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

3  The response of the market

13.  The initial investors were seeking returns higher than investors earn in operational PFI projects at the same stage after construction risks have been dealt with. The 10-11% return they sought may, in part, have reflected the particular risks of setting up transmission assets in a challenging offshore environment and that the initial licences were awarded in a new market where the success of such projects had yet to be established. The attractive licence terms, including the guaranteed 20 year revenue stream, would, however, have been an offsetting factor which should have reduced investor risks and the returns they required. More recent evidence suggests that the returns being sought by investors, who are not bearing construction risk, is decreasing from the 10-11% initially sought. [24]

14.  The Department and the Authority introduced competition to the licence awards with a view to improving value for money. There are, however, factors which could limit the diversity of the market and the extent to which competitive benefits will be secured. Competition would be limited if only a small number of bidders are sufficiently credible to be awarded licences. Four of the first six licences were won by one company Transmission Capital Partners. This risks the creation of a monopoly supplier. The Authority informed us that, in three bigger licences which are currently being tendered, there were four bidding consortia competing against each other so it was hopeful that wider competition was emerging.[25]

15.  A further risk to competition would arise if there is significant consolidation in the ownership of projects as a result of initial investors selling their shares on to long term investors with a business strategy to build up portfolios of similar projects. The sale of Macquarie's interest in the Walney 1 licence within two months of being awarded the licence indicates the potential for the development of a secondary market in ownership of the projects, similar to that which developed in the PFI market.[26]

24   Qq 17-18, 38, 202 Back

25   Qq 154-155 Back

26   C&AG's report para 3.13; Qq 7, 124-129 Back

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Prepared 14 January 2013