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28 March 202417 minute read

Early competition on the onshore transmission network: driving innovation

This article offers a summary of and an update on one of the reform (policy) measures enabled by the Energy Act 2023, namely the introduction of competition in the procurement of solutions (projects) for the development of the onshore electricity transmission network in Great Britain – the focus is on early-stage onshore project competition (i.e. running a competition early-on in the project development process). We hope what follows will be of interest both to energy market participants and those who work in the procurement and tendering of infrastructure projects.

 
The existing position

As things stand, the design, build, commissioning and operation of new onshore electricity transmission assets is arranged by the incumbent transmission owner (TO), which is regulated through its electricity licence pursuant to the ‘revenue = incentives + innovation + outputs’(RIIO) price control framework. Competition is possible for the award of an offshore electricity transmission licence, but the introduction of competition (including early competition) for onshore electricity transmission projects reflects new policy.

 
The early competition plan

The idea behind the early competition plan (ECP), as conceived by the energy regulator Ofgem in 2019, is to open up onshore transmission network needs to early competition (EC), with interested bidders (potentially including the incumbent TO, as well as new market entrants) competing to provide a solution to satisfy the relevant network requirement (this is with the aim of delivering improved outcomes for consumers). The procuring / delivery body for the purpose of any such competitive process could, under the EC model, be the electricity system operator (ESO) (this has proved to be the case), with the relevant TO being obliged, through its licence conditions, to act fairly and transparently in supporting the EC tender process.

 
What is early competition (EC) (or early-stage competition)?

An EC procurement model for an infrastructure project is one where the competition between the pre-qualified bidders occurs before the detailed design work for the project has been carried out (i.e. early in the relevant project’s development lifecycle, before the consenting stage). This approach has the benefit of giving end-to-end accountability to the successful bidder. Conversely, ‘late competition’ describes a competition for delivery of a project where the planning consents are already in place and the detailed design for the project is known (in other words, the tender exercise under a late competition model follows completion of the preliminary work for the project (i.e. the detailed design, surveying and consenting)).1 As for ‘very late competition’, an example of that would be the existing offshore transmission owner (OFTO) transmission asset procurement regime, where the competition is for the operation and maintenance of existing transmission assets as constructed, under the ‘generator build’ model, by the developer of the offshore windfarm, with a view to transfer for value to the successful bidder in the OFTO tender round.

Ofgem considers that EC “can maximise the level of innovation delivered through the competitive process, while also allowing for earlier supply chain engagement from bidders relative to late competition. This is an important consideration in the context of the … delivery of electricity network upgrades to minimise constraint costs as we transition to Net Zero2.

 
Key ECP onshore network publications (non-legislative)

Within the RIIO-2 documentation published by Ofgem on 24 May 2019, Ofgem requested National Grid Electricity System Operator (NGESO), as electricity system operator, to develop an ECP3: this can be viewed as the starting point for the onshore transmission network ECP.

A chronology of some of the subsequent key ECP-related (non-legislative) publications is set out below:

  • on 5 May 2021, NGESO, following consultation, published its ‘Early Competition Plan: Onshore electricity transmission’, dated April 2021, setting out its view on how an early competition tender process could work - this ECP document is available in the ‘Document library’ within NGESO’s ‘Early competition’ webpage;
  • on 3 August 2021, Ofgem published its ‘Consultation on our views on Early Competition in onshore electricity transmission networks’; and the Department for Business, Energy & Industrial Strategy (as it then was) published a consultation entitled ‘Competition in Onshore Electricity Networks’ (this concerns legislating to enable competition in onshore electricity networks, bringing in new, innovative entities, which have access to different sources of capital);
  • on 28 March 2022, Ofgem published its ‘Decision on the development of early competition in onshore electricity transmission networks’ – the decision (made following the above Ofgem consultation) was to proceed with the implementation of the ECP, to be delivered by the ESO (i.e. the ESO to be the procurement body), with Ofgem as both the approver (responsible for ensuring that a project advancing to early competition is in the interests of consumers) and the licence counterparty (licensing the successful bidder);
  • on 4 August 2023, the Department for Energy Security and Net Zero (DESNZ) published the independent report of the UK’s Electricity Networks Commissioner, Nick Winser, on how to accelerate the deployment of electricity transmission infrastructure. Section 5.6 of the report is headed ‘Contestability of Transmission Owner’ – the opening paragraph of that section reads: “Competition to deliver and own onshore transmission network [assets] is being introduced by Ofgem, to protect consumer interests and reduce costs. Historically, critical national transmission infrastructure projects have not been contested giving the Transmission Owner (TO) certainty on the pipeline of projects they will be expected to deliver. New powers are being introduced by Government through the current Energy Bill [(now the Energy Act 2023)] to enable contestability of onshore transmission projects.  … “ (square bracketed words added);
  • on 22 November 2023, DESNZ published the Transmission Acceleration Action Plan – this is the government’s response to the Electricity Networks Commissioner’s report of 4 August 2023 – it outlines the government’s commitment to introduce onshore electricity transmission competition as soon as is reasonably possible, with a view to saving consumers money and encouraging greater levels of inward investment into the energy networks;
  • on 13 December 2023, Ofgem published its ‘Decision on the framework for the Future System Operator’s Centralised Strategic Network Plan’ (CSNP) – the aim of the CSNP is to provide an independent, coordinated and longer-term approach to transmission network planning in Great Britain to help meet the government’s net zero ambitions4 (the CSNP is discussed below in the context of onshore electricity network EC);
  • on 14 December 2023, Ofgem published a document entitled ‘Update on development of competition in onshore electricity transmission’ – this provides a brief update on the work it will prioritise in the development of onshore competition for electricity transmission networks;
  • on 1 February 2024, NGESO published its ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’ (known as the ‘EC-I Update’), which sets out updates for the EC model and proposes some policy changes to the position under the April 2021 version of the ECP, as published by NGESO on 5 May 2021. The proposed changes include alignment of EC with the CSNP, and that only network solutions (as opposed to non-network options5) be considered eligible for the ECP;
  • on 21 February 2024, Ofgem published a ‘Consultation on policy updates to Early Competition in onshore electricity transmission networks’ – this seeks input on the outstanding policy issues for the ECP, including the amended ECP under the EC-I Update, conflict mitigation measures for TOs (i.e. where an incumbent TO bids into a tender process), the early competition cost benefit analysis methodology, dealing with a competitively appointed transmission owner failure, and the transmission network use of system (TNUoS) revenue recovery process. The closing date for responses was 20 March 2024. Chapter 2 provides background on EC, as well as detailing the progress made since Ofgem’s decision of 28 March 2022 on the development of an EC model; and
  • on 19 March 2024, NGESO published its report ‘Beyond 2030: A national blueprint for a decarbonised electricity system in Great Britain’, available on its ‘Beyond 2030’ webpage together with links to a number of annexes and other documents, including a ‘Glossary’ and the ‘Competition in electricity transmission’ report (the latter is one of the annexes). The ‘Beyond 2030’ report makes a set of recommendations in respect of offshore and onshore network upgrades – it is described as being a transitional plan (this is discussed further below).
 
The enabling legislation for onshore competition

To allow for the introduction of competitive tendering for onshore electricity transmission projects in delivery of the ECP, primary legislation was considered necessary6. The legislative vehicle used to achieve this was the multi-faceted Energy Act 2023, which received Royal Assent on 26 October 2023. This Act, which concerns energy generation, security and regulation, sets out (as below) the legislative framework to enable competition (both early-stage, which is the focus of this article, and late-stage competition) on the electricity transmission networks, and to facilitate competitively awarded transmission licences.

Part 7 (Market reform and consumer protection) of the Energy Act 2023, which encompasses a number of energy market-related provisions, includes section 203 (Competitive tenders for electricity projects). This short section (in a long Act) refers to the provisions of Schedule 15, which in turn contain the required amendments to the Electricity Act 1989 in connection with running competitive tendering exercises for electricity transmission projects (both onshore and offshore – this article concerns the onshore element).

The territorial extent of the above provisions of Schedule 15 of the 2023 Act is Great Britain. Those provisions contain the enabling powers for:

  • running competitions (tender exercises) in relation to relevant electricity projects;
  • awarding relevant licences and contracts, as well as for making: (i) criteria regulations; (ii) designation regulations; and (iii) tender regulations in respect of the competitive process; and
  • appointing (designating) a delivery body (procurement body) for undertaking tenders.7

Certain (but not all) of the amendments made to the 1989 Act by Schedule 15 to the 2023 Act, i.e. the amendments creating the above enabling powers, are considered below.

By new section 6C (Competitive tenders) of the 1989 Act, the Gas and Electricity Markets Authority (which acts through the energy regulator Ofgem) is given the power to make regulations in respect of competitive tenders for any “relevant electricity project”, a phrase which is defined in new section 6BA (Meaning of “relevant electricity project”, “relevant licence” and “relevant contract”) of the 1989 Act. Section 6BA defines a “relevant electricity project” in part by reference to the satisfaction (in relation to a project) of criteria to be specified in regulations to be made by the Secretary of State. Criteria regulations were made on 20 February 2024 in the form of the Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024 (2024 No. 168) (Criteria Regulations)8 – they came into force on 12 March 2024.

Pursuant to the Criteria Regulations, different criteria apply to different types of project (this is for the project to be determined to be a “relevant electricity project” for the purposes of sections 6BA and 6C). In the case of competitive tenders where the design, construction and delivery of a project is tendered for (i.e. early-stage competition), the applicable criteria are network need (regulation 4), novelty (regulation 5), separability (regulation 6) and consumer benefit (regulation 7); and in the case of competitive tenders where the construction and delivery of a project is tendered for (i.e. late-stage competition), the applicable criteria are network need (regulation 4), novelty (regulation 5), separability (regulation 6) and high value (regulation 8).9

Under new section 6C (Competitive tenders) of the 1989 Act, competitive tenders of relevant electricity projects are to be undertaken by a ‘delivery body’. New section 6BB (Designation of a delivery body) confers on the Secretary of State power by regulations to designate a person as a ‘delivery body’ – this power has been exercised in the form of the Electricity (Designation of Delivery Bodies) (Transmission) Regulations 2023 (2023 No. 1228) (Designation Regulations)10, which were made on 15 November 2023 and came into force on 11 December 2023. The Designation Regulations serve (amongst other things) to designate the ‘national system operator’ as the delivery body for competitive tenders for relevant onshore electricity projects relating to transmission. The national system operator is currently NGESO and will soon be the National Energy System Operator (as discussed below).

The functions of the delivery body (system operator) in conducting onshore transmission tender exercises will be set out in the separate tender regulations, which, under new section 6C of the 1989 Act, are (as noted above) to be made by Ofgem as energy regulator (see the ‘Next steps’ section of this article below).

Under the ECP, competitively appointed transmission owners (CATOs) will be selected through the tender process and then licensed under the Electricity Act 1989 to deliver a relevant electricity project (solution) on the onshore transmission network (e.g. the design, construction, ownership and operation of electricity network assets). The transmission revenues for a CATO will be recovered by the electricity system operator via TNUoS charges (i.e. in the same manner as is currently the case in respect of TOs and OFTOs). Ofgem expects EC bidders (i.e. bidders seeking to become a CATO, including any incumbent TO bidder) will structure the financing of the relevant network project using a typical project finance approach11.

 
The procurement / tender process

As commented above, Schedule 15 of the Energy Act 2023 makes provision (by amending the Electricity Act 1989) for the making by the regulator (Ofgem) of tender regulations as relevant to implementation of the ECP. These regulations, when made, will set out the framework for the competitive procurement of onshore transmission projects. In section 2.3.3 of its EC-I Update of 1 February 2024, NGESO explains how it is “supporting Ofgem with the analysis of the interaction between the Procurement Act and the tender regulations. … These regulations (which will have regard to the provisions of the Procurement Act) will set out the framework for the procurement of onshore transmission projects. The regulations are currently being drafted by Ofgem and will govern the tender process for early competition. Ofgem will consult on these regulations in due course. … The ESO understands that Ofgem anticipates the tender regulations will cover inter alia the relationship between Ofgem and the ESO as regards roles and responsibilities”. The Procurement Act reference in the quotation is of course to the Procurement Act 2023, which received its Royal Assent on the same day as the Energy Act 2023. For NGESO’s description of an early competition tender process for onshore transmission projects, please refer to the EC-I Update document (in particular, see section 5 (End-to-end process) of that document, along with section 3 (Identifying projects for early competition) and section 4 (Commercial model)).

 
Relevance of the Centralised Strategic Network Plan (and the transitional plan)

In parallel with the development of the ECP, NGESO and Ofgem have also been working on changes to the network planning process, involving a move away from the use of the Network Options Assessment for identifying network reinforcement projects to a Centralised Strategic Network Plan (CSNP) in 2026, with transitional arrangements in place in the meantime (see NGESO’s ‘Beyond 2030’ report published on 19 March 2024 – this is a transitional plan or stepping-stone to the CSNP).

Future transmission network system needs / investment options for the purpose of onshore ECP competitive tendering (as described above) will, under the latest ECP proposal (i.e. the EC-I Update), be identified and assessed by the new National Energy System Operator (NESO) using the CSNP12. The intention is, therefore, for network needs and solutions for the purposes of the ECP to align with the ‘optioneering’ in the CSNP process, so that indicative solutions identified in the CSNP set “the allowable solution space13. In sum, “[b]y aligning [a] bidder’s solutions to that of the indicative solution selected through the CSNP, greater certainty can be given earlier in the process to multiple stakeholders as they develop their own investments, wider works, and user connections14.

NESO is the future system operator taking over the operations of NGESO along with additional responsibilities later in 2024. NESO is to be an independent, public corporation responsible for planning Britain's electricity and gas networks and operating the electricity system – it is to be designated as the independent system operator and planner in accordance with Part 5 of the Energy Act 2023.

 
Next steps

Ofgem’s consultation document of 21 February 2024 explains that NGESO is to publish the second transitional CSNP (tCSNP) in March 2024, identifying potential projects for the electricity transmission network, with those projects to be assessed against the ECP eligibility criteria (see above) to identify those that are likely to provide the greatest benefit to consumers if subjected to an ECP tender. As reported above, the tCSNP (entitled ‘Beyond 2030’) was published by NGESO on 19 March 2024.

Ofgem expects to reach a decision on the ECP policy areas (i.e. those being consulted on by it) by early summer of 2024, with a separate consultation planned by Ofgem in early summer on:

  • the proposed commercial model being developed by NGESO (which is transitioning to NESO) for the ECP (i.e. the commercial arrangements for early competition); and
  • the related competitive tender regulations which Ofgem is developing to support the ECP.

If Ofgem’s objectives regarding the ECP are realised, at least one suitable project for early competition will have been identified by it by the end of 2024.


1 You will find discussion on early and late competition in section 4 of National Grid Electricity System Operator’s ‘Network Options Assessment Methodology’ document of July 2023, and in its ‘Competition in electricity transmission’ document of 19 March 2024.
2
 Ofgem’s ‘Consultation on policy updates to Early Competition in onshore electricity transmission networks’, 21 February 2024, at page 12.
3
 See numbered paragraphs 2.20 to 2.25 in Ofgem’s document ‘RIIO-2 Sector Specific Methodology Decision and Further Consultation – Electricity System Operator’, 24 May 2019; and see Ofgem’s letter to NGESO of 24 September 2019.
4 NGESO’s ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’, 1 February 2024, at page 8.
5 Non-network options (as considered in the CSNP process) are proposed to be procured through alternative processes such as Network Services Procurement – see NGESO’s ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’, 1 February 2024, at page 10.
6 Refer to section 2.3 (Changes in legislation and regulation) of NGESO’s ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’, 1 February 2024.
7 See section 2.3.1 (Recent developments) of NGESO’s ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’, 1 February 2024.
8 They were published together with an explanatory memorandum. As noted in the memorandum, the Criteria Regulations specify the “criteria which onshore electricity transmission network projects must meet in order to be considered as potentially eligible for a competitive tender process”.
There is discussion on eligibility criteria in NGESO’s ‘Competition in electricity transmission’ document of 19 March 2024.
 
10 They were published together with an explanatory memorandum.
11 Ofgem’s ‘Consultation on policy updates to Early Competition in onshore electricity transmission networks’, 21 February 2024, at page 46.
12 Ofgem’s decisions (following consultation) in respect of the NESO’s role in developing the CSNP were published in its ‘Decision on the framework for the Future System Operator’s Centralised Strategic Network Plan’, 13 December 2023.
13 Ofgem’s ‘Consultation on policy updates to Early Competition in onshore electricity transmission networks’, 21 February 2024, at page 15.
14 NGESO’s ‘Early Competition Implementation – Update: Onshore Electricity Transmission Networks’, 1 February 2024, at page 11.

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