Ofgem Provides Update on Development of Competition in Onshore Electricity Transmission

On 14 December 2023 Ofgem released an update on the development of competition in onshore electricity transmission (the “Update”) setting out its intended focus during 2024. This update is in response to the Government’s Transmission Acceleration Action Plan (the “TAAP”), published on 22 November 2023, which we reported on here. The TAAP committed to introducing competition to the onshore electricity networks as soon as reasonably possible, aiming to identify the first eligible project for competition in the summer of 2024. The TAAP outlines the Government’s commitment to introduce competition in order to save consumers up to £1bn by 2050 and encourage greater levels of inward investment into the GB energy networks.

In the Update Ofgem confirmed its intention to focus on “early competition” throughout 2024. “Early competition” refers to competition that is run before detailed design work has been undertaken, “late competition” applies after planning consents have been approved and “very late” competition refers to competition for operation and maintenance of existing assets (akin to the OFTO generator-build model). 

Early competition to date

A large body of work has been undertaken to date on the development of early competition. Ofgem’s 2022 Decision, available here, (the “2022 Decision”) set out the roles and responsibilities of NGESO, Ofgem and the Transmission Owners (the “TOs”), confirming Ofgem’s roles as the Approver and Licence Counterparty. As Approver, Ofgem retains responsibility ensuring projects progressing through early competition are and remain in the interest of consumers and, as Licence Counterparty, Ofgem awards and manages any licence awarded to successful bidders.  The 2022 Decision also summarised the work required to establish an early competition framework including: drafting the Cost Benefit Analysis methodology, conflict mitigation arrangements and CATO of last resort processes in case of competition failure. In the 2022 Decision Ofgem set out details on the likely criteria for projects that Ofgem and NGESO viewed as appropriate for early competition as:

• New and separable
• Certain; and
• Have initial cost base analysis suggesting that early competition would benefit customers.

Ofgem has outlined its view that although a minimum value threshold has been introduced for late competition of £100m in the context of RIIO-2, it is not going to adopt a minimum value threshold for early competition at this stage. Whether a minimum value threshold is adopted is likely to depend on the cost benefit analysis and methodology developed and adopted.

Energy Act 2023

These steps are supported by the policy framework set out in the Energy Act 2023 (the “EA23”) which received Royal Assent on 26th October 2023. Key features of the EA23 which support development of early competition include Schedule 15, which amends the Electricity Act 1989 setting the legislative basis for creating a framework for onshore competition by inserting new definitions for “relevant electricity project”, “relevant licence” and “relevant contract”.   Schedule 15 also legislates for Ofgem introducing a competitive tender framework via regulations. There however remains a large body of work to be done to design and implement the regulations as noted below.

Timeline for progress

The Update provides further detail on the timeline for further consultations and steps to be taken to implement early competition in the course of 2024:

• Early 2024: NGESO will publish the second Transitional Centralised Network Plan (tCSNP2) which will identify the reinforcements required on the transmission network. Ofgem will then identify suitable projects for early competition later in the year having assessed the projects in the plan against the early competition eligibility criteria and conducting cost benefit analysis;
• Spring 2024: NGESO to continue development of the commercial model and tender process and hold the initial consultation on commercial arrangements;
• In the course of 2024: Ofgem to consult on outstanding policy issues such as the CATO last resort arrangements, cost benefit analysis methodology, TO conflict mitigation measures and costs and recovery processes;
• By the end of 2024: Ofgem to hold an initial stakeholder consultation in Spring 2024 and to finalise the Tender Regulations; and
• Throughout 2024: modification of the existing TOs’ licences and creation of a new licensing framework for successful CATOs, with a licence drafting working group being established.

Comment

Ofgem concludes the Update by confirming that it will continue to work with NGESO to develop the early competition framework and states that it intends to publish a policy consultation in early 2024, setting out Ofgem’s thinking and the further work requirements in more detail.

While early competition has been in development for a number of years now, the timetable set out should mean that in the course of the next year there will be a much clearer picture of the projects eligible for early competition and developers, as well as the existing TOs, will be able to plan and pitch for projects within the new framework. However, it is noted within Ofgem’s RIIO-3 Sector Specific Methodology Consultation that is expected that the “large majority of projects will continue to be designed and procured by the existing TOs during RIIO-ET3”. The RIIO-ET3 period is due to run from April 2026 for a likely period of 5 years so while competition may be introduced in the next year, it seems likely that a number of projects will still be developed under the current model in the short-medium term.