To support the UK government’s efforts to achieve its revised ambitious offshore wind target of 40 GW by 2030 in a bid to reach net zero emissions by 2050, the Office of Gas and Electricity Markets (Ofgem) has been undertaking short- and long-term reviews of the offshore transmission network arrangements. According to the current regulatory regime for offshore transmission, the transmission infrastructure is developed by the developer and then transferred to an offshore transmission owner (OFTO) identified through a tender process run by Ofgem (generator-build model). So far, six tender rounds have been completed successfully resulting in the award of 21 OFTOs comprising an investment of GBP5.7 billion in offshore transmission.
In April 2021, Ofgem published its ‘Decision on developments to the tender process within the current OFTO regime’. The changes Ofgem plans to implement will help ensure that efficient, fit for purpose competitions continue to be run within the current OFTO regime. Some changes will be made in the seventh OFTO tender round (TR7), with further changes anticipated for future tenders. Separately, Ofgem is continuing to review the longer-term future of the OFTO regime to facilitate more coordinated transmission assets. In this regard, it is working closely with the Business, Energy and Industrial Strategy (BEIS), which launched the Offshore Transmission Network Review (OTNR) in July 2020. The OTNR has four workstreams, namely, early opportunities, pathways to 2030, enduring regime and multi-purpose interconnectors.
Previously, in 2018, Ofgem’s review of the OFTO regime resulted in implementation of some key changes from tender round 6 (TR6) onwards. These include the increase in the revenue period from 20 to 25 years; increase in the number of qualified bidders (QB) that can be shortlisted at the invitation to tender (ITT) stage from five to eight; introduction of an additional enhanced pre-qualification stage in case all eight QB places are not filled; and revisions to evaluation criteria at the ITT stage.
For the latest review, Ofgem published the consultation on the OFTO tender regime process in November 2020. Ofgem’s final decision will facilitate a streamlined OFTO tender process through changes to the data room and site visits, cost assessment, transfer and interface agreements. Other amendments relate to a change in reference rates to Sterling Overnight Index Average (SONIA) from London Inter-Bank Offered Rate (LIBOR) and a possible switch in indexation to consumer price index from retail prices index (RPI) in the future.
In November 2020, Ofgem opened the competitive process for the TR7, which will enable bidders to compete to own the transmission assets of two offshore wind farm projects, namely, 950 MW Moray East and 857 MW Triton Knoll. Both projects are under construction and are expected to be completed in 2022. The preferred bidders of the TR7 round are expected to be announced in October 2021 (Triton Knoll) and January 2022 (Moray East) while the entire process including transfer and licence grant is expected to be completed six months thereafter.
The following changes are applicable to TR7 and beyond:
Data room and site visits: Ofgem has decided to focus on improving the quality of documents available in the data room when it opens rather than opening the data room earlier. To improve the experience of the data room for both developers and bidders, Ofgem has introduced a new data management system, Ansarada, for TR7, which will deliver improvements in document management.
To reduce risks and minimise costs, the decision proposes to limit site visits to where they add most value. Accordingly, there is value to such site visits by preferred bidders (PBs), where they consider it necessary for their confirmatory due diligence, rather than at the ITT stage. However, PBs should consider whether technologies such as video links could provide an effective, safer and lower cost alternative.
Cost assessment: Ofgem recognises that the current cost assessment process is effective, but wanted to investigate whether timelines could be revised to reduce the time the process takes. It has decided not to delay the ITT process until costs are more certain and there is value in continuing with the cost assessment after the initial transfer value (ITV) has been set at the ITT stage. Ofgem will continue to work with developers to settle outstanding cost items more quickly.
Transfer and interface agreements: Ofgem has decided not to change the timescales associated with the transfer and interface agreements. However, it is important that bidders and developers take a more pragmatic approach to finalising agreements and conclude them within the existing timelines. This is in line with stakeholder feedback, some of whom argued against delaying the submission of ITT bids until the agreements were substantially concluded.
Reference interest rates and indexation: Given that LIBOR is no longer an effective interest rate for many financial products, SONIA will be introduced as the benchmark interest rate for TR7. Ofgem has decided to retain RPI-linked revenue indexation for TR7 projects. However, Ofgem will continue to monitor index-linked markets closely and consider introducing consumer price index including housing costs (CPIH)-linked revenue indexation in future tender rounds. Currently, OFTO bidders can choose to index any proportion of the tender revenue stream (TRS) to RPI and hedge their exposure to inflation risk through a combination of index-linked debt and inflation swaps.
Other considerations for future tender rounds: Further work will be done on aspects including the qualitative approach to evaluation and the possibility of debt funding competition for potential application in TR8. Regarding insurance requirements, Ofgem will monitor the ability of a bidder to secure the appropriate insurance cover (in line with the existing requirement of LEG3 insurance or equivalent) and does not propose any immediate changes. With respect to appointment of a reserve bidder to PB, the decision states that it is preferable that such a need does not arise. It reinforces the importance of developers and PBs working constructively and pragmatically together to complete the transaction timeously.
Ofgem is currently doing a lot of work around wider regime developments including cost assessment and treatment of innovative design proposals, offshore transmission coordination between projects, information sharing on asset health by OFTOs and end of TRS policy. The ongoing developments are expected to lend greater clarity to the changes in the policy and regulatory framework of UK’s offshore transmission industry in the future.
The article has been sourced from Global Transmission Report