On 6th July 2022, the UK Government published the Energy Security Bill (the “Bill”) which draws together a range of measures which are aimed at improving independence and security of supply and contribute towards the transition towards net zero. This article examines the measures introduced in the Bill in relation to two elements of electricity networks: onshore competition and multi-purpose interconnectors (“MPIs”).
Under the current system, electricity networks are owned by network companies who build, own and operate networks within set areas as regional monopolies. The UK Government expects creating competition within onshore networks by opening network projects up to third parties other than the incumbent network companies should lead to more innovative network design and provide further investment opportunities where it is efficient to do so. Indeed, the UK Government anticipates competition in onshore networks could save consumers up to £1 billion on such projects being tendered over the next 10 years. With the creation of a new onshore competitive market the UK Government has outlined that it aims to “improve efficiency in investment, foster innovative solutions to network needs, including increasing the opportunities for smart and flexible solutions, and reduce costs to consumers”. It is also hoped that further onshore competition will encourage greater levels of inward investment and provide additional network capacity.
The new legislation included in the Bill follows Ofgem’s consultation and decision published in August 2021 (here) and March 2022 (here) respectively. Ofgem has highlighted that to facilitate the shift towards net zero, the electricity transmission network will need to accommodate shifts in sources of supply and demand. It also recognises the role third parties could play in the onshore network to maximise value for money for consumers. You can read our analysis of the key features of the early competition model here.
The Bill amends the Electricity Act 1989 (EA89) and inserts new definitions for “relevant electricity project”, “relevant licence” and “relevant contract”. The definition introduced for “relevant electricity project” encompasses all transmission and distribution systems and this will see competition introduced to onshore assets which are currently operated within the areas currently the subject to regional monopolies.
Further, the Bill gives the Secretary of State powers to appoint a body to run competitive tenders in relation to the above assets and allows the Secretary for State to introduce tender regulations. In its decision published in March 2022 (the Decision) Ofgem outlined the type of projects it expected would benefit from onshore competition and reiterated the view of both Ofgem and the National Grid System Operator (ESO) that early competition will deliver benefits to consumers. In the Decision it is proposed that the criteria for projects suitable for early competition, which each project solution should be assessed against should be:
- new and separable,
- certain, and
- have initial cost base analysis suggesting that early competition would benefit consumers.
Ofgem also outlined its view in the Decision that while a minimum value threshold was introduced for late competition of £100m in the context of RIIO-2, it is not possible at this point in time to adopt a minimum value threshold for onshore early competition that would provide meaningful benefits to bidders/ existing network companies without providing a disbenefit to consumers. Whether a minimum value threshold may become relevant to onshore competition is subject to the cost benefit analysis and methodology for onshore competition being established.
It has been anticipated that the development of the early competition model would necessitate changes to the existing roles and responsibilities held by ESOs and transmission owners under existing arrangements for onshore electricity transmission network planning, design and delivery and the Decision outlines their view on the ESO’s proposals for these changes. Figure 1 shows a high-level outline of the ESO’s proposals for the roles and responsibilities to be adopted.
The Bill amends the EA89 to allow for the Secretary of State to designate persons for different purposes by way of further regulations. The Bill therefore creates the initial framework for these roles and responsibilities to be put in place.
As well as onshore competition, the Bill lays foundations for the creation of Multi-Purpose Interconnectors (MPIs) which we commented on in May 2022 (here) and during the summer of 2021 (here). MPIs are assets that combine interconnection of electricity (typically subsea electricity cables connecting GB to neighbouring electricity markets) with direct connections to offshore electricity generation.
In the Bill, the UK Government proposes a new definition of licensable activity under the EA89 allowing for MPI activity. MPIs are a new asset type which is not currently defined under the EA89 and therefore is not easily licensable by Ofgem. The introduction of a licensing regime for MPIs will provide certainty to investors and developers.
In comparison to existing point-to-point interconnectors and radial connections for offshore wind, MPIs combine these activities and seek to lower the impact on the environment and local communities by reducing infrastructure required by having fewer “landing points” in coastal regions. As the UK moves towards its target of 50GW of offshore wind capacity, 5 GW of floating offshore capacity and at least 18GW of interconnector capacity by 2030, MPIs will play a key role in the co-ordination of offshore transmission and the rationalisation of connection framework.
As well as introducing a new definition for MPIs the Bill provides that the Secretary of State must also introduce standard conditions for MPI licences. Current interconnector and OFTO conditions are not appropriate for MPIs and will have to address various factors in projects such as priority access, payment arrangements, flexibility, outage planning and revenue split.
MPI projects will also be subject to existing EU and UK unbundling requirements and the ownership structure of projects is a point which requires consideration as unbundling requirements will restrict the number of potential investors in MPI projects. The Bill introduces licensing requirements for MPI operators, following a very similar regime to the current interconnector regime and further outlines the independence requirements.
Also similar to onshore competition, the Bill includes MPIs in the definitions of “relevant electricity project”, “relevant licence” and “relevant contract”. This therefore also allows the Secretary of State powers to appoint a body to run competitive tenders in relation to the MPIs and for tender regulations for MPIs to be introduced.
Now six years on, the changes introduced by the Bill for onshore competition are the initial stages of CATO legislation, which we most recently commented on in the summer of 2021 (here). It is clear however that detailed secondary legislation will also be needed, including the tender regulations. It will therefore be some time yet before we have a fully effective suite of legislation enabling onshore competition. Further development will also be needed to the commercial model itself and the associated tender process.
The same can be said of MPIs, albeit the concept of multi-purpose interconnection is more recent.
Whilst further development and detail for both onshore competition and MPIs is awaited, the UK Government has in mind the offshore transmission competition regime as the building blocks and this may be a useful consideration for third party market participants looking at onshore network projects and MPIs as a potential area of future investment.
Article co-authored by Euan Rose, Trainee Solicitor at CMS.