Background
On 19 August 2026, Ofgem published a non-statutory consultation on the proposed generic Transmission Licence for Competitively Appointed Transmission Owners ("CATO Licence") https://www.ofgem.gov.uk/consultation/draft-competitively-appointed-transmission-owner-cato-licence-and-guidance . The consultation is open until 16 October 2026 and builds on recent progress in the development of the early competition framework for onshore electricity transmission.
The consultation follows on from the Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2025 and the Expression of Interest for the early-model CATO framework launched by NESO in March 2026. The consultation builds on Ofgem's July 2025 decision on the Early Competition commercial framework, which set out the terms under which a CATO will be responsible for designing, financing, constructing, operating and maintaining its transmission assets.
Structure of the CATO Licence
The CATO licence is structured as a new "Section F" of the standard conditions for onshore electricity transmission. The proposed conditions predominantly draw on Sections B and E of the existing transmission licence standard conditions to maintain consistency with other transmission licences. In developing the licence, Ofgem has drawn on the existing electricity transmission licence framework, including conditions applicable to transmission owners and conditions developed for offshore transmission owners.
This approach is described as making the CATO licence "familiar where it can be, and specific where it needs to be". It avoids creating different licence arrangements where existing electricity transmission licence provisions remain suitable and appropriate, while ensuring that the licence can reflect the commercial framework needed for competitively tendered onshore transmission projects.
All transmission licensees, including CATOs, will be obliged to comply with Part A of the current electricity transmission licence. CATOs will not be obliged to comply with Parts B, C, D, or E.
The proposed CATO licence comprises the following elements:
Standard Conditions (F1–F50): these range from conditions retained from existing transmission licences (with no or only minor changes), to conditions tailored for the CATO context, to entirely new CATO-specific conditions.
Special Condition 1Milestone Payments: a new condition which establishes the value and timing of Milestone Payments before the Commencement Relevant Year.
Schedule 1 Specified Area: as is standard in other transmission licences, this defines the territorial scope of the licensee's authorised transmission activities.
Schedule 2 Revocation: again, similar to other transmission licences, this sets out the circumstances and process by which the licence may be revoked.
Technical Annex: this is unique to CATO and comprises Part A (Tendered Scope of Works), Part B (Bid Baseline Solution), and Part C (Post-Adjustment Solution).
CATO Guidance: A separate accompanying document providing explanatory detail on the processes a CATO will follow in designing, consenting, financing, constructing, and operating its assets.
Key Novel CATO-Specific Conditions
A number of conditions are entirely new and have no precedent in either the offshore transmission owner (OFTO) licence or the onshore Transmission Owner (TO) licences:
Condition F29: Project Specification / Technical Annex
This condition requires the licensee to plan and develop its transmission system in accordance with the Technical Specification before the Tendered Revenue Stream (TRS) Commencement Date. It obliges the CATO to develop its assets in accordance with the Tendered Scope of Works (Part A), the Initial Bid Design (Part B), and the Post-Adjustment Technical Specification (Part C).
Condition F39: Requirement for Security During Construction
This new condition requires the CATO to put in place Delivery Security Arrangements covering a Protected Amount for the duration of the Security Period. Security must take the form of a Letter of Credit, First Demand Guarantee, or cash deposited in a Delivery Security Trust Account. This reflects the fact that the CATO bears construction risk directly. No equivalent condition exists in the onshore TO licences, where construction risk is managed through the RIIO framework and the Totex Incentive Mechanism.
Condition F46: Application for PPWCA Adjustment
The Post-Preliminary Works Cost Assessment (PPWCA) is a new mechanism for adjusting the Tender Revenue Stream after the preliminary works stage to reflect permissible project changes. The PPWCA occurs near the end of the preliminary works phase and is intended to fix Project Costs and the Target TRS Commencement Date for use in the debt funding competition. Any PPWCA Adjustment is subject to a 40% upward-adjustment cap, creating a significant allocation of construction and development risk to the CATO. This represents an important feature of the early competition framework and requires market participants to assess carefully the extent of cost and consenting risk that remains with the project company.
Condition F47: Asset Health
This condition requires the CATO to undertake a health review no later than five years before the end of the TRS. Following the review, the Authority may direct remediation works to ensure assets are in a condition expected at thirty years of asset life. While the OFTO licence includes provisions for a Health Review and related Investment Works, the CATO condition is structured differently, as it ties into the Residual Value Amount through an "Asset Health Withholding" that reduces the end-of-term payment if remediation is not completed.
Condition F48: Refinancing
The CATO refinancing condition is materially different from the OFTO approach. Under the OFTO licence, refinancing is subject to a gain share mechanism whereby consumers share in any refinancing gain (via the RFGt term deducted from Allowed Transmission Owner Revenue). Under the CATO licence, any positive or negative impact of an Agreed Refinancing must be allocated fully to consumers through the Tender Revenue Stream, and the licensee must not retain any gain, benefit, saving, or other economic value unless expressly provided for in a determination or direction by Ofgem. The CATO refinancing also introduces a requirement for an Initial Agreed Refinancing Decision and an Agreed Refinancing Determination before any refinancing Debt Funding Competition can proceed.
Condition F49: Arrangements for Handover of Business
This condition ensures orderly transfer to a CATO of Last Resort at revocation, expiry, or on Ofgem's direction, requiring a Business Handover Plan and ensuring contracts are transferrable. While the OFTO regime has an Offshore Transmission Owner of Last Resort mechanism (under standard condition E21), the CATO condition is more detailed and includes the requirement for the licensee to facilitate a property scheme under Schedule 2A of the Electricity Act.
Condition F50: CATO of Last Resort
This condition enables Ofgem to appoint a CATO of Last Resort where a competitive tender fails. It requires existing CATOs to participate in CATO of Last Resort Appointment Processes unless they can demonstrate material prejudice. No direct equivalent exists in the onshore TO regime, where incumbents have enduring licence obligations.
Special Condition 1: Milestone Payments
This establishes the value and timing of Milestone Payments to be made in advance of the Commencement Relevant Year. Payments are triggered upon completion of defined milestones and are netted against Base Revenue through the Milestone Payment Adjustment.
Material Differences from the OFTO Licence
| Feature | CATO Licence | OFTO Licence |
| Revenue period | Fixed 35-year Tender Revenue Stream | Typically 20–25 years |
| Construction risk | CATO bears construction risk, with PPWCA cap at 40% | No construction risk for prevalent Generator Build model. |
| Delivery security | Required during construction (Letter of Credit, First Demand Guarantee, or cash deposit) | No equivalent for prevalent Generator Build model. |
| Refinancing | All gains/losses allocated fully to consumers; no gain share retained by licensee | Gain share mechanism – consumers receive a share of any Refinancing Gain (via RFGt) |
| Debt Funding Competition | Required post-PPWCA to discover market financing terms; Selected Financing Option chosen by Ofgem | Funding Solution forms part of Bid competitive evaluation prior to licence grant with Market Rate Revenue Adjustment methodology agreed at Financial Close. |
| Residual Value | Initial RVA of 1/8th of Project Costs; adjusted for Asset Health Withholding | No equivalent Residual Value Amount mechanism |
| Milestone Payments | Pre-construction payments upon achieving defined milestones | No equivalent for prevalent Generator Build model. |
| PPWCA | Cost adjustment mechanism with 40% cap for permissible project changes | Post Tender Revenue Adjustment (PTRAt) for pre-transfer variations |
| Asset Health | Health Review required 5 years before TRS end; withholding from Residual Value | Health Review with Investment Works mechanism; availability exclusions during works |
| Network Innovation Competition | Not included in CATO licence | Included (E12-J11) |
Key Consultation Questions
Ofgem has posed 14 consultation questions, of which the following are likely to be of most interest to potential market participants:
- Whether the proposed credit-worthiness requirements are appropriate and proportionate for all stages of the project lifecycle, particularly investment grade credit ratings during both construction and operational periods (Q8).
- Whether the proposed conditions related to debt refinancing are appropriate, taking into account multiple debt facilities and debt types, changing risk profiles from construction to operations, and matching debt tenors to the Tender Revenue Stream (Q9).
- Whether the proposed conditions could create unnecessary barriers to participation in Early Competition (Q7).
Several aspects of the proposed licence are likely to attract particular scrutiny from potential market participants:
The refinancing regime is notably more restrictive than the OFTO model. The requirement for all refinancing gains to flow fully to consumers, rather than through a gain share mechanism, may dampen incentives for CATOs to pursue value-accretive refinancings and could affect the attractiveness of the regime to equity sponsors accustomed to the OFTO gain share model.
The credit rating requirement warrants careful consideration. The draft licence proposes investment-grade creditworthiness requirements for CATO projects, including during construction in certain circumstances. Achieving and maintaining investment-grade ratings during the development and construction phase of a greenfield SPV may present practical challenges, depending on the allocation of construction risk, project scale and the availability of sponsor support.
The 40% PPWCA cap establishes a clear threshold for construction cost risk allocation. Market participants will need to assess whether this provides sufficient flexibility for the types of complex linear infrastructure projects likely to be tendered, particularly given the consenting and environmental risks inherent in onshore transmission development.
The Debt Funding Competition mechanism, whereby Ofgem selects the financing structure from options presented by the licensee post-PPWCA, represents a significant departure from both the OFTO model (where financing terms are substantially fixed at tender) and project finance market norms (where sponsors typically have discretion over financing structure).
Next Steps
Ofgem expects NESO to request the first project(s) for competitive tender later this year, following publication of the transitional Centralised Strategic Network Plan 2 Refresh. It is Ofgem's ambition to launch the first CATO onshore competition tender during 2027.
This consultation is open for 8 weeks until 16 October 2026. Following consideration of responses, Ofgem will publish a further update in early 2027, followed in due course by a statutory consultation to implement Part F of the electricity transmission licence.
