UPDATE ON THE OFFSHORE TRANSMISSION NETWORK REVIEW

INTRODUCTION

The Offshore Transmission Network Review ("OTNR") was launched in July 2020 to ensure that transmission connections for offshore wind generation can be delivered to support the UK Government's ambitions to increase offshore wind power to 40GW by 2030 and to deliver on its Net Zero ambitions.

In April, Ofgem published two Minded-to Decisions as part of this ongoing review, which looks to address two key challenges inherent to the delivery of this regime change.

MULTI-PURPOSE INTERCONNECTORS: INTERIM FRAMEWORK

On 14 April 2022, Ofgem published its minded-to decision relating to the development of an interim regime to facilitate and regulate near-term Multi-Purpose Interconnectors ("MPI").

Today, interconnectors operate to share electricity between countries.  The vision of MPIs is to facilitate offshore wind and interconnection to work together as a combined asset, delivering green electricity from offshore wind to different countries.

With the publishing of this minded-to decision, Ofgem has given an insight into what the regime for MPIs may look like in the future and how Ofgem will go about licensing such projects.

Ofgem is considering two MPI models, being:

1. the Offshore Transmission Operator led model (where the assets are classified and licensed in two sections, one "OFTO" section linking the wind farm to the onshore GB transmission network, and one interconnector section linking the wind farm to the connecting country, to facilitate cross border trade; and
2. the Interconnector led model (where the assets are classified and licensed as a single continuous asset).

Ofgem's minded-to decision is that the asset classification will be based on the primary and main use of the asset, which will be monitored using a reporting regime. One particular consideration for Ofgem is that it wishes to avoid imposing additional costs on developers, and it recognises that the process of pre-existing assets evolving into MPIs can be complex and costly. Any such evolution would therefore be considered on a case-by-case basis. This flexibility in approach will be encouraging to developers of and investors in offshore assets.

In parallel to this, on 25 April 2022, the Department for Business, Energy & Industrial Strategy ("BEIS") published its response to the MPI questions from the OTNR consultation, which focus on the need for and benefit of legislative change in this area. BEIS recognises that there are restrictions and limitations in the current legal and regulatory framework which will need to be adjusted to deliver an enduring solution for MPIs.

In particular, BEIS recognises that there is a need for an efficient and implicit cross-border trading arrangement, in order to deliver certainty and support investment. BEIS has stated that it is committed to the UK-EU Trade and Cooperation Agreement which requires the development of new trading arrangements, however, there is no certainty on the timeline as to when such cross-border trading arrangements will be developed.

OFGEM OFFSHORE COORDINATION: ANTICIPATORY INVESTMENT

Ofgem announced the Early Opportunities workstream on 14 July 2021 which aims to facilitate greater coordination in the connection of offshore wind farm projects which are at a relatively advanced stage of the development process. This minded-to decision is an important update on the allocation of Anticipatory Investment ("AI") risk.

AI risk is a risk taken by a developer of offshore transmission infrastructure to support the later connection of other offshore projects, which may or may not come online on time, or at all.

Ofgem's minded-to decision proposes that such risks would be allocated to consumers until the future planned user starts paying Transmission Network Use of System charges, or in the alternative situation where the future planned user fails to connect. To support these changes, and to minimise risk to consumers, Ofgem proposes to extend user commitment provisions (with cancellation charges) to the future planned users of new offshore development.

If finalised, this position will provide necessary increased certainty and incentive for developers and investors to engage in the greater coordination of offshore projects.

NEXT STEPS

There are a number of windows open to provide feedback on the minded-to decisions, and we look forward to further updates from Ofgem and BEIS, as the policy in this area continues to crystallise.