Finally the introduction of CATO legislation? 

England and Wales

Background

On 3 August, BEIS published a consultation on Competition in Onshore Electricity Networks.  This follows the Government’s confirmation in December 2020 that it would bring forward legislation to allow competitive tenders for the building, ownership and operation of the onshore electricity networks.

Competitively Appointed Transmission Owners (CATOs) have been under consideration for a long time.  Indeed, CATOs were first considered and consulted on as part of Ofgem’s 2012 Integrated Transmission Planning and Regulation project and draft legislation was produced and taken to pre-legislative scrutiny in 2016, but a lack of parliamentary time meant it was not progressed.  

This Law-Now summarises the current consultation, including the key proposed changes to the draft framework of 2016.

A Competitive framework for Onshore Electricity Networks

The consultation highlights three key policy changes that are considered necessary to reflect changes in the electricity system since 2016, including Net Zero; changes in technology available to manage constraints and to reinforce the existing network; and changes – and proposed changes – to system governance. 

  1. Flexibility on the body appointed to run tenders: The Secretary of State would be able to appoint a body they deem suitable to run competitive tenders under the legislative framework, which may be someone other than Ofgem. If the appointed body is not Ofgem it is expected to work closely with Ofgem and share information relevant to Ofgem’s role.  Proposed factors for the Secretary of State to consider include the following, with the first three stated to be “essential” and the remainder stated to be “desirable”:

    1. The independence, actual / perceived bias and conflicts of interest of the potential body;

    2. Economies of scale offered e.g., through the centralisation of expertise and culture;

    3. Technical proficiency i.e., that the body has sufficient depth of experience, although BEIS notes that the body could potentially bring in external expertise;

    4. Experience in running tenders; and

    5. Any other relevant considerations e.g., whether there are external factors in energy network regulation that impact on the body’s ability to carry out the role; whether there are national security risks with the body; whether the Government needed to offer an indemnity to the body; if the body has a good record of embracing diversity and inclusion; and whether the body presents a reputational risk to Government.

BEIS considers that Ofgem and/or NGESO are currently the only two suitable bodies and that network companies assessing competitions for solutions to constraints on their own networks would not provide comparable levels of confidence, as some bidders may not recognise them as sufficiently independent to be free from bias.

  1. Flexibility on the stage for competition: BEIS wishes to create an enabling framework which is flexible enough to allow for early stage or late (or even very late) stage competition, with the choice determined by Ofgem in the light of the applicable constraint and circumstances:

    1. Early-Stage Competition: This type of competition occurs where a network constraint is identified prior to the detailed design, surveying and consenting phases of asset development, so the design, construction and delivery of a project is tendered for. National Grid recently published their Early Competition Plan and Ofgem published a consultation on the proposals on 3 August 2021 (please see our earlier Law-Now on the Plan and consultation here: Early Competition: opportunities and challenges for all, but we cannot forget the Net Zero context (cms-lawnow.com)).

    2. Late-Stage Competition: This type of competition occurs after the main design phase is complete and major planning consents are secured so it is the construction and delivery of a project that are tendered for.

    3. Very Late Stage Competition: This occurs where the asset is built and the tender is for ownership and operation of the asset (as has been the case with OFTO tenders to date).  There is a suggestion that this may be used to cater for “projects in flight”, i.e. those that are at an advanced stage of development at the time a new competitive regime is in place.

  1. Flexibility on the competitive solution: As a result of technological changes and changes in the network due to increasing levels of renewable generation, BEIS wishes to ensure that any competitive regime to address network constraints should be open enough to allow different solutions to compete against each other in the market on a level-playing field.  

Detailed Tender Regulations and Invitation to Tender documentation will set out the process for the tender and factors that will be considered in the bids.

Role of Network Planning and Net Zero Infrastructure

Process for competitive tenders for electricity assets

The indicative process and timeline for onshore competition allowing for the award of licences or contracts is demonstrated in the table below.  It is worth noting however that each constraint is different and the preparation time and the commencement point during the network planning process will vary, with the type of competition also affecting this.

Energy table 01 

Implementation of Onshore Competition in Practice

BEIS has set out indicative timings for the introduction of competition, as set out below:

Energy table 02

Criteria for competition

BEIS states that the legislative framework will enable competition to address needs identified at distribution level as well as transmission.  

BEIS is not consulting on the early competition criteria (as this instead features in Ofgem’s consultation on early competition).  For the late model competition, it is proposed that projects would be considered suitable for competition if the asset is new and separable from the existing network, and of high value.

High value is taken to mean ‘at or above £100 million of expected capital expenditure’ at the point of Ofgem’s initial assessment of the appropriate delivery model, but the consultation is seeking views on whether £100 million is still the appropriate level to set the threshold.  For distribution projects, BEIS states that there may be a case for reducing the high value threshold in the future and note that Ofgem has set out that it has decided to carry out further work to consider potential mechanisms and principles for “packaging” lower value projects with a common need driver or common purpose, towards the £100 million threshold. 

Distribution Roles

The roles that apply to competition are broadly considered to carry over well to their counterparts. Network planning roles will remain with the DNOs / DSOs, with Ofgem taking the role of Approver and Licence Counterparty, and the DNOs/DSOs will take on the role of contract payment counterparties.

There is a difference in approach however in the role of the Appointed Body in transmission and distribution. Stakeholders have expressed support for the Appointed Body to sit with the DNO/DSO, with the introducing of Ofgem or a Third Party being seen as a very significant disadvantage due to the perceived complexity and cost. BEIS however expresses some concerns that the current relationship between DNO and DSO roles and responsibilities could result in a conflict of interest or a perception of bias. BEIS proposes to monitor how future energy system governance and distribution system operation projects are developing ahead of the Secretary of State taking a decision on the identity of the Appointed Body.

Next Steps

Responses to the Consultation are due by 26 October 2021. Primary and secondary legislation will be needed to implement any decisions made on competition. No date is given for the Government’s response to the consultation but it is noted that this will be ‘in due course’. It is noted that the Government will continue to work with Ofgem and other stakeholders as the details of competitive frameworks are developed.

Comment

Some industry players have been critical of the timing of the Consultation, given the wider challenges that increased electrification and the drive to Net Zero present to electricity networks. However, five years on, it seems likely that the “CATO” legislation will finally be introduced to Parliament, albeit in a form that will not require the competitions to result in the appointment of traditional “CATOs” and that is unlikely to involve Ofgem replicating its OFTO role.