Offshore Transmission Network Review: updates on multi-purpose interconnectors
On 14 April 2022, Ofgem published its consultation on its minded-to decision on the approach to multi-purpose interconnectors (the “Ofgem Consultation”). The Ofgem Consultation sets out the proposed decisions in response to an earlier consultation on changes intended to bring about greater coordination in the development of offshore energy networks, published on 14 July 2021 (see our previous commentary here).
Separately from Ofgem, BEIS ran a consultation on the multi-purpose interconnectors (“MPIs”) from 28 September 2021 to 23 November 2021. It published its response on 25 April 2022 (the “BEIS Response”).
The Ofgem Consultation is primarily focussed on the implementation of the interim MPI framework through existing law and proposed licence modifications, while the BEIS Response considers wider issues and proposes changes to primary law to enable an enduring MPI regime.
Background
In support of the UK Government’s offshore wind and net zero ambitions, the Offshore Transmission Network Review (the “OTNR”) aims to deliver improvements in the way that offshore generation is connected to the onshore transmission network and facilitate a more supportive approach for MPIs that combine market-to-market interconnectors with offshore transmission. In April 2022, the Energy Security Strategy increased the ambitious target for offshore wind to 50GW by 2030 (see our commentary on the strategy here), placing a renewed importance on the outcomes of OTNR.
The OTNR contains four workstreams with the following objectives:
- Early opportunities – to identify and facilitate opportunities for increased coordination in the near term, with a focus on “in-flight” projects.
- Pathway to 2030 – to drive coordination of offshore projects progressing through current ScotWind and Crown Estate Leasing Round 4, connecting before 2030.
- Enduring Regime – to develop a new post-2030 framework that drives coordination from the earliest stages of an offshore project, with changes being driven across multiple Government departments.
- Multi-purpose interconnectors – to make tactical changes to facilitate early opportunity MPIs and to develop an enduring MPI regime for 2030 onwards.
The government aims to reform offshore wind connections by introducing MPIs as part of offshore connection hubs that combine offshore wind and electricity interconnections. The MPI model is expected to help reduce barriers to offshore wind development and bring down project costs.
The fourth workstream which is the subject of the Ofgem Consultation sets out the proposed decisions in response to an earlier consultation on changes intended to bring about greater coordination in the development of offshore energy networks, published on 14 July 2021 (see our previous commentary here).
Separately from Ofgem, BEIS ran a consultation on the MPIs from 28 September 2021 to 23 November 2021. It published its response on 25 April 2022 (the “BEIS Response”).
The Ofgem Consultation is primarily focussed on the implementation of the interim MPI framework through existing law and proposed licence modifications, while the BEIS Response considers wider issues and proposes changes to primary law to enable an enduring MPI regime.
Ofgem Consultation
MPI Models
The Ofgem Consultation considers two MPI models:
- The interconnector-led model - where the point-to-point interconnector cable includes direct connections with GB offshore wind farm(s) which use the interconnector as their connection to market; and
- The OFTO-led model - where a radial connection to shore from a GB offshore wind farm is combined with a further direct connection between the GB offshore wind farm and the electricity network or offshore wind farm of neighbouring country or territory.
An illustrative diagram of the models taken from the Ofgem Consultation is set out below:
For a more detailed description of the two models please see our previous Law-Now here.
Ofgem’s minded-to decision is not to limit the interim framework to one MPI model. Ofgem will accept applications for both the interconnector-led model and the OFTO-led model of MPIs, as well as others that might be in development to provide more flexibility for the future and encourage innovation.
Asset classification
The BEIS Response has indicated that a new asset class will not be introduced under the Electricity Act 1989 until parliamentary time allows. As a result, Ofgem must work within the current legal framework to formulate an interim solution for MPIs. Under the Electricity Act 1989, assets, such as interconnectors or offshore transmission system, are classified based on their primary function. The type of asset determines what type of licence will be needed and what regulatory framework will apply to it.
As MPIs are multi-use assets that can allow the electricity to flow across borders as well as from an offshore wind farm to the domestic grid, Ofgem will require licence applications for multi-use assets to demonstrate the expected primary or main use of the asset.
In its minded-to decision, Ofgem plans to determine the primary use of an MPI by comparing the interconnector cable capacity with the offshore wind farm load factor. It will set reporting requirements to allow it to monitor how often the asset is expected to be available for cross-border flows compared with offshore wind farm output transmission over the lifetime of the asset and classify it accordingly.
However, as the asset classification of the status quo under law remains, different components of the MPI must still be owned and operated by different legal entities, each with its own licence meaning that there must be separate ownership of different OFTO, interconnector and generation assets.
Primary use reporting
Ofgem’s planned approach is to require an upfront submission or declaration based on a self-assessment by the licensee (as the burden sits with the licensee under law to ensure it holds the relevant licence for its licensable activities). After five years of annual submissions, Ofgem will then undertake an in-depth review of licensable activities.
To ensure that the granted licence remains fit for purpose, Ofgem is planning to consider the direction, volume and breakdown by source of physical flows within the most recent operational year. It is yet to determine the appropriate within-year temporal granularity for reporting (i.e. half-hourly or other). It will then compare this to the aggregated information on physical flows across an MPI by source.
Should asset usage fall short of the parameters agreed when a licence was granted, Ofgem plans to deal with this on a case-by-case basis to avoid penalising early adopter projects while remaining compliant with its duties under the Electricity Act 1989. Ofgem will also consider in the future the migration of pilot interim MPI projects to whichever legal framework is put in place for the Enduring Regime.
Changes to standard licence conditions
To ensure that interconnectors and OFTOs that form part of an MPI are bound by the appropriate obligations in relation to their activities, Ofgem has confirmed that it will introduce changes to the interconnector and OFTO standard licence conditions. These will include:
- Granting access to wind farms: while granting access to wind farms to use an interconnector’s capacity is not a new activity, the nature of access will be changing, therefore a change to the charging methodology to allow for differential treatment of different user classes will be required;
- Giving priority access for capacity to the wind farm rather than cross-border trade: amending access rules to give primacy to the offshore wind farm and residual capacity offered to others;
- Interconnector would need to factor in additional electricity from the OFTO: securing rights for connected wind farm use will need to be reflected in the access rules;
- Interconnector would require payment arrangements with the generator: developing a methodology for determining the interconnector charge to the offshore wind farm;
- Requirement to alter operational patterns of connected wind farm: allowing the interconnector operator to control flows with the wind farm and to onshore connection points;
- Requirement to accommodate OWF testing and commissioning: considering whether a duty or obligation will be imposed on the interconnector to cooperate; and
- Providing for coordination of outage planning.
Pilot MPI Cap & Floor Framework
In December 2021, Ofgem published a decision on its Interconnector Policy Review, confirming it will run a pilot MPI Cap & Floor scheme in mid-2022. Eligible MPI projects will be able to apply for a Cap & Floor to be applied to the interconnector asset of an MPI. This will mean that the project development will progress through the interim regime and follow a process different to the usual assessment route for point-to-point interconnectors. Ofgem hopes that the pilot scheme will help inform BEIS’ policy development for an enduring MPI regime.
The Cap & Floor provides a minimum revenue allowance (subject to a minimum availability threshold) which reduces projects’ exposure to uncertain future capacity revenues. Where the revenue falls below the ‘floor’, it is topped up by consumers. Conversely, if revenues exceed the ‘cap’, consumers receive the excess. The cap and floor levels are calculated based on project costs including financing costs (at the floor) and a return to equity (at the cap).
BEIS Response
Asset classification
The BEIS Response agrees with the consultation respondents that the existing licensing and legal frameworks are unable to provide a long-term solution for the different elements of MPI projects such as licensing, funding and ownership to interact. BEIS are considering how to introduce a new licensable activity into the Electricity Act 1989 for the operation of MPIs and whether an associated definition of MPI is necessary. The timescale for this would be to introduce a proposal before Parliament when time allows and therefore form part of the Enduring Regime workstream. In the interim, BEIS Response is supportive of Ofgem’s proposed amendments to standard licence conditions for both the OFTO- and interconnector-led MPI models (as we set out above) to enable MPIs under the current interconnector Cap & Floor scheme.
Support mechanisms
Alongside the Cap & Floor regime, the Contract for Difference (“CfD”) is the Government’s other main support mechanism for low-carbon electricity generation. The CfD mechanism helps protect the developers from volatile wholesale prices by providing a consistent energy price, which supports financing of the high upfront project costs.
At present, eligibility for the Cap & Floor mechanism is contingent of holding an interconnector licence. CfDs are usually awarded to renewable projects which have a generation licence only. Because both incentive systems have been designed with the traditional radial connection framework in mind, they will have to be adapted to enable MPIs to connect. BEIS has expressed support for Ofgem’s MPI pilot Cap & Floor scheme (as discussed above) and is further considering how to the reform the CfD system.
Cross-border considerations
Due to the cross-border nature of MPIs, the BEIS Response acknowledges that interaction with other jurisdiction’s regulatory landscape and market arrangements will have to be considered for the Enduring Regime workstream. The BEIS Response states that many respondents highlighted the requirement under EU law for 70% of cross border trade of an interconnector be made available to market participants, which could mean that the available capacity of the offshore wind farm is just 30% of the interconnector capacity. Respondents further highlighted the need for efficient, implicit cross-border trading arrangements, as these would be key to the development of MPIs as the current method of explicit trading may cause significant inefficiencies in operating MPI assets.
The BEIS Response states that following the UK’s exit from the EU, the 70% requirement has been removed and that instead that it requires for the “maximum level of capacity of electricity interconnectors is made available, respecting the (i) need to ensure secure system operation; and (ii) most efficient use of systems.” However, the BEIS Response acknowledged that developers are seeking further clarity.
The BEIS Response does not provide any clarity in this regard, and relies on continued political discussion for collaboration with the European Commission, EU member states and Norway. The UK government states its intention to create a specific forum for technical discussions between the relevant international stakeholders and governments.
Market Models
Two MPI market models are considered in the BEIS Response - the home market and offshore bidding zone models.
Under the home market model, the price for the offshore-produced electricity is based on the electricity price in the home market to which the wind farm connects. For offshore bidding zones, in the absence of electricity demand, the electricity price is determined by the availability of interconnection capacity to other markets. Therefore, under the offshore bidding zone model, overall utilisation is optimised, but revenues of wind farms may be reduced with more revenue allocated to the transmission assets.
The BEIS Response notes that as CfD payments use GB day-ahead hourly prices as reference prices to determine payments to generators, further consideration is required on the impacts of wind farms in an offshore bidding zone model on price protection.
These market models are also used in the European Union. The BEIS Response states that it believes that they can continue to co-exist as long as arrangements are compatible which will require further consideration.
Consenting
Uncertainty remains as to the status of MPIs under marine licensing frameworks as they are not directly regulated under the existing legislation, such as the Marine and Coastal Access Act 2009. BEIS considers that MPIs should be subject to marine licensing in the same way as offshore transmission cables are.
Comment and Next Steps
An overhaul of the current offshore wind regulatory frameworks will be necessary to achieve the ambitious target of 50GW of offshore electricity generation by 2030. In the long term, MPIs could enable the UK to export excess wind energy to neighbouring countries.
The announcement by BEIS of its intent to provide legal clarity and development certainty for MPI projects by introducing a new licensable activity into the Electricity Act 1989 for the operation of MPIs is welcomed. However, the timing of the implementation of this is unclear and will likely take considerable time.
Ofgem invites stakeholders to share any feedback on its minded-to decisions regarding the MPIs by 9 June 2022.
