The end of an (tender revenue stream) era?

United Kingdom

On 23 July 2021, Ofgem published its Decision on the End of Tender Revenue Stream (“the Decision”). The Decision follows the March 2021 Consultation, which raised 23 important questions relating to the future of the Offshore Transmission Owner (“OFTO”) regime. This comes at a time when 9 of the 21 OFTOs currently in place are coming to the midpoint of their existing regulatory revenue period.

The Decisions

Timing: When should asset health reviews be carried out on generator assets?

The Decision set out that:

  • Health reviews on generator assets should be completed no later than 6 years before the end of the OFTO regulatory revenue period.

  • Health reviews for offshore transmission assets should be completed no later than 5 years before the end of the same period.

  • A tender will be carried out in the 4th year before the end of the tender revenue stream and Ofgem will aim to announce the preferred bidder in the 3rd year.

The figure below sets out the proposed timeline prior to the end of the regulatory revenue period (“T”).

End of Tender Revenue Stream image
(Figure 1: End of Tender Revenue Stream First Decision Document page 10).

Roles and Responsibilities: Who is responsible for health reviews of assets?

The Decision set out that:

  • Each party will be responsible for the health reviews of their own assets and any related but unforeseen costs incurred by the OFTO will be reimbursed, although it is not specified how such reimbursement will take place.

  • There will be a way to claim for availability loss directly resulting from carrying out the health reviews.

  • Where investment is required within the current revenue term to enable an extension, this should be made by the current OFTO who will be economically recompensed where the costs incurred are beyond the scope of the current revenue stream.

The Decision shows that stakeholders largely support the decisions made. Emphasis has been placed on the fact that health reviews will result in additional costs not originally factored in by the relevant OFTO and therefore not covered by existing revenue streams beyond the maintenance of OFTO assets.

Extension Options: Procedure and Process

The Decision set out that:

  • No specific threshold will be set to determine what processes and procedures need to be carried out to facilitate an extension to the regularly revenue period of OFTO assets. Each project is unique and will be decided on its merits.

  • Further extension periods will be possible by taking into account asset information and willingness of the generator to continue to generate electricity.

A 2012 Report concluded that transmission assets, their components and windfarms have differing lifespans ranging from 10 to 40 years. Stakeholder views indicate that it would be more economically viable to carry out extensions only once. In order to accommodate a range of possible outcomes as a result of the diverse lifespans, Ofgem acknowledges that future policy will be needed to avoid generation assets being stranded.

Tender Revenue Stream

The Decision set out that:

  • Cost mechanisms for determining the tender revenue stream for any extension period will be set on a project-by-project basis.

  • Some cost elements will be standardised; however it is not possible to set one mechanism. Key considerations will include the level of identified risk, future uncertainty and the length of time that an extension is required for.

  • Incumbent OFTOs are to be required to settle any availability liabilities due at the end of the original revenue term.

Ofgem considers that two different cost mechanisms could be used in any further regulatory revenue period – the ‘building blocks’ mechanism and the ‘cost plus’ method. Most stakeholders believe that there should be a base mechanism for determining the revenue stream, yet there is also a need for this to be flexible. The cost plus method would allow such flexibility to vary revenue return and take account of any unforeseen costs forecast.

Comment

While the Decision addresses 10 of the 23 questions raised in the March 2021 Consultation, the remainder will not be addressed until November 2021.

We anticipate that the second awaited decision document to be published in November will provide more clarity on the operation of the tender revenue stream going forward. The more challenging questions are yet to be answered and it will be particularly interesting to learn how stakeholders and Ofgem envisage these aspects working in the future. Such questions include: whether the tender revenue period should be extended and whether licences should be re-tendered, what safeguards may be needed to make bidders comfortable, what the market value of an OFTO may be, whether the decommissioning funds and liability should be transferred across in full to any new OFTO and the questions around the inclusion of LEG3/06 exclusion clauses.