Ofgem's open letter and more recent consultation on the offshore transmission regulatory framework are extremely important to everyone with an interest in the offshore wind, wave and tidal markets. The regime for enduring projects will take effect in late spring/summer 2010 and any offshore project that has not managed to qualify as transitional will require to be entered into a competitive tender for the design, build, finance and operation of the grid assets to be administered by Ofgem.
This briefing note suggests a high level strategy for responses to the current live consultation on the OFTO process for enduring projects.
In responding to this paper, industry needs to consider that this framework is now in its final stages of consultation. This means that influencing any material change at this stage will be very difficult. The fact that there may be a change in Government this year, however, may mean that it is well worth the time to document now any particular issues that remain with the overall approach and structure of the OFTO regulatory process.
Overall, Ofgem is seeking views on a number of issues relating to the detailed strategy and tactics of running the bid process such as the nature and level of detail to be provided in the specification, the ability for bidders to provide variant bids and so on. To date industry has been concerned about the lack of developer involvement in the OFTO selection process. We suggest that this consultation helps to focus the developer on what really matters to them.
For a developer, the key point is to have confidence that the regime will produce a successful bidder with the technical skill, approach to quality and delivery and the financial credibility to deliver grid assets on time and then operate them efficiently in the long term. These aspects are at least as important if not more important to the developer than cost. For the OFTO bidder, its key concern is to understand the criteria and weighting that will be applied to evaluation of its bid as these apply to the particular project being tendered.
The consultation paper confirms Ofgem's proposed approach to evaluation of OFTO bids – all of the evaluation items listed relate to cost or carbon consequences of the project. We suggest that this is the critical issue for the consultation. Industry should suggest working with Ofgem and NGET to develop a balanced evaluation approach that gives a rounded technical and financial assessment of each bid. If that evaluation approach can be agreed, developers relying on the process to deliver a viable OFTO can take comfort from the fact that a rounded interpretation of what constitutes value for money in the long term will be taken by Ofgem in selecting OFTOs. OFTO bidders will also have greater clarity as to how an overall value for money view will be taken and the importance that will be attached to price compared with technical solution/quality and other related issues.
In addition, Ofgem will have experience from the transitional tender round and feedback from successful and unsuccessful OFTO bidders on that process. That experience may well influence Ofgem towards revisiting its general approach to evaluation.
There are many other areas where the consultation paper seeks views – we believe, however, that a one size fits all approach on issues such as variant bids, whether or not bids should be based on firm pricing or estimates and level of detail in the specification, is a mistake. The job that Ofgem is tasked with is to run an effective competitive process and these decisions may be different for certain projects depending on the surrounding circumstances and competitive conditions at the time.
Our recommendation is that Ofgem should run a pragmatic and commercially astute bid process for each project within the broad timescales and process already mapped out. In addition, developers could lobby for increased involvement in explaining information in the data room to OFTO bidders and helping resolve issues with that information in order to avoid misunderstandings and risk premiums in OFTO bids that are unnecessary. This combined with a robust evaluation methodology would go a long way to addressing many of the points raised in the current consultation paper regarding the bid process.
Further commentary is available from Shepherd and Wedderburn on request regarding some of the key issues that industry has raised in relation to the OFTO regime for enduring projects and our views on whether or not these have been addressed in the current consultation.