The Department for Energy and Climate Change (the Department) estimates that offshore wind farms have the potential to contribute 8-15% of electricity by 2020. This will require a large investment in offshore infrastructure, including around £8 billion of investment in transmission assets (offshore platforms, cables and onshore substations) to bring electricity from offshore wind farms onshore to the national electricity grid.
The Department and the Gas and Electricity Markets Authority (the Authority) have introduced an elaborate regime that licences operators of offshore electricity transmission assets following competitions. The terms of the transmission licences awarded so far appear heavily skewed towards attracting investors rather than securing a good deal for consumers.
The transmission operators receive their income from the National Grid which recovers its costs from electricity suppliers and generators. Although all concerned state that no public funds are directly involved, the future payments to licensees, which will amount to around £17 billion, will in fact be passed onto consumers through electricity bills.
The investors' estimated returns of 10-11% on the initial licences look extremely generous given the limited risks the investors bear. Licensees are guaranteed a fully retail price index-linked income for 20 years regardless of the extent to which assets are used. Yet penalties are limited to 10% of expected income in any one year if the operators fail to provide the transmission facilities when required. Despite the lessons from the PFI market the Government has failed to ensure that gains secured, for example, from debt refinancing are shared. The Department and the Authority must also ensure that the offshore electricity transmission market remains competitive and does not become an oligopoly both at the bidding stage and if and when initial investors sell shares to long term investors.
On the basis of a Report by the Comptroller and Auditor General, we took evidence from the Department of Energy and Climate Change, the Gas and Electricity Markets Authority, and industry representatives on the new licensing regime for offshore electricity transmission.