Getting the CATO(ut) of the Bag: A Review of Progress Towards Early Competition in Onshore Transmission in 2025

Throughout 2025, Ofgem and the National Energy System Operator (“NESO”) have continued working together to create a regime for Early Competition in onshore energy transmission. 

Ofgem and NESO have been working together since 2021 to introduce an Early Competition regime with the aim that it will stimulate innovation, improve cost efficiency and attract new investment into the sector, which we initially covered here. The regime is intended to strike a balance between protecting consumers against the costs of project risks, while creating the necessary commercial appeal to attract capable and competitive bidders.  In 2023 the Government’s Transmission Acceleration Action Plan set out the Government’s commitment to introduce Early Competition in order to save consumers an estimated £1bn by 2050. The legislative process for establishing onshore competition is underpinned by the Energy Act 2023 with Schedule 15 supporting the development of onshore competition by amending the Electricity Act 1989 and legislating for Ofgem to introduce a competitive tender framework. We have previously covered the steps taken to implement Early Competition through the introduction of new Regulations.

Ofgem have published a series of decisions and updates in 2025 outlining how Early Competition will operate, namely:

• Its policy decision on the Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2025 (“Tender Regulations Decision”) published on 4 April 2025, which described the process of bidding for a Competitively Appointed Transmission Owner (“CATO”) licence;
• Its decision and updated policy position on the onshore electricity transmission Early Competition commercial framework (“Commercial Framework Decision”) published on 2 July 2025, which set out the commercial framework of arrangements that would apply to projects after a CATO licence is granted; and
• a brief update on the next steps in finalising the Early Competition process, published on 3 December 2025 (“December Update”).

This briefing gives a quick overview of these 2025 developments.

The Tender Regulations 

The Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2025 (the “Tender Regulations”) entered into force on 25 April 2025. The final Tender Regulations do not deviate significantly from the draft regulations initially considered in our previous LawNow: Tenders Regulations for Early Competition: another piece of the jigsaw. However, the Tender Regulations Decision made some clarifications, including:

• Licensing – It was confirmed that Ofgem will be responsible for assessing the Transmission Owner (“TO”)’s compliance with its CATO licence obligations.
• Securities and Bid Costs – Ofgem confirmed that tender round-specific details on any bid cost reimbursements and security payments will be shared with bidders ahead of each tender round. However, unsuccessful bidders will not be reimbursed as Ofgem argued this would undermine their policy intent of enabling early competition.
• Qualifying Bidders and Timelines – All timelines for the tender process will be published in the round-specific guidance documentation.
• Withdrawal, Cancellation, Re-run and Disqualification – Ofgem announced that it will take steps to manage the risk of tender failure by collecting ‘comprehensive information’ at the pre-qualification stage. Ofgem also clarified tenders will only be re-run if there is likely to be a consumer benefit to it after taking into account the costs associated with the re-run.

Commercial Framework Decision

The Commercial Framework Decision confirmed that the key components of the Commercial Framework will include the following:

• Post-Award Security Obligation - Ofgem has set a post-award security obligation at 10% of forecast construction costs, capped at £50 million, to ensure CATOs are committed and reduce non-delivery risks for consumers. Projects exceeding £1 billion will have bespoke security arrangements, managed by NESO, which must be in place throughout preliminary works and construction, reducing to 0% once the CATO’s investment matches the security amount. The security remains until financial close and may be provided as a letter of credit, performance bond, or cash in escrow.
• Preliminary Works Payments (“PWPs”) - PWPs cover pre-construction activities such as site surveys and stakeholder engagement, allowing prospective bidders access to similar funds to incumbent TOs. Ofgem has set a 50% of NESO’s estimated preliminary works costs for PWPs, although this may be raised for initial tenders if it benefits consumers. Ofgem may increase this threshold for the first tendered projects if they believe this would be in consumers’ best interests. The 50% limit is designed to encourage financial discipline among bidders while alleviating some cashflow pressures.
• Post Preliminary Works Cost Assessment (“PPWCA”) - The PPWCA allows post-preliminary works cost increases for “reasonably foreseeable” items. While NESO recommended capping this at 40% of the original estimate, Ofgem will set a higher cap for the initial tender round to maintain bidding incentives, with the final cap determined during pre-tender engagement. Following stakeholder responses, specific High Impact Low Probability events will also be excluded from the cap.
• Payment Mechanism and Performance Incentives - Ofgem will reward CATOs for efficient performance, whilst holding them to delivery standards via a regulated tender revenue stream (“TRS”), indexed to the Consumer Price Index including Owner Occupiers’ Housing Costs. Ofgem will set a 98% target for availability of CATO projects, with a 2.5% TRS adjustment for each 1% deviation from that target. The CATO licence will also require stakeholder engagement, environmental considerations, and timely new connections incentives, but there will be no penalty for late delivery.   The TRS is set for a fixed 35-year term, incentivising asset maintenance through a residual value payment aligned with the asset’s economic life.
• Additional Works Obligations - Ofgem will require CATOs to self-fund all additional works cumulatively worth up to 20% of the original CAPEX value. Additional works with a cumulative value greater than 20% but below 50% of the original CAPEX value will need to be self-financed by the CATO or funded by a pass-through payment. If the cumulative value is above 50% of the original CAPEX value, the CATO can self-finance the additional works, fund them through pass-through payments, or receive an upfront payment or bespoke funding arrangement from Ofgem. This differs from the OFTO regime, which imposes an absolute cap on OFTOs’ liabilities between 0% and 20% of the original CAPEX value. Ofgem explains this difference in approach is due to the higher chance of additional works being required for onshore connections compared to offshore.

December Update

The December Update sets out the work Ofgem and NESO are undertaking independently to implement Early Competition.

Ofgem are currently developing the CATO licence, which will implement the Commercial Framework Decision and set out the legal obligations of CATOs. Ofgem are expecting to consult on this in early 2026 (initially expected in the summer and autumn of 2025).

NESO are currently assessing projects’ eligibility for early competition. Whilst NESO proposed a section of the WCN2 project - a new double circuit between North-West England and South-West Scotland - as the first project to be tendered under the regime, Ofgem determined this did not meet network needs due to ongoing uncertainties such as ongoing connections reform work. NESO plans to publish their “transitional Centralised Strategic Network Plan 2 (tCSNP2) Refresh,” in summer 2026, outlining the pilot project and a pipeline of future tenders under Early Competition.

As both Ofgem and NESO continue to refine the details and consult with industry participants, the sector can expect further clarity in 2026. These developments will be pivotal in shaping future competitive tenders and ensuring the successful transition to a more dynamic and resilient energy network.

Article prepared with assistance from Jack Bell, Trainee Solicitor, in our Energy and Infrastructure team.