Ofgem publishes minded-to decision and further consultation on Pathway to 2030

In July 2020, the Offshore Transmission Network Review (“OTNR”) was launched with the objective of ensuring that the transmission connections for offshore wind generation are delivered in the most appropriate way, taking into account the UK government’s ambition for a significant expansion in offshore wind in order to achieve net zero. To achieve the deliverables of the OTNR, there are four workstreams operating in parallel, notably being:

1. Early opportunities – to identify and facilitate opportunities for increased coordination in the near term, with a focus on ‘in-flight’ projects.
2. Pathway to 2030 – to drive coordination of offshore projects progressing through current ScotWind and Crown Estate Leasing Round 4, connecting before 2030.
3. 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.
4. Multi-purpose interconnectors – to make tactical changes to facilitate early opportunity MPIs and to develop an enduring MPI regime for 2030 onwards.

In this article, we focus on the Pathway to 2030 following Ofgem’s publication on 20 May 2022 of its minded-to decision and further consultation on this workstream (the “Consultation”). This builds on Ofgem’s July 2021 consultation (the “2021 Consultation”) covering the same (our commentary on the 2021 Consultation can be found here).

Decision on delivery of radial assets in scope of Pathway to 2030

In the Consultation, Ofgem confirms that the existing generator build and Offshore Transmission Owner (“OFTO”) build models will be available to developers where the Holistic Network Design (“HND”) indicates a radial solution for those offshore projects which fall into the Pathway to 2030 workstream, maintaining the current status quo. Ofgem states the reason for this decision is because the OFTO regime has been highly successful at securing the timely connection of offshore generators to the transmission system at a low cost of capital, with combined savings from Tender Rounds 1, 2 and 3 estimated at being between £628mn and £1.149bn. In addition, the OFTO regime continues to be robust, attracting low-cost capital and is well understood by all parties including bidders and developers. With this in mind, Ofgem believes it would not be prudent to introduce a new delivery model with associated uncertainty for these assets.

Minded-to decision on non-radial assets in scope of Pathway to 2030

In the 2021 Consultation, Ofgem consulted on six different delivery model options for the delivery of non-radial solutions, illustrated in the table below:

Source: Figure 2 of the Consultation – Offshore delivery model options

Ofgem has made the minded-to decision to apply a ‘very late competition generator build’ model (option 6) to non-radial offshore transmission systems in scope of the Pathway to 2030 workstream of OTNR in the hope that this model will deliver the offshore transmission infrastructure needed to achieve the government’s ambitions in the timeframes expected, whilst also delivering value for money for the consumer. This is equivalent to the generator-build OFTO option currently used in the GB offshore wind sector. For shared infrastructure, HND would be carried out by the ESO with the offshore generator undertaking detailed designs, consenting and construction of shared infrastructure and a competitive tender process. This is the simplest option in terms of implementation, however there is a perception that this option provides less scope for early-stage innovation or to exert competitive pressure and Ofgem recognises that there will have to be some adaptions to reflect differences between radial and non-radial solutions and how these may be used.

The intention is that HND will result in in a design of fixed infrastructure at its outset. This infrastructure be owned by OFTOs under this workstream will not be added to significantly during the anticipated life of the assets and a certain amount of anticipatory investment will be incorporated into the initial design. Ofgem expects future parties connecting to those assets which have been developed under the HND to do so on a ‘plug and play’ basis without the need for additional shared infrastructure at a later date.

A range of factors were considered in reaching this minded-to decision, including the earliest that infrastructure might be developed under each of the options, alongside the competition savings that could be delivered under each option and the potential benefits or drawbacks from the model options themselves, summarised in the table below:

Source: Figure 4 of the Consultation - Summary of factors considered when reaching minded-to decision

This table displays the discounted delay costs for carbon and option fees in cumulative terms, for the 19GW of planned offshore wind capacity included in the HND. Such delay costs included the Crown Estate option fees (with the risk that such fee costs would be recovered by the generator through higher Contracts for Difference (“CfD”) strike prices, and could effectively be passed through to electricity consumers, as CfD subsidies are funded by a levy on end user bills) and the ‘carbon costs’ of delaying renewable energy generation beyond 2030. Ofgem has estimated that the costly delays avoided by the very late competition model outweigh the potential capex savings provided by the other competition models.

Having reached its minded-to decision, Ofgem has expressed its views on how it intends to implement this model for coordinated offshore transmission assets, focusing its consultation on:

• introducing a Gateway Assessment for Pathway to 2030 models;
• arrangements for a very late model tender process; and
• policy considerations on implementing the OFTO regime for non-radial transmission.

Comment and next steps

The Consultation marks further progress in addressing the barriers to roll out shared offshore transmission network infrastructure, which will be key to achieving the government’s recently updated goal to procure 50GW of offshore wind capacity by 2030 (see here for our commentary on the energy security strategy), and reach net zero by 2050.

While the radial option has been maintained, it is clear that Ofgem expects the industry, led by the transmission system operator, to utilise non-radial solutions wherever possible to achieve a more economic, efficient and coordinated electricity transmission system. The minded-to delivery model may mitigate timing risks in the project development cycle, but questions remain surrounding the additional complexity of developing, constructing and tendering shared assets, consequential changes to the regulatory framework, and ensuring generators build network infrastructure for assets beyond those required for their specific projects.

The Consultation is due to close on 15 July 2022, and a decision is expected to be made this autumn on the consulted issues, together with a final impact assessment. Following this, Ofgem will decide how best to implement these proposals.

Although this document sets out Ofgem’s positions for the Pathway to 2030 workstream, this does not set precedent for the delivery model(s) which may be adopted under the Enduring Regime. Ofgem expects a Government Response document to last year’s Enduring Regime consultation to be published in due course.

National Grid ESO will be issuing its HND during the summer; once this has been finalised, in respect of non-radial solutions, Ofgem will work with the ESO and relevant developers to agree how non-radial infrastructure will be delivered.