On 18 March 2016, Ofgem hosted an information event for OFTO Tender Round 4 and update on future OFTO tenders. The event provided details on recent updates to Ofgem’s structure, an overview of Tender Round 4 (including a presentation from DONG Energy) and Tender Round 5, as well as other updates from the Competitive Networks division.

TR4

Ofgem had previously announced that Tender Round 4 (TR4) would contain a single project, DONG Energy’s 258 MW Burbo Bank Extension, and at the information event TR4 was described as a ‘bridge’ between Tender Round 3 (TR3) and the larger upcoming Tender Round 5 (TR5) expected to launch this autumn. Ofgem renewed their threefold commitment to (i) lower the cost of building and operating offshore transmission assets; (ii) enable new participants to bring innovation to the OFTO regime; and (iii) take a lighter touch regulatory approach to offshore transmission. Ofgem also announced the initial transfer value for Burbo Bank Extension of £230.2 million. 

Ofgem confirmed that there would be minimal procedural changes between TR3 and the upcoming TR4, and those that will be introduced were as a result of changes to the structure of the pre-qualification stage (PQ) following the Public Contracts Regulations 2015. Ofgem also announced measures to reduce the burden on bidders in participating in the tender process, specifically the removal of Enhanced Pre-Qualification (EPQ) and Invitation to Tender (ITT) bidder payments; and removal of the requirement to submit an Indicative Tender Revenue Stream (ITRS) at EPQ stage. 

Ofgem raised the possibility that the index for the 20 year OFTO revenue may move from Retail Price Index (RPI) to Consumer Price Index (CPI), and a decision on this for TR4 will be made in the coming weeks. 

Lastly, Ofgem released indicative timings for the TR4 process as follows:

Click here to view table.

TR5 (and beyond)

Ofgem announced that TR5 will contain up to 5 of the following offshore wind farm projects: (i) Walney Extension; (ii) Race Bank; (iii) Dudgeon; (iv) Galloper; and (v) Rampion. All projects will continue to utilise the ‘generator build’ option for construction of the assets and will be fully commissioned at the point of transfer to the OFTO. Initial transfer values for these projects are not yet available, although current estimates indicate that the projects would comprise £2bn to £3bn of assets.

As part of Ofgem’s commitment to reduce the burden on bidders, the process for TR5 is still being finalised and deliberations are still underway on whether to include both a PQ and qualification to tender stage for TR5. Ofgem will also reconsider the method of indexation for revenue and the evaluation criteria for tenders; further news on these developments is expected in due course. Notwithstanding these processes, the current timetable for TR5 is for tender launch to take place in Autumn 2016.

Ofgem briefly touched on Tender Round 6 (TR6) and beyond, and noted that projects currently with Contracts for Difference (Beatrice, East Anglia 1, Hornsea and Neart Na Gaoithe) would be likely to come through future tender rounds first. It will be interesting to see how the OFTO pipeline evolves beyond TR6 in light of the government’s recent budget announcements relating to CfDs. 

Lastly, Ofgem confirmed that accommodating ‘OFTO build’ (whereby the OFTO has a role in the construction and commissioning of the transmission assets) was still very much part of their planning for the future. Against the backdrop of the current legislative framework that allows generators the choice of whether to adopt generator-build or OFTO-build for their projects, the focus was on finding solutions that were of sufficient comfort to generators who want to retain control over their route to market whilst introducing new bidders, financial solutions, and efficiencies into the market. Further detailed thinking on this option will be announced by Ofgem in due course.

Comment

Ofgem’s latest announcement will be well received by previous OFTO bidders and new entrants into the market. TR4 will offer bidders an attractive project from the industry leader in offshore wind, which will act as a bridge to the much larger TR5 in the Autumn. Bidders considering taking part in TR4 should be preparing now, as they will only have 8-10 weeks from April in which to prepare and submit their bids.