Update on Competition in Onshore Electricity Transmission

United Kingdom

New Developments

On Thursday, 4 August 2016, Ofgem published a further consultation on competition in electricity transmission. The new consultation sets out further detail on how Ofgem proposes to appoint Competitively Appointed Transmission Owners (CATOs) and the regulated revenue, incentives and obligations for CATOs. The regulated revenue and incentives will be particularly important to the bankability of the CATOs and should be carefully considered.

The focus of this consultation is on the late CATO build tender model i.e. the tender will start 4 – 5 years before the assets are needed, being the point where there is certainty as to what transmission assets are required, as well as to deliverability. The early CATO build tender model will be consulted on at a later point.

Relevant background

Prior to the current consultation, developments for competition in onshore electricity transmission included:

a. first introduction of competitive tendering for onshore electricity transmission as part of the RIIO-T1 price control for the period 2013 – 2021. Ofgem developed a Strategic Wider Works (SWW) incentive applicable for onshore electricity transmission owners for dealing with large and uncertain projects and set out that projects under the SWW regime could be subject to competitive tendering.

b. a key decision by Ofgem in March 2015, as part of the Integrated Transmission Planning and Regulation (ITPR) project, to extend the use of competitive tendering to onshore electricity assets that are new and separable (i.e. brand new overhead lines, cables or substations, or a complete replacement of these) and high value (£100m or above).

c. a consultation in October 2015 on proposed arrangements for competitive onshore tendering, including as to the types of projects, the tender process and the basic revenue and incentive packages.

d. Ofgem’s published decision in May 2016 on certain policy areas, with a focus on the criteria and process for identifying when a competitive tender can be run, the pre-tender arrangements and proposals for conflict mitigations measures.

Current Consultation: Proposed late CATO build tender model

Ofgem has proposed the following core elements:

a. Enhanced pre-qualification: c. 3 months

b. Bidders’ outline proposals for the project: c. 3 months

c. ITT: 9 -12 months

d. Preferred Bidder Stage: 3 – 6 months.

This process is generally in line with the offshore regime and the processes in place for competitive tendering in the OFTO regime. It also appears to reflect some lessons learned from the OFTO regime, with the outline proposals stage closely reflecting the Qualification to Tender stage in earlier OFTO tender rounds. The overall process is proposed to take between 18 – 24 months. Ofgem has made clear that the ITT stage will not start until planning consent is in place, in order to manage any risk of delay.

All preliminary works, including planning consents and land rights are proposed to transfer to the CATO on appointment.

There have been significant concerns raised by industry in relation to the transferability of planning consents and land rights and further work is being done by Ofgem on this. In relation to the transfer of preliminary works, this is proposed to be by asset sale or share sale.

CATO obligations

Ofgem proposes that CATOs will be subject to the same basis regulatory framework as all other transmission owners. This means that a CATO will hold an electricity transmission licence, adhere to industry codes and standards and potentially enter into additional commercial agreements with third parties.

Ofgem still expects the CATOs to follow a similar approach to EU Third Package certification as adopted for OFTOs.

What incentives will CATOs have?

Ofgem proposes the following baseline financial incentives:

a. a delivery incentive payable only on completion of construction;

b. an availability incentive to ensure CATOs’ assets are available when they are needed;

c. a penalty for failing to fulfil obligations to enable new connections to the transmission network;

d. financial and reputational incentives to promote good stakeholder and environmental performance;

e. an obligation to fund all necessary new asset investment during the CATO revenue term, capped at £100m for each tranche of new investment; and

f. CATO reporting on asset condition at regular intervals.

Regulation period

Ofgem proposes a 25 year revenue stream, however this could be shorter or longer depending on the circumstances of a particular project.

Ofgem further proposes that CATOs should continue to own and operate their assets when the revenue term ends, rather than re-tendering or transferring their assets to an incumbent transmission owner.

Next Steps

Responses to the consultation must be received by 29 September 2016. Ofgem has stated that it intends to have the regime in place and be ready to run the first tender in mid-to-late 2017, with a consultation on further details of the regime expected late 2016 or early 2017.