Ofgem has issued a further consultation document regarding the competitive tender process by which offshore transmission owners (OFTOs) will be appointed. This note summarises the proposals made.

Background

The Government intends to introduce a new regulatory regime for the operation of offshore networks. The new regime will apply from 1 April 2009 and will come into full effect on 1 April 2010.

The new regime will include the following:

  • offshore assets rated at 132kV and above will be classed as transmission, and all owners/operators will require a transmission licence;
  • National Grid Electricity Transmission (NGET) will be responsible for operating (and co-ordinating the flow of electricity on) all offshore transmission assets;
  • offshore transmission assets will be owned and maintained by OFTOs, one of which will be appointed for each asset on the basis of a competitive tender for that asset;
  • those offshore transmission assets that have already been built (or that are built during a transitional period) will be sold by the generator to the appointed OFTO. In the future, the appointed OFTO will construct the relevant offshore transmission assets;
  • the costs of building and operating the new offshore transmission assets will be recovered from generators via NGET's charging methodology (with the relevant portion being passed on to OFTOs).

Overview of tender process

Ofgem's current consultation document provides further detail on the tender process that it will run in order to identify an OFTO in respect of each offshore transmission asset. The current focus is on the transitional projects (where the constructed asset will be transferred to the OFTO), but the enduring regime will be similar.

The transitional projects currently identified are: Barrow; Robin Rigg; Gunfleet Sands 1 & 2; Thanet; Greater Gabbard; Ormonde; Walney Phase 1 and Phase 2; London Array; Sheringham Shoal; Lincs; Gwynt-Y-Mor; Docking Shoal; and Race Bank.

In the case of each tender, the following stages will be followed:

  • a pre-qualification stage based on detailed responses to the Pre-Qualification Questionnaire;
  • an invitation to tender stage, during which bidders would put forward proposals (including revenue stream proposals);
  • an optional best and final offer stage, where a small number of bidders would have the opportunity to put forward improved final bids;
  • identification of the preferred bidder and a reserve bidder by Ofgem; and
  • grant of the offshore transmission licence to the successful bidder.

Pre-qualification

The consultation document contains a draft of the proposed pre-qualification questionnaire (see annex 1 to the consultation document). Interested bidders would need to complete the questionnaire within two months of the tender's commencement.

In order to obtain as much interest as possible, Ofgem intends to advertise each project. The projects would be advertised in national and international publications. Ofgem will make certain information available in respect of each project, including its ex-ante assessment of the regulatory asset value from which the successful bidder will earn its revenue stream.

Ofgem will establish a tender panel to assess each completed pre-qualification questionnaire. The tender panel would consider each application against the following criteria:

  • suitable ownership structure, demonstrating an efficient and legally robust decision-making process;
  • adequate financial standing and an understanding of the investment economics;
  • suitable management capability for operating the OFTO; and
  • relevant technical and specialist capability for OFTO operation.

Ofgem has confirmed that a single bidder (or consortium of bidders) can apply to become the OFTO for more than one project. One OFTO licence would be issued per project.

Invitation to tender stage

The aim of this stage is to identify the preferred bidder. Ofgem proposes that up to four bidders be admitted to the invitation to tender stage.

Those admitted to this stage would have access to an electronic data room containing:

  • all contracts, consents, leases, warranties and guarantees relating to the transmission assets (including the connection agreement);
  • details of all assets and liabilities relating to the transmission project;
  • the investment and operation plans for the transmission project;
  • relevant seabed surveys; and
  • evidence of compliance with applicable legislation, regulations and industry governance arrangements.

Bidders will have the opportunity to make further enquiries. Ofgem will act as the hub for such enquiries.

Ofgem envisages a period of four months within which bidders would respond to Ofgem's invitation to tender. The bids would be assessed to identify the most economically advantageous bid.

Best and final offers

Where Ofgem considers it appropriate to do so, it will ask a number of those who responded to the invitation to tender to submit best and final offers. Given that standard licence conditions apply to transmission licences and that the OFTO's operations will be largely governed by the standard industry agreements, any negotiation is likely to focus on the financial aspects of each bid.

Preferred bidder

Ofgem will identify a preferred bidder, and where possible a reserve bidder.

Licence grant 

Once the preferred bidder has secured rights to the transmission assets, and provided it can demonstrate to Ofgem that the financing proposals set out in its bid are in place, Ofgem will grant the OFTO licence.

Ofgem has statutory powers to secure transfer of the transmission assets to the preferred bidder if necessary.

The licence granted to the OFTO will be subject to special conditions that identify the relevant transmission assets, and set out the details of the revenue stream and incentive mechanism agreed in respect of the assets in question.

Other matters

The consultation also contains details of how the tender process under the enduring regime will differ from the transitional process outlined above.

In addition, Ofgem will be taking formal steps over the next few months to establish the regulatory asset values to apply to each of the transitional projects.

Response to consultation

Ofgem has invited responses to this consultation from all parties who have an interest in renewable energy and offshore electricity transmission. The consultation closes on 14 November 2008.