The Future of Offshore Networks – UK Government announces review

On 15 July 2020 Energy Minister Kwasi Kwarteng announced a review into the existing GB offshore transmission regime (the “Review”) to address the barriers the current single radial connection approach presents to the further significant deployment of offshore wind. The Review suggests that greater coordination between industry participants, in particular between electricity networks, offshore wind projects and interconnectors, may be possible from 2025 onwards.

The Review will be led by the Department for Business, Energy & Industrial Strategy (“BEIS”) with support from a range of government and industry bodies and an industry expert group, as well as updates and roundtables with external stakeholders.

Background

The current approach to designing and building offshore transmission was developed when offshore wind was an emerging sector in GB. Whilst the existing regime provides for an “OFTO Build” option, the “Generator Build” option for offshore wind transmission infrastructure has been used exclusively. The current regime has resulted in single “point to point” connections being built by offshore wind developers, which are ultimately transferred to an independent offshore transmission owner via the Ofgem regulated process.

The Review acknowledges that, in the context of increasingly ambitious offshore wind targets in particular, this may no longer be the most efficient approach. Ofgem, the industry regulator, had previously indicated its ambition for a more coordinated approach in its Decarbonisation Action Plan published in February 2020, with a specific focus on the cost to the consumer of the current approach.

Issues arising from the current approach include:

• No ability to take advantage of potential cost efficiencies and optimisation for offshore connections, generation projects and onshore networks e.g. avoiding the need for reinforcement, resulting in higher costs to the consumer;
• Constrained onshore networks resulting in potentially unnecessary reinforcement to facilitate “point to point” connections and not providing the opportunity of offshore network options for the transmission of electricity across GB and to neighbouring jurisdictions;
• A more significant impact on local coastal communities where onshore connection infrastructure is required to allow each offshore connection to be made; and
• Environmental issues resulting from the lack of physical space in congested areas where a number of offshore wind farm connections make landfall.

Scope of the Review

The Review launched by the Energy Minister will bring together the key stakeholders to consider all aspects of the existing regime. The terms of reference for the Review set out that:

• In the medium term (i.e. projects connecting after 2025), the Review aims to:
  • “identify and implement changes to the existing regime to facilitate coordination in the short-medium term;
  • assess the feasibility and costs/benefits of centrally delivered, enabling infrastructure to facilitate the connection of increased levels of offshore wind by 2030; and
  • explore early opportunities for coordination through pathfinder projects, considering regulatory flexibility to allow developers to test innovative approaches.”
• In the long term (i.e. projects connecting after 2030), the Review aims to:
  • “conduct a holistic review of the current offshore transmission regime and design and implement a new enduring regime that enables and incentivises coordination while seeking to minimise environmental, social, and economic costs; and
  • consider the role of multi-purpose hybrid interconnectors in meeting net zero through combining offshore wind connections with links to neighbouring markets and how the enduring offshore transmission regime can support the delivery of such projects.”

Barriers to greater coordination

Offshore wind is expected to play an important role in delivering net-zero emissions by 2050 and as such it is timely that the government have acknowledged that the framework for delivering offshore transmission connections should be reviewed.

The Review will require the government to consider challenges facing the industry. These include:

• How coordination between the different stakeholders will be facilitated and even incentivised. Is a central coordinator desirable and who should take on such a role?
• The degree of anticipatory investment by developers and network owners that will be permitted and how this will be regulated in terms of cost recovery and efficiency.
• Competition concerns arising from a coordinated approach between generators, interconnector developers and networks.
• Differing regulatory regimes between GB and other jurisdictions. For example, the OFTO concept has not been adopted on the Continent, whilst the licensing and regulatory arrangements applicable to interconnectors varies depending on the relevant jurisdictions involved.
• Differing revenue regimes between offshore wind farms (supported by CfDs or merchant), OFTOs (supported by the revenue via the OFTO licence) and interconnectors (supported by the cap and floor model), each of which have different requirements, timings etc.
• The physical and other interfaces (such as shared consents) between different offshore wind farms themselves, OFTOs, networks and interconnectors. Currently, complex contractual arrangements are put in place to manage such risks and potential liabilities.
• Given the capital requirements of such large infrastructure projects, debt financing is increasingly required and therefore the overall regime must be bankable from a lender perspective.
• Technology challenges of allowing for multi-point connection solutions with different technical requirements, particularly offshore.

There is no one size fits all approach for the future of offshore networks. As illustrated above, there are a range of different regulatory arrangements, contractual structures, designs and technologies that could be considered. The scope of the Review indicates that the government is thinking beyond cables directly between offshore wind farms to future developments such as the incorporation of interconnectors linking two or more jurisdictions through to other options such as offshore energy ‘islands’. Designing a regime that provides sufficient certainty to offshore wind developers from 2025 onwards, but which also enables future innovations, will be a key challenge for the Review.

Next Steps

An update of the Review will be published by the end of the year with a view to providing clarity for an enduring approach in 2021. Policy recommendations and proposed changes to the existing regime will be delivered through the usual consultation process.