricity system in the world.   

In 2023, coal was responsible for just 1% of electricity generation, down from 5.1% in 2018, and 39.6% in 2013 (NESO), with the vast majority of energy now generated through renewable sources such as nuclear, hydrogen, solar or wind. 

To put this into a bit more perspective, since 2020, we’ve doubled the amount of electricity generated from renewable sources (30% in March 2020 versus 60% in August 2024). 

Electrical demand has been rising gradually over recent decades, and global demand is forecast to grow a further 4% in 2024 (up from 2.5% in 2023).  

The role of electricity distribution networks is already evolving as increasing numbers of small generators connect to them, and consumer adoption of low-carbon technologies – such as electric vehicles, heat pumps, storage batteries and solar panels – gathers greater pace. 

Future Energy Scenarios 

Future Energy Scenarios (FES) 2024 outlines various credible strategies for decarbonising Great Britain’s energy system to meet the 2050 Net Zero target, emphasising the urgent need for infrastructure investment and policy support. 

Below is a quick summary of the key messages and actions, taken from the report. Other key points of note that brokers may be interested in include faster update of EV vehicles/charging, heat pump installation, and hydrogen becoming a key source of energy.

Maintaining supply through the transition to a decarbonised energy supply chain 

Balancing this increasing need for energy with supply from an increasingly diverse mix of renewable sources is a challenge that the NESO is responsible for tackling. 

As we move towards a relying on renewable and domestic energy sources and less on imported natural gas our existing (complex) energy system needs to become smarter and more flexible. 

Already, the system is adapting to utilise new sources of power generation – solar and wind farms, for example.  

And despite the move away from fossil fuels, gas is expected to remain an important part of our energy mix – with natural sources such as biogas (made from food waste and deliberately decomposing rubbish), and synthetic gas (made in a refinery from hydrogen and carbon emissions that are extracted from the air) making up for the reduction in natural gas imports.  

While renewable tech and investment is growing, we still can’t be fully reliant on it and balancing is something that businesses (and heavy industry in particular) are asked to support. 

Shortly before the NESO launched, the National Grid announced the first of ‘demand turn-up, generation turn-down’ contracts, as part of winter flexibility requirements which mean flexible assets need to be available to turn up demand or turn down generation within a day’s notice to help balance the grid. 

What changes in the supply chain mean for energy brokers (and their customers) 

So, to wrap things up, let’s take a quick look at what brokers can be doing now to help their customers prepare for – and adapt to – these changes to the way the energy system works, and potential regulatory change coming our way as 2050 edges ever closer. 

“Consumers, including households and industry, can offer flexibility in their demand for energy, and this will see them play a more active role in the future energy system. Flexibility in both supply and demand will become a fundamental part of energy system operation.”
– NESO

Carbon offsetting is already a practice that many businesses are engaging in as a way to hit their environmental pledges, but as part of the ongoing need to improve the energy efficiency of their operations and buildings, businesses are likely going to play an increasingly important role when it comes to the generation and storage of energy too. 

Although making use of large roof spaces/land to harness solar energy and wind power may be something that large manufacturing, warehousing and logistics organisations are best positioned to explore, there are an increasing number of options suitable for smaller high street businesses too.  

Shifting to half-hourly metering provides data that can help. Market-wide half hourly settlement comes into force next year and will provide further data to help demand forecasting and load balancing.  Businesses can save money by switching to half-hourly meters now.  

“With the upheaval of moving across to new systems, terminology and the need to roll out the right metering, its essential to start working with your clients to be prepared and get ahead of the competition now.”  
– Jurjen de Greeve, Stark

The business benefits of switching early include potentially lowering bills, identifying opportunities for increasing energy efficiency, and generally getting a head start on half-hourly data collection (which can speed up the energy pricing/renewals process). 

Investing in EV fleets and installing EV charging points is also an easy way to help reduce energy costs – and cut carbon emissions too (which is needed to hit Scope 1 and 2 emissions targets). 

Preparing for large-scale change 

Right now, the formation of a new whole system energy systems operator has little direct impact on Brokers (or their customers). However, the enhanced focus on decarbonisation and renewable energy is increasingly set to influence government policy as we near our NetZero obligations, and by extension the energy – and broader environmental targets – imposed on businesses.  

As a result of this, Broker’s may start to see customers lean on them as quasi-energy advisors, rather than merely a way to access better energy rates from suppliers.  And this means being able to provide information and source service providers to meet their wider environmental needs.  

Diversifying your brokerage portfolio 

You’re (hopefully) already aware that we have a number of trusted partnerships beyond gas and electric suppliers – including water and waste, metering, and new connections partners.  

We also have access to a range of technology and expertise to help brokers add value to their customers and deepen existing relationships.  

For example, we can help support customers in becoming more energy efficient by: 

• Monitoring energy usage with smart meters and energy analytics 
• Controlling energy consumption with smart thermostat upgrades or more comprehensive building energy management systems (BEMS) 
• Reducing energy usage by replacing outdated lighting with modern LED solutions 
• Generating energy by installing Solar PV, Biomass and Heat Pumps 

Brokers who offer these services have improved long-term customer retention and value. Plus, what’s good for your customers is good for the planet, so we’re here to make that as easy as possible.  

Find out more about our range of sustainability reporting and energy efficiency services or get in touch to speak with our team of in-house experts today.