Ofgem has proposed a series of measures to speed up the delivery of large onshore electricity transmission upgrades needed to achieve the government’s target of deploying 50GW of offshore wind by 2030.
The regulator said it is considering providing early certainty on funding, reducing number of regulatory approval gates and giving exemptions from the incoming introduction of competition to large onshore transmission projects.
In a refresh of its Network Options Assessment (NOA) recently published alongside its Holistic Network Design, National Grid Electricity System Operator (ESO) identified 78 onshore transmission network projects worth £21 billion that will be needed to connect 50GW of offshore wind to the power grid by the end of this decade.
Ofgem said the measures it is consulting on concern the 26 high value strategic projects, which are each estimated to cost more than £100 million and have a combined value of £19.8 billion. It said 10 of the projects, worth £10.6 billion, are currently expected to be delivered after 2030.
The regulator said the delivery of these types of projects typically takes around 11 to 13 years, with half of this period being taken up by consenting processes and construction lasting around 4 to 5 years, depending on the length of the circuit.
Ofgem said the failure to complete these projects by 2030 will have significant consequences: “Insufficient capacity in the onshore transmission network could mean that some of the new renewable generation expected to be connected in 2030 will not be able to do so in a full and safe manner, putting at risk the ambitions set out in the Energy Security Strategy.
“In addition, even if some generation can be safely connected to the onshore transmission network, there may be boundary transfer capability constraints elsewhere on the system which means that the electricity cannot be safely transmitted to where it is needed.
“This could lead to a substantial increase in constraint costs being paid to generators and passed on to consumers’ energy bills.”
The regulatory funding arrangements for these projects is currently covered by the Large Onshore Transmission Investment (LOTI) process, which adapted and replaced the Strategic Wider Works mechanism as part of the RIIO2 price controls.
This process sees transmission owners submit an initial needs case to Ofgem for approval ahead of seeking planning consent. Once a detailed project design has been completed and a planning application has been made, companies submit a final need cases to Ofgem, which then undertakes a project assessment.
Pre-construction funding is provided for projects listed in the NOA but full funding is only made available after planning permission has been secured and Ofgem has undertaken a project assessment to determine efficient costs.
Ofgem said it believes the LOTI process can be streamlined by accepting the need for projects without requiring transmission owners to submit an initial and final needs case, and providing early certainty of funding before the detailed design is known and planning permission has been secured. It said these changes could reduce the time taken to deliver projects by one year.
The regulator put forward four potential options for streamlining the process:
- Early acceptance of project need on a programmatic basis for all qualifying projects, without endorsing particular design choices or costs, thereby giving an early signal for transmission owners to proceed with pre-construction work
- Approval of allowances for qualifying projects in stages: one for early construction funding in advance of any planning permission and a second for a full cost assessment after planning permission is granted
- Early (pre-planning) approval of full project costs for qualifying projects, subject to a review after planning permission if there are material changes in scope or cost
- Passthrough of full cost for qualifying projects, subject to a cap
The regulator said its minded-to position is to adopt a combination of the first and second options, explaining that this would strike a good balance between providing transmission owners with sufficient confidence to accelerate project delivery and protecting consumers by building a full cost assessment into the overall process. It said the third and fourth options would expose consumers to a high risk of excessive costs.
Ofgem said some strategic onshore transmission projects could soon be delivered by third parties through a competitive tender process it is developing with the ESO.
Changes to primary legislation to enable this process were recently introduced by the government as part of its Energy Security Bill. This legislation, and the associated regulatory arrangements, are expected to be in place by 2024 at the earliest.
Ofgem said it does not believe that the delivery of strategic projects by competitively appointed third parties should ultimately take any longer than delivery by transmission owners.
However, the regulator said for the some of the projects needed by 2030, transmission owners may need to start engaging with the supply chain and moving ahead with pre-construction and construction work before the supporting legislation and regulatory arrangements are in place to enable competitive tenders.
It noted concerns raised by transmission owners that they may otherwise face difficulties in mobilising the supply chain due to a significant increase in global demand for high voltage direct current cables and other assets and components: “Without being able to bulk procure for projects in Britain well ahead of construction, transmission owners are concerned that the supply chains will prioritise their focus elsewhere in the world, which could lead to delays to the delivery of investment in Britain.”
The regulator said is therefore considering exempting a number of projects from competition.
Of the 26 high value strategic projects identified in the NOA, Ofgem said five projects worth £0.7 billion are not expected to meet the criteria for competition.
A further five projects worth £4.1 billion are expected to be eligible for competition but will need to mobilise the supply chain before competitive tenders can be held. The regulator said any delays to these projects could significantly increase constraints costs, more than offsetting any savings derived from competition.
Ofgem said there are another ten projects worth £10.6 billion that are not currently expected to be completed until after 2030 and therefore need to be accelerated. This leaves just six projects worth £4.3 billion that are expected to be delivered by 2030 and could be subjected to competition without causing delays in mobilising the supply chain.
The regulator it is considering either exempting all 26 projects from competition, or all but the last six, with the latter option being its minded-to position.
The deadline for responses to the consultation is 6 September.
Alongside Ofgem’s proposals, the Department for Business, Energy and Industrial Strategy also issued its response to an earlier consultation on the introduction of competition to onshore electricity networks at the transmission and distribution levels.
As well as affirming the planned exemption of some strategic projects from competition as previously outlined in the government’s Energy Security Strategy, BEIS proposed that the ESO should be appointed to run competitive tenders at the transmission level, with this function being transferred to the Future System Operator when it replaces the ESO. It said this is not a final decision and will be at the discretion of the secretary of state at the time of the appointment.
The department said there is not enough certainty about the future of distribution system operator (DSO) governance to make a similar recommendation for competitive tenders at the distribution level. It said it will give further consideration to the issue once Ofgem has completed its ongoing review of DSO governance and it is closer to implementing the supporting legislation for competition for distribution projects.
BEIS said Ofgem’s current high value threshold of £100 million is an appropriate criterion for considering transmission projects to be eligible for late-stage competition, but said this will be kept under review as the market becomes more established. It said the eligibility criteria of “new, separable and high value” are also suitable for late stage competition at the distribution level, but it is still considering what is an appropriate high value threshold.
The Association for Renewable Energy Clean Technology (REA) welcomed BEIS’ response to the consultation but raised concerns over its deferral of decisions concerning distribution networks.
REA head of policy Frank Gordon said: “We strongly welcome the principle of greater competition in this area as grid connections have become a key barrier to new power and storage projects due to high costs and lengthy delays. Any initiative to reduce these costs and speed up connections is essential to the net zero transition.
“We look forward to Ofgem publishing further detailed proposals on the type of projects to be tendered for and the more detailed processes and timelines.
“We note the deferral of some decisions still outstanding for distribution level connections with more concern however, as this part of the market is in most need of beneficial change. BEIS and Ofgem must prioritise changes at this level, and we would welcome further clarity on this quickly.”
Ofgem and BEIS have additional published their joint Electricity Networks Strategic Framework, which set out a number of actions they are taking to transform the power grid as part of its decarbonisation. These included accelerating the regulatory approval of onshore transmission upgrades and introducing competition to onshore electricity networks.