Decision on NESO’s performance incentives framework for BP3

What changed

Ofgem confirmed the performance incentives framework that governs NESO during BP3, the Business Plan cycle running 1 April 2025 to 31 March 2026. The decisions are largely consistent with the August 2024 consultation and cover four areas: performance incentives, the business plan and its assessment, cost regulation, and stakeholder and external scrutiny. BP3 is the second phase of the phased rollout of NESO's new regulatory framework (Day 1 having been 1 October 2024) and the final cycle of the RIIO-2 price control.

The framework is transitional. It bridges the period between NESO's vesting as a public corporation and the design of an enduring regulatory regime. Ofgem has signalled it will consult on a longer-term approach before RIIO-2 ends on 31 March 2026, meaning BP3 is the last business plan cycle before the regulatory architecture is rewritten.

What this means in practice

The choice of metrics determines what NESO optimises for. NESO sits at the centre of every consequential bottleneck in the GB electricity system: the connections queue, network planning, system operation, and the design of future market arrangements. The incentive structure decides whether NESO's energy goes into clearing the queue, holding down balancing costs, improving the quality of strategic planning advice, or being seen to consult well. These are not equivalent. A framework weighted toward stakeholder engagement and process metrics produces a different NESO than one weighted toward throughput (connections offered, capacity released, MWs energised) or system-cost minimisation.

For developers waiting on connections, the operative question is whether BP3 puts a meaningful financial reward on connection-process speed and a meaningful penalty on delay. Without that, the queue reform programme depends on goodwill rather than incentive. NESO is a monopoly performing a function (allocating scarce grid capacity) that no price mechanism currently disciplines. The performance incentive framework is the only substitute for that missing price signal. If it does not bite on throughput, nothing else in the regulatory stack does either.

For network companies, the relevant pieces are the cost-regulation and business-plan-assessment elements. NESO sets the planning assumptions, scenarios, and need cases that TOs and DNOs build against. Incentives that reward planning quality (defined how?) determine whether NESO's outputs are conservative, optimistic, or calibrated. The same applies to ESO-style functions now sitting inside NESO: balancing services procurement, control room operation, and the costs that flow through to consumers via BSUoS.

For consumers, the incentive payments themselves are small relative to BSUoS and network charges, but the behavioural effects are large. A NESO that is paid to minimise balancing costs behaves differently from a NESO that is paid to run good stakeholder workshops. The decision document does not appear to publish a headline figure for the maximum reward or penalty exposure under BP3; that detail sits in the [289KB PDF](https://www.ofgem.gov.uk) and would need to be read against BP2 to see whether the at-risk amount has grown, shrunk, or shifted between categories.

Verified from this page: the four decision areas, the BP3 dates (1 April 2025 to 31 March 2026), the RIIO-2 end date (31 March 2026), and the phased rollout. Inferred: the specific weightings, metric definitions, and at-risk amounts are in the linked PDF rather than in the summary above.

What happens next

Three things to watch.

First, the longer-term consultation. Ofgem says it will consult on the enduring regulatory framework "at an appropriate later point" before 31 March 2026. That consultation is the one that matters. BP3 is a one-year transitional cycle; the post-RIIO-2 framework will set NESO's incentives for the years in which queue reform, strategic transmission planning, and the connections reform programme either deliver or do not. The May 2025 timing trailed in the consultation context suggests the enduring framework consultation is the next material decision point.

Second, the interaction with the Business Plan Guidance and the BP3 plan itself. The incentives framework is the scoring rubric; the business plan is what gets scored. NESO will publish its BP3 plan against this rubric, and Ofgem's assessment of that plan will reveal how the metrics translate into operational targets. Expect the plan to surface in early 2025 ahead of the 1 April start.

Third, alignment with the connections reform timetable. NESO is running the TMO4+ reordering and Gate 2 process on a tight schedule. If the BP3 incentives do not align with the connections reform milestones (queue clearance volumes, Gate 2 decisions issued, capacity offered into the strategic network), there is a coordination problem inside the regulatory framework itself: NESO incentivised on one set of metrics while delivering on another.

The enduring framework consultation is where the structural questions get answered. BP3 is the holding pattern.