Summary and implications

On 17 June a joint Ofgem and DECC statement set out an 'Overview of Great Britain's Offshore Electricity Transmission Regulatory Regime'. This comes about as DECC and Ofgem reveal they have unveiled the finalised regime for regulating the undersea networks and other infrastructure that will carry power from offshore wind farms.

Up to 39 GW of offshore wind capacity is hoped to be installed by 2020. Roughly £15 billion of investment is estimated to be needed in the new transmission infrastructure required to deliver this capacity. The new offshore wind power has the potential to create 70,000 new 'green jobs' in the UK as well as bringing in £8bn of investment by 2020.

The update report is seen as useful:

  • to clarify the regime before Ofgem runs the first tenders to appoint Offshore Transmission Owners (OFTOs) for projects in the first tender round;
  • to pull together recent updates in this area;
  • to illustrate the Governments' commitment; and
  • to highlight the potential rewards available to prospective tenderers.

Background

Given the proposed increase in offshore wind technology, clearly considerable new development will be needed in the grid infrastructure to ensure the electricity generated gets to peoples' homes and businesses. Given the innovative nature of this new electricity source, Ofgem and the Government felt there was a need to adapt the traditional transmission regulatory regime to better manage the requirements of offshore wind.

Through the competitive tender process proposed, Ofgem hope to deliver 'fit-for-purpose connections at the best value for offshore generators and consumers'. Ofgem released their final statement on the design of the competitive tender process ahead of the first round of tenders commencing this summer. The legal framework for this process is provided in the Electricity (Competitive Tenders for Offshore Transmission Licences) Regulations 2009 that came into force on 2 June 2009. The Regulations provide the necessary powers to run the competitive process, set out the requirements that developers need to satisfy to be able to tender, the process for bidders and the provisions for disqualification from, and cancellation of, tenders.

The regulatory framework

Where possible, Ofgem have sought to extend the principles of the onshore regulatory framework for the grid network in the UK. National Grid Electricity System Transmission plc (NGET) will see its role extended to cover offshore transmission through the National Electricity Transmission System Operator (NETSO). This will allow for greater co-ordination between the networks. The competitive tender process will be open to all companies as qualified by Ofgem and it is hoped a significant number of new entrants to this sector will be attracted. Each connection will be awarded to a licensed OFTO.

This remains subject to EU Energy Third Package unbundling requirements, which come into force in early 2012, and largely prohibit companies from owning and operating both transmission and generation/supply assets.

Once licensed however, an OFTO will be subject to licence and code obligations which are generally consistent with those of onshore transmission.

The Competitive Tender Process

On 26 June, Ofgem published a final statement on the tender process. This sets out the tender process for 'transitional projects', with the tendering process due to start this summer. To qualify as a transitional project:

  • the project must have been completed by 24 June 2009; or
  • if not constructed it must have achieved financial (or equivalent) close by 24 June 2009; or
  • if it has not achieved financial close (or equivalent) by 24 June 2009, it has done so by 'Go-Active' (expected June 2010).

If a project does not meet these criteria then it will be considered an 'enduring project'. For these the OFTO will also design, finance and construct the transmission assets as well as operating and owning them. Tendering for these is expected in summer 2010.

OFTO entitlements and incentives

Key to attracting OFTOs is the 20 year revenue stream. This is determined during the tender process, based upon the OFTO's calculation of the costs of financing, operating, maintaining (and for enduring projects, designing and building) the transmission assets. Crucially the OFTO's revenue stream will be based on asset availability and not asset utilisation. This means that so long as the asset is available to transmit electricity back to the onshore grid, the OFTO will be entitled to its full revenue stream irrespective of anything else.

Furthermore there is room for revenue adjustment in certain pre-defined events. There will also be performance incentives.

Where next?

Apart from further consultation and publication of guidance on the 'OFTO of Last Resort Direction' (a specific part of the tendering process), everything is ready for the first tender exercise to commence this summer. This will hopefully precipitate further development in this area.