Ofgem will consider two new funding models for all major onshore transmission projects during the current RIIO T-1 price control.
The regulator says the alternative funding arrangements will save money for consumers by introducing or imitating competition.
Under the “competition proxy” model, transmission owners will finance, build and operate the assets themselves but will receive revenues in line with the likely outcomes if they had been procured through competitive tenders.
Ofgem intends to use this model for the connection of the Hinkley Point C nuclear plant to the power grid – a decision which has been criticised by National Grid.
It also considered a “special purpose vehicle” (SPV) model, under which transmission owners will run competitive tenders for the assets. They will be financed, built and operated by companies created specifically for their delivery.
Ofgem said this model could deliver the greatest savings for consumers but could also increase costs if project risks are not allocated properly. It rejected the model for the Hinkley connection on this basis.
The regulator said it will take further steps to establish an efficient allocation of risk across transmission owners, SPVs and consumers to enable its use for future projects.
According to Ofgem, competitive tendering for projects to connect offshore wind farms to the power grid has saved consumers more than £700 million since the offshore transmission owners (OFTO) regime was launched in 2009. In recent years, it has been working with the government to implement a similar regime for onshore transmission assets called competitively appointed transmission owner (CATO).
In June, Ofgem revealed it had put this work on hold as the required legislation appeared unlikely to be passed in the near future given the pressure on the parliamentary timetable due to Brexit. The competition proxy and SPV models will be used as stop gap measures until the CATO regime can be introduced.
As part of the RIIO T-1 price control, Ofgem introduced a mechanism known as strategic wider works which enables transmission owners to be allocated funding for major projects within the price control period. The regulator said it will consider the new funding models for all future strategic wider works projects that undergo a needs case assessment during RIIO T-1.
They will only be deemed appropriate for those projects which meet three competition criteria as outlined by the regulator in November 2016, namely that they are:
- New – they are a completely new transmission asset or a complete replacement of an existing transmission asset.
- Separable – the boundaries of ownership between these assets and existing assets can be clearly delineated.
- High value – the expected capital expenditure of the projects at the time of their assessment exceeds £100 million.
Ofgem plans to formalise the criteria in a guidance document and has launched a consultation on draft proposals which closes on 20 February 2018.