Ofgem consults on a proposed framework for coordination of offshore transmission

It has set out a proposed framework (77-page / 732KB PDF) for offshore transmission coordination, building on its previous work in this area with the Department of Energy and Climate Change (DECC). The consultation anticipates a flexible framework, depending on the type of investment being undertaken.

The current regulatory regime for the construction and operation of offshore transmission assets was developed by DECC and Ofgem and began in 2009. It sees offshore transmission owners (OFTOs) selected and licensed through a competitive tender process run by Ofgem.

Over 2011-12, DECC and Ofgem carried out a joint project to assess the potential benefits of a more coordinated regime, and to consider whether regulatory changes were necessary in areas where there could be benefits. Their Offshore Transmission Coordination Project (OTCP) found that increasing coordination of investment could potentially reduce costs by between 8 and 15%; however, that the potential for savings was uncertain.

A preliminary consultation (91-page / 1.5MB PDF) by Ofgem in March focussed on two of the biggest potential barriers identified by the OTCP, namely system planning and encouraging anticipatory investment to support the development of a coordinated network. The regulator published an update (19-page / 553KB PDF) in July, seeking further feedback.

Energy law expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com, said that the new consultation was not a "significant leap forward in detailed policy design" from the open letter published by the regulator in July. However, this was understandable given the "real challenges" that needed to be resolved before a framework could be finalised, he said.

"There is broad support from the industry for the underlying policy ambitions - it is, after all, intended to incentivise efficient deployment of offshore transmission infrastructure so as to provide best value to consumers," he said. "Work remains ongoing to develop workable and robust solutions."

Issues needing to be addressed include arrangements for integrated transmission planning, which Chang said would be necessary to "deliver efficient and coordinated offshore transmission investment", as well as the design of "sufficiently strong" incentives to investment, he said.

"For example, the incentives on offshore transmission owners are primarily addressed at ensuring the availability of a single, standalone, connection to shore in relation to a particular offshore wind generation project," he said. "Could part of any solution be a move to a model for offshore transmission where the incentives are perhaps more akin to the onshore transmission RIIO model?"

"It is these kinds of considerations where further work still needs to be undertaken before a proper assessment can be carried out as to how successful any framework for the coordination of offshore transmission is likely to be. However, if these challenges can be met – and Ofgem is working in close collaboration with industry to do so – an effective framework may present opportunities for offshore participants, especially OFTOs and their investors, to expand their portfolio of offshore transmission assets outside of developer-led investment."

The RIIO model, which stands for Revenue = Incentives + Innovation + Outputs, is a new performance-based mechanism used by Ofgem to set price controls. It allows companies who deliver low carbon energy while saving customers money to avoid burdensome price control regulations, and penalises inefficient companies that fail to deliver.

The proposed framework anticipates different risk allocation arrangements depending on whether a generation project involves generator-focused anticipatory investment (GFAI), where investment is geared towards a particular project, or wider network benefit investment (WNBI), where the investment is geared towards the network as a whole. The proposed WNBI framework differs according to whether the investment is being taken forward by an offshore developer or not.

"Ofgem admits that there is currently no clear framework for developing and progressing non developer-led WNBI, but it anticipates that this is something in respect of which transmission owners could submit proposals for funding to undertake preliminary works followed by a tender exercise for the appointment of an OFTO to build the necessary infrastructure," Chang said.