Delivering 40GW of offshore wind: Offshore Transmission Network Review Consultation - Creating an enduring Multi-Purpose Interconnector Framework

Introduction

On 14 July 2021, Ofgem published a consultation (the “Consultation”), the first in a series of consultations that will be launched as part of the Offshore Transmission Network Review (the “OTNR”), which aims to bring about greater co-ordination in the design and delivery of offshore energy network infrastructure (our commentary on the OTNR can be found here), in support of the UK government’s wider ambitions to procure 40GW of offshore wind capacity by 2030, and reach net-zero carbon emissions by 2050.

The Consultation covers three key components of the OTNR as follows:

1. Early opportunities –the objective of this area is to identify and facilitate opportunities for increased coordination in the near term, with a focus on “in-flight” projects;
2. Pathway to 2030 – the objective of this workstream is to drive coordination of offshore projects that are progressing through the current ScotWind and Crown Estate Leasing Round 4 and will connect before 2030;
3. Multi-purpose interconnectors (“MPIs”) – the objective here is to make tactical changes to facilitate early opportunity MPIs and develop an enduring MPI regime for 2030 onwards.

This article is the last in a series of three articles looking at the above areas of consultation and therefore focuses on MPIs.

The MPI Workstream

The objective of the OTNR’s MPI workstream is to explore amendments to the current regulatory and legal framework to facilitate MPIs. Ofgem is leading on incremental changes to the existing framework to allow for the use of MPIs. BEIS is leading on investigating the need for and benefit of legislative change, with a view to potentially creating an enduring MPI regime via changes and/or updates to the Electricity Act 1989. While the workstreams differ, Ofgem has flagged to stakeholders that these workstreams are interconnected and will inform each other.

The Consultation aims to support and build on the conclusions of the Integrated Transmission Planning and Regulation (“ITPR”) project rather than replacing or duplicating them. The ITPR project was set up by Ofgem in 2012 and reviewed how regulatory barriers for multi-purpose projects (“MPP” – an MPI would count) could be addressed. The conclusions focussed on increasing flexibility while maintaining continuity in the regulatory treatment of an existing transmission asset if it evolves into an MPP. Ofgem has sought to reflect these conclusions in the Consultation as well as through the ongoing Interconnector Policy Review.

The Consultation does not set out firm proposals on policy developments, rather it is an invitation to hear from developers in relation to how the component assets of an MPI are expected to be used and their views on the feasibility and risk of the two main concepts for MPI development through the OTNR.

The MPI Models

The Consultation sets out the two main concepts for MPI development as follows:

1. The interconnector-led model, where the point-to-point interconnector cable includes direct connections with GB offshore wind farm(s) which use the interconnector as their connection to market; and
2. The OFTO-led model, where a radial connection to shore from a GB offshore wind farm is combined with a further direct connection between the GB offshore wind farm and the electricity network or offshore wind farm of neighbouring country or territory.

An illustrative diagram of the models taken from the consultation is set out below:

Key areas on which view are sought

Ownership licensing and classification of MPIs

The Electricity Act currently has no provision for the licensing of a specific MPI activity and therefore, in order to be able to license an MPI within the current framework, Ofgem would need to consider how to classify the individual components of an MPI.

In terms of ownership, there is a statutory prohibition on the same person holding an interconnector licence and an OFTO or generation licence. “Ownership unbundling” requirements also apply to the holders of interconnector and OFTO licences. These restrictions mean that the same person could not own and operate all component parts of an MPI. Ofgem has requested views on the possible move away from this model and possible changes to primary legislation.

A key challenge with the classification of MPIs (and their components parts) is how to determine the primary use of the individual assets to grant the appropriate licence and how to define and licence the activity undertaken by the asset that conveys electricity from the offshore substation to the GB shore. Ofgem is therefore seeking views on how developers envisage the usage of the line to shore varying across the two MPI models suggested and whether factors, including construction sequence, would influence which model is better for an MPI project.

Ofgem is also seeking views on whether there could be merit in certain exemptions e.g., an exemption for a limited period for one asset of an MPI while the other is under construction.

Suitability of the cap and floor for MPIs

The suitability for MPIs of Ofgem’s “cap-and-floor” model for interconnectors is being considered as part of Ofgem’s Interconnector Policy Review. Ofgem’s decision and policy recommendations from the latter are expected in Autumn 2021, which aligns with when Ofgem expects to publish its next policy consultation on the OTNR. Further detail on this workstream and Ofgem’s thinking will therefore be available later in the year.

Priority dispatch and curtailment and third party access requirements

Currently, new renewable generators cannot benefit from priority dispatch and can only be curtailed as a last resort. Therefore, the wind generation aspect of an MPI would not benefit from priority market access but could not be extensively or regularly curtailed. Ofgem is interested in stakeholder views on how these requirements will affect model choice for MPIs connecting the UK and EU member states (as well as any wider issues created).

Third-party access is also a key issue. How access is given to offshore wind and cross-zonal trade in different models may have implications for satisfying third-party access requirements and the possible need for exemptions. Ofgem wants to hear views on how these access requirements and the availability of exemptions will affect model choice.

Margin available for cross-zonal trade

Currently, for projects linked to EU Member States the volume of interconnection capacity made available to market participants must not be limited, with a minimum level of 70% of capacity available for cross-zonal trade to demonstrate this provision has been met. This provision has not been retained in the UK but there is a similar, less prescriptive, requirement under the Trade and Cooperation Agreement agreed by the UK and EU. Ofgem is looking for views on how these requirements will affect model choice and any wider issues created.

Cross border market arrangements

Ofgem recognises that the development of cross-border trading arrangements over interconnectors will have implications for MPIs. Pursuant to the Trade and Cooperation Agreement, EU and UK TSOs have been developing the concept of multi-region loose volume coupling (“MRLVC”). They have recognised that the development of MPIs will require trading arrangements supporting efficient energy pricing and capacity utilisation and that the design and overall performance of MRLVC will be critical to the development of MPIs. As the next stage TSOs will be developing technical procedures further which will be submitted to regulators and the Specialised Committee on Energy (established under the Trade and Cooperation Agreement) in November 2021. The Consultation seeks views on how the proposals would impact MPI models.

Comment and Next Steps

The Consultation is an initial exploratory consultation and links in with a number of other workstreams, including Ofgem’s Interconnector Policy Review, the cross-border trading arrangements being developed between the UK and the EU, and the EU’s own developing strategy in this area, with the European Commission having published its Offshore Renewable Energy Strategy in November 2020.

Ofgem intends to signal policy options later in the year and there will be further consultations on the implementation of changes to the framework including undertaking Impact Assessments as required. As has already been mentioned the ICPR is expected to be published in Autumn 2021.

BEIS will also be publishing a consultation on a future enduring regime for projects connecting beyond 2030, which will also consider MPIs, later in 2021 as well as exploring whether legislative change is necessary or beneficial.

If you have any questions on the Consultation, or OTNR more broadly, please get in touch with any of the authors of this article, or your usual CMS contact.