Department of Energy and Climate Change: Offshore electricity transmission-a new model for infrastructure - Public Accounts Committee Contents

1  Design of the licensing regime

1. The Government has set a target requiring 15% of the UK's energy to come from renewable sources by 2020. 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 to help meet this target. 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.[2]

2.  The Department and the Gas and Electricity Markets Authority (the Authority) have introduced a regime of competitions to award licences to operators of offshore electricity transmission assets. The Authority designed the terms of the licences against which transmission operators bid. The licensees receive their income from National Grid which recovers its costs from electricity suppliers and generators, who seek to pass on the licensee charges in their prices to consumers. [3]

3.  These complex arrangements involve the regulator running competitions for services which the market could provide by other means. For instance, offshore electricity generators could appoint transmission contractors, or current onshore transmission companies, such as National Grid in England, could extend their operations offshore. An EU requirement for the generation and transmission of energy to be separated has ruled out the option adopted previously in the North Sea oil and gas industry, of the generators operating the transmission assets themselves.[4]

4.  A fundamental aspect of good project planning is to evaluate all viable alternatives before selecting the method which will deliver the best value for money. In this case the Department and Authority have not put forward a convincing case for the licensing regime they have adopted. The consumers' capacity for meeting the costs of these new offshore transmission licences through higher prices does not appear to have been considered. Instead the Department sought to justify the arrangement in calculations which concluded that the licence competitions would bring competitive benefits in line with the PFI market, an argument we question. We have not seen any evidence that the Department and the Authority rigorously assessed the relative value for money to consumers of other alternatives. [5]

5.  Ongoing project management should also include rigorous evaluation of whether the project is delivering the expected benefits. The Authority told us that its more recent deals were more competitive than the first four competitions and that, in particular, the returns required by the investors were reducing. This is encouraging but needs to be incorporated in a full evaluation of the benefits and risks for consumers compared to different alternatives. The National Audit Office had reservations about the Authority's earlier assessment of the benefits from the first four licence awards which included tax savings which may benefit consumers but are offset by loss of tax revenues to the public finances. [6]

2   C&AG's report paras 1-3. Back

3   C&AG's report para 5. Back

4   Qq 18,103 Back

5   Qq 83-87, 190-198 Back

6   Qq 200-203; C&AG's report paras 16&3.18  Back

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Prepared 14 January 2013