Stephanie McGregor

1
UK’s Offshore
Transmission Regime:
A case study for
financing a low carbon future
Stephanie McGregor
Director Offshore Transmission
June 2011
www.ofgem.gov.uk
Today’s presentation
1.
Big picture
2.
The OFTO
3.
Making the opportunity real
(aka fundable)
4.
Opportunities/challenges
ahead
All you can see in 30 mins!
www.ofgem.gov.uk
Critical developments & debates…
Electricity
Market
Reform
Retail
Market
Review
Climate
change
targets
RO review
EU
Renewable
Energy
Directive
European
Intergration
Significant challenges ahead
www.ofgem.gov.uk
…grand ambitions…
UK energy policy aspirations:
•
•
•
•
•
Meeting the 2020 Renewable energy
commitment;
Decarbonisation of electricity by 2030;
2050 carbon pathways;
Marine renewable generation – potentially up to
67GW installed by 2030;
Nuclear – could have a significant role in
decarbonisation.
This will require significant new transmission
infrastructure.
Similar aspirations across Europe
www.ofgem.gov.uk
….and a universal challenge for a low carbon
future…
www.ofgem.gov.uk
….securing investment!
Estimates - £200bn +
Capital markets fragile
Market players seeking certainty
(investors, funders, developers, operators,
suppliers….)
Challenges & opportunities ahead
Xx
www.ofgem.gov.uk
OFTO regime
Implementing a model which
is…
...attracting/delivering investment
www.ofgem.gov.uk
What is the OFTO opportunity?
• Offshore Transmission Owner
(OFTO)
• An entity licensed to provide
transmission services
•
So what is an OFTO again?
•
How do we select an OFTO?
•
How does the OFTO licence work?
•
Market activity to date
• The owner and operator of the
assets relevant to provide the
transmission services
Xx
www.ofgem.gov.uk
What is an OFTO (2)?
Onshore
TO
Offshore Transmission Owner (OFTO)
Licencee
Generator
Connection to
onshore network
Onshore
Substation
Offshore Substation
Platform
Subsea cable
132 kV
33 kV Inter Array Cables
www.ofgem.gov.uk
How do we appoint an OFTO ?
Developer project qualified by Ofgem
˜
˜
financial commitment
detailed data provision
•
Ofgem run a competitive process - defined
stages & requirements
•
Project specific & revenue (20 year) based
bidding
•
Identified project, known transfer value & clear
licence obligations
•
Long list of bidders
Qualification to Tender
(QTT)
Scored
Short list of 3-5
bidders
Invitation
to tender
(ITT)
Scored
•
Pre-qualification (PQ)
Pass/fail
Preferred Bidder &
Successful Bidder
Accessible to range of funding approaches
Licence
Grant
www.ofgem.gov.uk
The OFTO Licence - how does it work?
1. Obligations
OFTOs are required to:
•
achieve the broad obligation to operate assets
in line with industry best practice to minimise
the effect and duration of any transmission
outage
•
report details of any service reduction over 21
days
•
provide written statement of compliance with
best practice if availability below 75% in a year
or 80% over two years
This creates an obligation to repair assets
If does not comply, enforcement action could be
significant - licence revocation
www.ofgem.gov.uk
OFTO Licence - how does it work?
2. Incentives
•
•
Not to compensate generator for
lost revenue – disproportionate
Incentive designed to encourage
behaviour to maintain availability
•
OFTO faces reduced revenue if it
fails to meet availability target
•
Incentive significantly reduces
equity returns in case of major
outage – does not put OFTO at risk
of breaking minimum cover ratios
Design
• Availability target set at 98%
• Revenue uplift for good
performance
• Monthly weighting
• 50% of OFTO revenue is at risk for
performance below the target in a
year
• Revenue impact is spread over five
years
Xx
www.ofgem.gov.uk
OFTO Licence - how does it work?
3. Enforcement
Authority can take enforcement action against
licensees that:
•
•
Contravene licence conditions
Are likely to contravene licence conditions
Enforcement actions can include:
•
•
•
Enforcement orders
Fines
Licence revocation
Therefore up to 100% of revenue is at risk!
www.ofgem.gov.uk
Making the opportunity real
(aka fundable)
•
Clear commercial & regulatory structure
•
Transparent & clear process
•
Accessible to different funding approaches
•
Project pipeline
KEY = CERTAINTY
www.ofgem.gov.uk
Commercial & regulatory structure
Licence
NETSO
O&M
Contract
Code
s
Transmissio
n Licence
Consents
Government
OFTO
Ofgem
Lease
Sale &
Purchase
Agreement
Crown
Estate
Lease
Offshore Generator
Generation Licence
www.ofgem.gov.uk
Key investment features
Attractive investment
sector
Robust new
regulatory regime
Transparent
competitive process
Long term
opportunity

Strong UK political & regulatory support

Rare opportunity for new entrants to UK transmission sector

Relatively low risk asset class

20 year revenue stream with limited regulatory intervention

Pass through of certain key costs

OFTO protected from wind farm operating risk & risk of stranding

Upside potential: opex, non-regulated services, increased capacity

Well defined tender process,

Structured to ensure level playing field & transparency

2 qualification stages followed by ITT stage with M&A data rooms

A number of phases over several years: potentially £15 bn of assets

Early participation will provide valuable experience

Enduring regime offers design & construction opportunities
www.ofgem.gov.uk
Project pipeline
•
•
•
•
•
Linked to Crown Estates R1, R2 & R3 Zones
Early tender rounds transitional rounds (TR1, 2a & 2b)
Under enduring regime it will be developer/generator
requirements & choices that influence timing & model for
opportunities come to market.
Enduring regime = generator choice of generator build or
ofto build.
Extensive engagement with generation developers on
developing plans
OFTO pipeline
2009
2010
2011
2020
35
Final
Consultation
Cumulative
UK Offshore
Wind
Capacity
(GW)
30
Go-Active
25
20
First Transitional
Tender Process (£1bn+)
15
Go-Live
10
2nd Transitional
Tender (up to £2bn+)
5
0
Enduring Regime Tender Process
(£12bn+)
www.ofgem.gov.uk
Tender Round 1
Project
Preferred Bidder/OFTO
Robin Rigg (FC/Licensed March
‘11)
G.Sands (S.8A con closed June ‘11) • Transmission Capital Partners
(TCP)
Barrow
Ormonde
Thanet
Walney 1
Walney 2
Sheringham Shoal
Greater Gabbard
Value = £1.1bn & circa 2GW
•
Balfour Beatty
•
Macquarie
•
Green Energy Transmission
(Equitix, Balfour Beatty, AMP)
Savings forecasts positive
www.ofgem.gov.uk
Tender Round 2
Humber Gateway
(300MW £218m)
Race Bank
(up to 620MW c.£500m)
West of Duddon Sands
(389MW £255m)
Lincs
(250MW £311m)
Tranche 2a Projects
(1.5GW & £975m est. value)
TR2a bidders:
• TCP
• Blue Transmission
(Macquarie/Mitsubishi
)
• Green Energy
Transmission (Balfour
Beatty & Equitix)
• National Grid
Offshore Ltd
Gwynt-y-Mor
(576MW £306m)
London Array
(630MW £476m)
Expected Tranche 2b Projects
(1.3GW & £1m+ est. value)
www.ofgem.gov.uk
Opportunities & challenges ahead
•
Rapid market development
•
Moving into the enduring regime – generator choices
•
Co-ordination – enhancement
•
Wider policy landscape
www.ofgem.gov.uk
Market development
• Market evolving rapidly on bidder & developer sides
• Interest strong to date
• Bidder/consortium configurations evolving
• Market awareness & understanding increasing, breadth & depth in growing
phase – bidders & generators
• Particular interest in larger asset opportunities – interest expressed from
potential future new entrants
• Bidder/partnering approach may need to evolve for enduring depending on
how projects come to market
• Understanding of technology options, innovations & constraints
www.ofgem.gov.uk
Coordinated offshore transmission
development
• Ofgem/DECC announced coordination workstream in August 2010 to focus
on opportunities for enhancing co-ordination within the offshore
transmission regime
• Offshore Transmission Coordination Advisory Group (OTCG) established &
work underway with inputs from Stakeholder Community
• Ofgem/DECC conclusions to be informed by a range of evidence &
analysis
• Assessment of options which emerge will relate to how they
perform against Ofgem & Government objectives & statutory
obligations
• Any proposals that are set out in our conclusions report would be
subject to public consultation
www.ofgem.gov.uk
…and there are major challenges ahead
Investment challenge:
•
•
•
Significant capital requirement - £200 billion+ over the next decade to meet our
aspirations;
Capital markets fragile;
Investors need certainty and stability
• Impact on developers?
• Impact on supply chain?
Future still very uncertain:
• Political uncertainty – eg impact of EMR proposals;
• Scale and timing of onshore development – what role will nuclear play;
• Scale and timing of offshore development – ODIS scenarios has a broad range 2567GW.
Network development:
• Long lead time to deliver new capacity;
• Supply chain readiness – volume of new tech.
What is the appropriate network configuration?
25
THANK YOU