On 14 July 2021, Ofgem published the first consultation (the “Consultation”) in a series that will be launched as part of the Offshore Transmission Network Review (the “OTNR”). The OTNR aims to bring about greater co-ordination in the design and delivery of offshore energy network infrastructure (our commentary on the launch of 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:
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” offshore wind projects;
Pathway to 2030 – the objective of this workstream is to drive coordination of offshore projects that will connect before 2030, including projects that were successful in the ScotWind and Crown Estate Round 4 leasing rounds; and
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 second in a series of three articles looking at the above areas of consultation. We set out in further detail below Ofgem’s proposed delivery models under its “Pathway to 2030” framework.
Proposed delivery models under the “Pathway to 2030” framework
The Pathway to 2030 workstream covers offshore projects that aim to be operational by 2030, but which are not currently “in-flight”. Under this workstream, Ofgem are considering moving away substantially from the existing model for design and delivery of offshore transmission and have focused work in this regard on three areas:
Developing a generation map showing where offshore wind projects (in particular projects from Round 4 and ScotWind) are expected to be located and when they are expected to connect to the system;
Producing a design for network infrastructure which is based on the generation map and other relevant information – this design work may also include work detailing where changes might be required to industry codes; and
Considering options for the efficient delivery of the coordinated infrastructure required to connect offshore generation. This workstream comprise three elements:
a holistic network design (“HND”), proposed to be delivered by ESO
detailed designs (“DNDs”) for the offshore network assets. The responsibility for the offshore DND will depend on the delivery model (set out below) that will be employed; and
DNDs for the onshore assets, which will be delivered by the electricity network transmission owners (“TOs”) under their existing price controls and the DND for offshore network assets.
The Consultation specifically seeks stakeholder views on the ‘network design’ and ‘delivery of offshore’ elements as well as the delivery of HND and offshore DND.
Where the HND indicates that a ‘traditional’ radial connection would be the most economic and efficient solution, the Consultation proposes continuing with the existing OFTO regime. However, where the HND indicates a non-radial connection, the Consultation sets out six potential models for delivery of offshore network infrastructure:
Option 1: TO to build and operate
The TO would undertake the offshore DND, develop, construct and operate all shared connection infrastructure in their licence area. Infrastructure and delivery can be co-ordinated easily as the same parties will be responsible for the whole chain of development potentially increasing the speed at which the connection infrastructure could be taken from design and delivery. However, this approach would be a significant move away from the existing independent OFTO regime and would require substantial further legislative reform, including consideration of how these assets are categorised and how they would be licensed for operation.
Option 2: TO to build and OFTO to operate
The TO undertakes the offshore DND, develops and constructs the shared connection infrastructure, but an OFTO would acquire the assets for the operation phase. At or near asset completion, a tender process would be run to transfer ownership of the assets built by the TO to the OFTO. As it stands, this would be a tender process. If this model is adopted, consideration will need to be given to the appropriate transfer value of any offshore transmission assets in a similar way to the assessment of the transfer value in the current generator-build OFTO model.
As Options 1 and 2 would involve amendments to the incumbent TOs’ licences and funding arrangements, this would impact the timing of delivery of these models.
Option 3: TO to design and OFTO to build and operate
The ESO would undertake the HND, the TO would undertake the detailed design and consent work on the shared infrastructure with an OFTO being appointed to construct and operate the infrastructure. This model has many similarities with the ‘Late OFTO Build’ model under the current regime, however this model has not been pursued by offshore generators for any project to date.
Option 4: Early OFTO competition
The TO or ESO would carry out the offshore DND for any shared infrastructure before a competitive tender process to appoint an OFTO to consent, build and operate the transmission assets. The ESO would however need to develop competence in the detailed technical design of network assets.
Option 5: Very Early OFTO Competition
A competitive tender process for the appointment of an OFTO would be implemented after the HND has been completed, with the appointed OFTO responsible for undertaking the DND, consenting, financing, construction, and operation of infrastructure. This option brings maximum scope for competition including a greater role for innovation at the detailed design phase.
Options 4 and 5 are similar to the early CATO model. However, the existing regulatory framework does not allow for a tender process to be held this early in a project’s development. Significant work would therefore be required to apply these options within the offshore transmission frameworks.
Option 6: Developer to design and build, OFTO to operate
This is equivalent to the generator-build OFTO option currently used in the GB offshore wind sector. For shared infrastructure, HND would be carried out by the ESO with the offshore generator undertaking DND, consenting and construction of shared infrastructure and a competitive tender process. This is the simplest option in terms of implementation, however there is a perception that this option provides less scope for early-stage innovation or to exert competitive pressure.
All of the above approaches will require changes to the regulatory regime (with option 6 being the closest to the current system) as well as accounting for the competence and incentives of the party designing and building the assets. The Consultation states that the time likely to be required to implement changes to regulatory frameworks will be a factor informing which delivery model is selected as the preferred model.
The responsibilities in each of the proposed delivery models are summarised visually as follows:
Following feedback on the above models, Ofgem will issue its minded-to decision on the delivery model before the end of the year and will then run a further consultation on the detailed implementation of the preferred delivery model.
Charging arrangements and code changes
The Consultation notes that subject to the complexity of the network design outputs, this workstream might require fundamental changes to existing charging arrangements given that the Pathway to 2030 may result in offshore transmission infrastructure that is increasingly shared, resembling the onshore network. While this is likely to be an area of further consultation, Ofgem have set out some high level principles to be considered in this regard:
Charging arrangements should be reviewed to enable the locational differences in charges for offshore users to better reflect the differences in costs that different offshore users confer on the system;
Network users should face cost-reflective charges for network access; and
Charging arrangements should ensure that charge avoidance isn’t enabled or incentivised.
In addition, wider changes to the industry codes are also anticipated as part of this workstream in order to support the implementation of network design and delivery options. The Consultation notes that the identification of changes to codes for the Pathway to 2030 workstream will take place in parallel to the development of the HND.
The existing approach to the connection of offshore wind has had to evolve alongside the UK’s current ambitions and targets for offshore wind. Some stakeholders have expressed concerns as to whether the UK, quite simply, has enough space to accommodate all the infrastructure required to deliver on its ambitions. In particular, a key challenge in respect of offshore transmission networks is managing the environmental and physical impacts of existing offshore radial point-to-point connections at their landfall, which are only anticipated to become further congested with the expected scale up in offshore transmission infrastructure being deployed to support the construction of new offshore wind farms.
On the other hand, while it is recognised that greater coordination and collaboration could have a range of benefits, the implementation of the Pathway to 2030 delivery models needs to be carefully managed to avoid it becoming a cause for concern for the industry. It is anticipated that NGESO will publish its HND by the end of January 2022 with implementation of the Pathway to 2030 reforms taking place during 2022. However, as the Consultation recognises, depending on the delivery model selected, substantial amendments to legislation and industry codes could be required. As a result, the process will need to think carefully about how it can proceed without creating delay or hiatus impacts on projects looking to connect in the mid to late 2020s. To keep the projects on track will require such projects to progress consenting and project design in parallel over the next 18 months or so.
Further, if a delivery model utilising a competitive tender is selected, we have seen with the current OFTO tender processes that the timing of such tenders can slip for reasons outside of the control of the offshore developer. Any timing risks in the project development cycle are problematic for developers, but even more so in the current environment as development programmes are compressed to mitigate the substantial costs of any delay.
We also note that the majority of the delivery model options under consideration would require the generator to be reliant on another party to deliver transmission assets in a timely and effective manner, creating new interfaces that would need to be considered from (among other things) a risk allocation perspective. Whilst mechanisms for mitigating this risk e.g. appropriate penalties for late delivery will be consulted upon, this structure has not yet been utilised in the UK offshore wind market, and we anticipate will be scrutinised closely as the first tranche of these projects look to achieve financial close.
The deadline for responses to the Consultation is 8 September 2021. In addition to the previous industry consultation, Ofgem intends to hold structured engagement with stakeholders throughout the course of the consultation window and beyond.
In respect of the Pathway to 2030 workstream, further policy consultation is expected in December 2021 – January 2022 with decisions and implementing consultations issued in May/June 2022. Changes to facilitate the Pathways to 2030 delivery model are expected to be in place by July-September 2022.