Tenders Regulations for Early Competition: another piece of the jigsaw

Ofgem have published a consultation on their proposed Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2024 which are aimed at promoting Early Competition in onshore transmission.

We have previously written about the Early Competition model, commenting on the Regulations introduced earlier this year to establish the criteria that onshore electricity transmission projects must meet in order to be eligible for Early Competition here. Those Regulations came into force on 12 March 2024. 

The latest draft Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2024 (the “draft Tender Regulations”) is another piece in the Early Competition jigsaw, taking Ofgem a further step to making its aspirations for providing opportunities for new investment in the onshore electricity networks a reality.

The Draft Tender Regulations – Key Provisions

The draft Tender Regulations set out the proposed process for the granting of onshore electricity transmission licences to a “relevant electricity project” (see “Qualifying Projects” below) and goes into detail on how the competitive tender process will be carried out. Ofgem’s consultation aims to gather feedback on the proposed legislative framework for future onshore transmission tender exercises.

The draft Tender Regulations have been drafted by Ofgem in conjunction with the Electricity System Operator and the Department for Energy Security and Net Zero (“DESNZ”). They outline the stages of a tender exercise, the process for competitive tenders, and the governance framework for events such as withdrawal, re-run, and cancellation of tenders.

1. Stages of Onshore Transmission Tender Exercise

The proposed tender exercise stages begin with a Pre-Qualification stage and finish with a Preferred Bidder stage, where a Successful Bidder may be determined. These five proposed stages are detailed in the consultation as:

• Pre-Qualification stage
• Invitation to Tender stage
• Best and Final Offer stage (optional)
• Delivery Body Functions Assessment stage
• Preferred Bidder stage

2. Qualifying Projects

Ofgem set out specific criteria for projects to qualify for the tender process. As set out in the Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024, the criteria states that the project must be innovative, distinct, able to address a network requirement with reasonable certainty, and expected to provide a tangible benefit to consumers.

Ofgem will assess this information to determine if a project qualifies for a tender exercise. The draft Tender Regulations also allow Ofgem to issue an ‘information notice’ if additional details are needed to make a decision. These criteria ensure that only suitable projects are considered, maintaining the integrity and efficiency of the tender process.

3. The Tender Process

There are certain pre-tender activities that Ofgem and the National Energy System Operator (“NESO”) will be required to follow prior to beginning a tender process. They may have to engage with the market in order to assist with preparing tender documentation, identifying potential bidders and shaping the approach to the tender exercise.

The draft Tender Regulations require that, during preliminary market engagement, tender parties must take steps to ensure fair competition. NESO must either publish a ‘preliminary market engagement notice’ outlining the timing and scope of the engagement or provide reasons for not doing so in the ‘intention to commence notice’. This ensures that no party gains an unfair advantage or disadvantage from participating in the preliminary market engagement, and that the process is conducted openly and transparently.

Then, the process begins with the Pre-Qualification (“PQ”) stage. This stage ensures potential bidders are suitable for the tender. NESO will use a Pre-Qualification questionnaire, approved by Ofgem, to gather necessary information. The PQ stage assesses bidders’ capability to deliver the project. Bidders who pass must sign a confidentiality agreement before moving on. To streamline the process, Ofgem proposes in the consultation that bidders who pass the PQ stage and submit a tender will also be eligible to apply for an onshore electricity transmission licence simultaneously.

NESO will then determine which bidders qualify to proceed to the Invitation to Tender (“ITT”) stage and will notify all bidders of its decisions and reasons. The ITT stage invites qualifying bidders to submit bids into the tender. The draft Tender Regulations make provision for Ofgem to receive payments from the qualifying bidders to recover the cost of running the tender. NESO will then prepare the ITT documents, to be approved by Ofgem, which sets out the information bidders require to submit as part of the tender process and the evaluation criteria.

Following completion of the tender exercise, NESO will then evaluate the submissions in accordance with the evaluation criteria and determine a ‘Provisional Preferred Bidder’, and subsequently a ‘Preferred Bidder’. Provided the conditions outlined in the draft Tender Regulations are met, the Preferred Bidder will be designated as the ‘Successful Bidder’ and will be responsible for advancing the project, contingent upon receiving a licence from Ofgem.

4. Governance Framework

The regulations also detail the governance framework around specific elements of a tender process. It sets out: the manner in which bidders can withdraw from a tender exercise; the process for when a tender requires to be re-run or cancelled; the handling of payments and securities upon such cancellation; and the process for when a bidder is to be disqualified from the tender process.

Comment

The draft Tender Regulations represent a significant step towards implementing Early Competition. The draft Tender Regulations provide a clear framework for tender exercises, governance, and the roles of key bodies like NESO and Ofgem, the regulations aim to ensure a fair, transparent, and efficient process.  For those familiar with the OFTO model, the draft Tender Regulations will not appear too dissimilar to the Electricity (Competitive Tenders for Offshore Transmission Licences) Regulations 2015 (the “OFTO Tender Regulations”).  However, key differences include:

• the OFTO Tender Regulations include detailed provisions around the value of the transmission assets to be transferred (generator build) or to be developed (OFTO build) whereas the draft Tender Regulations are silent on the valuation of assets to be included in the onshore transmission licence;
• the draft Tender Regulations include provisions around preliminary market engagement, which are absent from the OFTO Tender Regulations;
• the draft Tender Regulations and the OFTO Tender Regulations include similar disqualification criteria such as conflicts of interest, anti-competitive behaviour and bribery but the draft Tender Regulations include more detailed provisions in relation to conflicts of interest and anti-competitive behaviour; and
• the draft Tender Regulations also include provisions for accelerated application for an onshore transmission licence, which may be applied for once a qualifying bidder has submitted its tender.

The draft Tender Regulations also raise questions.  For example, it remains to be seen how any valuation of assets will be reflected in the payments to be made to the successful bidder (and its licence) for an Early Competition project.  Further, the accelerated licensing process in the draft Tender Regulations refers only to an application form being determined by Ofgem, together with such information and documents requested under that form (which is similar language to that in the Electricity Act 1989 (e.g. section 6A)).  Regulation 41 of the draft Tender Regulations also dispense with Sections 6A and 6B to the extent an onshore transmission licence is applied for under the draft Tender Regulations.   However, we would suggest clarity is needed within Regulation 41 as to whether other key provisions of the Electricity Act 1989 do still apply (as we would expect they should), for example Section 8A (applying the standard conditions of licences) and Sections 10A to 10O (unbundling). 

Next Steps

Industry stakeholders are invited to provide feedback on all aspects of the draft regulations by 1 November 2024, after which the draft Tender Regulations shall be finalised and submitted to the Secretary of State for approval.

Ofgem notes that some elements of the Early Competition framework are still to be determined and it intends to consult on the commercial model later this year. However, Ofgem does not foresee that subsequent changes to the framework and commercial model will require changes to the draft Tender Regulations.

Article prepared with assistance from Soha Ahmed, Trainee Solicitor, in our Energy and Infrastructure team.