Significant steps taken to implement Early Competition in onshore transmission with release of Regulations and further consultation
On 20th February 2024 the Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations (the “Regulations”) were published. Due to come into force on 12th March 2024, the Regulations set out the criteria that onshore electricity transmission projects must meet in order to be eligible for Early Competition.
The publication of the Regulations follows the body of work done to date on Early Competition which we recently outlined in our article in December 2023.
“Early Competition” has been defined by Ofgem as competition which is run before detailed design work is undertaken in respect of a project. Last year the Government’s Transmission Acceleration Action Plan (the “TAAP”) reiterated the Government’s commitment to introduce Early Competition in order to save consumers an estimated £1bn by 2050. It is also hoped that Early Competition will encourage greater levels of inward investment into the GB energy networks, also covered in our December 2023 article.
The legislative process for establishing onshore competition was commenced by the Energy Act 2023 (the “EA23”) which received Royal Assent on 26th October 2023. Schedule 15 supports the development of onshore competition by amending the Electricity Act 1989 to insert new definitions, including, “relevant electricity project”, “relevant licence” and “relevant contract” and also legislates for Ofgem introducing a competitive tender framework.
New definitions
The Regulations introduce a number of new definitions, including for both an “early-model tender exercise” and “late-model tender exercise”.
Early-model tender exercise is defined as “a tender exercise which relates to a project before the completion of preliminary works”.
Late-model tender exercise is defined as “a tender exercise which relates to a project after the completion of preliminary works”.
Criteria
There are 5 main eligibility criteria set out in the Regulations:
- Network Need
- Novelty
- Separability
- Consumer benefit criteria in respect of an early-model tender exercise; and
- High value criteria in respect of a late-model tender exercise.
The network need and novelty criteria state that, in order to be eligible, projects must be capable of addressing a network need and must be wholly new to the electricity transmission system. The novelty criteria requires projects to replace an entire asset which forms part of the electricity transmission system.
The separability criteria outlines that eligible projects must be capable of being clearly distinguishable from any other part of the transmission system to which it relates and from any other electricity solution related to that transmission system. The explanatory notes published alongside the Regulations highlight that different criteria will apply to different types of project. Further, in relation to both early-model tender exercises and late-model tender exercises, the ownership and control must be separable from the ownership and control of the transmission system. This separability is similar to that seen under the current OFTO model.
In relation to the consumer benefit criteria added, the Regulations add a new definition of “cost benefit analysis” which is defined as meaning “(a) an analysis of the costs and of the benefits to consumers; and (b) a reasonable estimate of those costs and benefits”. The analysis must demonstrate that the non-tendered consumer impact does not outweigh the tendered consumer compact. However, the exact model of the analysis to be undertaken remains under development. As set out in the Early Competition Plan, published by the ESO in 2021 and developed at Ofgem’s request to set out the ESO’s plan for the introduction of Early Competition, the ESO is likely to undertake the cost benefit analysis before making a recommendation to Ofgem on whether a project should be tendered. In the ESO’s latest update it incorporated a first of a kind premium, a qualitative scoring mechanism and bidder cost sensitivity benchmarks. The full ESO update on implementation of February 2024 is available here.
The final section of the Regulations outlines the high value criteria for late-model tender exercises. There is no similar high-value threshold introduced for early-model tender exercises. Projects to be classified under this section must have an estimated capital expenditure of £100M or more. Costs that fall within the £100M+ figure include: construction costs, land acquisition and project management costs.
Ofgem consultation
Separate to the publication of the Regulations, Ofgem released a policy update and consultation on 21st February 2024 on Early Competition in onshore electricity transmission networks (the “Consultation”). The Consultation sets out Ofgem’s latest thoughts, and seeks views, on proposals in a number of areas for development in Early Competition.
Changes to the early competition model by the ESO under its EC-I Update, including the Cost Benefit Analysis (CBA) model and wider methodology for identifying projects for early competition.
The ESO has proposed that an Early Competition tender is specified in detail following the release of the transitional Centralised Strategic Network Plan (“tCSNP”) and Strategic Spatial Energy Plan (“SSEP”), both of which have been developed subsequent to the 2022 Decision. Ofgem’s view is that this will provide more certainty to bidders and local stakeholders, by providing alignment on a number of measures, while allowing for easier comparison of bids and that the removal of the Transmission Owner’s (“TO”) role within the bid assessment will encourage bidder’s participation. Ofgem seeks stakeholders’ views on the amended model removing the ability for non-network and network solutions to directly compete in early competitions. This has been proposed by the ESO due to the complexity in designing a procurement that enables an objective comparison of two fundamentally different offers and the award will likely be different between a network and non-network award i.e. a licence for network bids and a contract for non-network bids.
TOs conflict mitigation in supporting early competition tender processes
The Consultation adds detail to Ofgem’s plans to address potential and perceived conflicts such as TOs influence on options considered in analysis determining network upgrades required, TOs role in initial network design, TOs role in reviewing other bidders and access to confidential bidder information and the risk of cross-subsidy from RIIO funding. It is proposed that TOs are obliged through their licences to act fairly and transparently in supporting the tender process. The proposal envisages a requirement for TOs to submit a conflict mitigation statement to be approved by Ofgem to enable TOs to participate as bidders. Ofgem is particularly keen for TOs to participate, noting that their knowledge and experience of delivery of electricity infrastructure will enhance the number and quality of bids received. The statement would include detail on the separation of the bidding unit and management structures, separation of costs, assets and financing of the project and limits on the transfer of staff knowledge.
TNUoS revenue recovery for competitively appointed transmission owners (CATOs)
Ofgem proposes that it is not in consumer interests to expose CATOs to TNUoS over and under recovery as is the present case for onshore TOs. It is Ofgem’s view that revenue uncertainty would lead to costs being passed onto consumers. This reflects the current position for OFTOs, who are similarly not subject to the recovery mechanism.
The Consultation also proposes that existing TOs who win an Early Competition tender would be treated as a CATO in respect of the relevant project.
Options for dealing with CATO/ tender failure
A range of regulatory approaches which would be available in the event of a CATO failure during a project lifecycle are set out in the Consultation. Dependent on the situation and timing of a failure potential options which may be considered include re-tendering, TOs being funded to carry out the works under their RIIO arrangements and a process catering for a transfer of assets to a CATO of last resort. The re-tendering and CATO of last resort mechanisms will be familiar to OFTO market participants, as these are also a feature of the OFTO regime.
Looking ahead
The Consultation is open until 20th March 2024 for responses and Ofgem expects to reach its decision on the policy areas covered within the Consultation by early summer. There will be a separate consultation on the ESO’s proposed commercial model and the tender regulations under development of the early competition model. In line with the update in 2023 Ofgem expects to identify at least one suitable project by the end of 2024 further to the release of the tSCNP in March 2024.
