34.Clause 16 and the schedule introduce provisions to support the draft legislation’s third and final policy area: competitive tendering for licences to participate in onshore transmission. According to the Government, almost one quarter of the average household electricity bill in 2014 was made up of the cost of transporting electricity from the place that it was generated to the customer. The draft legislation therefore seeks to introduce competitive tendering for onshore transmission and distribution networks. The Government explained the current situation:
The onshore electricity network consists of high-voltage, and typically long-distance, transmission networks and lower-voltage, local distribution networks. They operate as geographically-defined regional monopolies regulated by the Authority, supported by the Office of the Gas and Electricity Markets (Ofgem), through price controls […]
The Energy Acts of 2004 and 2008 amended the Electricity Act 1989 to enable the Authority to identify on a competitive basis the party licensed to participate in offshore transmission (transmission between offshore electricity generation and the mainland network).
Government believes that there would be benefit in extending this competitive process to enable the allocation of some other network licences [...]
This draft legislation therefore provides powers for the Authority [Ofgem], where it thinks it appropriate, to determine on a competitive basis the person to whom some onshore transmission licences or distribution licences are awarded.
35.In August 2014, an independent report commissioned by Ofgem found that across the first nine projects and £1.1 billion worth of investment, the competitive offshore transmission regime had generated savings of £200 million–£400 million against any other plausible counterfactual regime. The Government has therefore said “the experience of the competitive allocation of licences for offshore transmission suggests that significant savings can be made through a competitive approach to network licensing”. Ministers and Ofgem believe there would be benefits in extending such competition to licences for certain onshore transmission assets.
36.Industry witnesses welcomed in principle the introduction of competition, but they expressed some concerns, particularly in relation to which projects would be subject to competitive tendering and how the detailed tendering regime would be applied.
37.The Government, in its explanatory notes to the draft legislation, stated:
It is not cost-effective or practical to award all licences competitively, so the power to make a competitive determination for onshore transmission licences and distribution licences is limited to assets which meet a set of generic criteria set out by the Secretary of State in regulations. These criteria could be, for example, that the asset is new, high-value and separable.
Under the draft legislation, Ofgem will then decide which assets that meet the high-level criteria will be subject to competitive tendering, and in turn manage the tender process to determine the party that is licensed to operate and, in some cases, build the asset. Ofgem has recently consulted on how onshore competitive tenders could work, including on details of how suitable projects will be identified. It has also confirmed to us that it will look at whether it is appropriate to tender “in-flight projects”—that is, those that already have a firm grid connection date. Before 2021, when the current “RIIO-T1” price control period ends, assets will be eligible for competitive tendering if they are “strategic wider works” (SWW) projects and worth more than £100 million. In response to this, however, SP Energy Networks (SPEN) told us that:
a specific pounds million value should be utilised. Ofgem has proposed that a high value of £100m is used, however, this value is not fair if applied to all Transmission Owners.
In the current price control, only Strategic Wider Works (SWW) projects will be eligible for tender. The threshold for SWW projects in England and Wales is £500m, therefore, the majority of projects open to tender up to 2021 will be in Scotland (the SWW threshold for Scottish Hydro Electric Transmission is £50m and £100m for SP [Scottish Power] Transmission).
The Scottish Government voiced similar concerns about this provision, noting that Scottish transmission operators would be “differentially exposed to competition compared with their counterpart with responsibility for England and Wales, National Grid Electricity Transmission”. Ofgem explained that transmission operators had put forward those thresholds as part of their RIIO business case submissions, and that it had been “made clear that that was also the threshold that we would be using for deciding which projects were going to be subject to tender.”
38.Looking at the issue in another way, we suggested to the Government that under the proposals Scottish consumers might see benefits from competitive tendering which were denied to their English and Welsh counterparts. In response John Fiennes, Director, Energy Strategy, Networks and Markets at DECC, suggested that the financial benefits should be shareable through the transmission regime more generally, and therefore the benefits would not be limited to Scotland.
39.For projects due to begin construction beyond the RIIO-T1 period (post-2021), Ofgem expects all “new, separable and high-value” transmission investments to be eligible for competition. For all these projects post-2021, it is proposed that the System Operator (SO, currently National Grid) will undertake a Network Options Assessment (NOA), and recommend whether a project meets the criteria for tendering and whether there is a technical and economic need for it. Ofgem will scrutinise the SO’s processes and continue to make the final decision on tendering. The Energy Networks Association said that:
the policy proposals being developed by Ofgem are not at a stage where they give clarity over the SO [system operator’s] role. Alongside the proposals for competitive onshore tendering, there is a separate piece of work looking to establish the NOA [network options assessment]… the two work streams need to be more joined up with clarity over roles and responsibilities established quickly.
40.Any decision on whether to subject a project to competitive tendering will include consideration of whether any one of two different tendering models will provide value for money. Under the late CATO (Competitively Appointed Transmission Operator) model, the SO will prepare a specification based on system performance requirements and preliminary works, including the parameters of any planning consent. Bidders will then be able to submit fixed-price bids for construction, operation and maintenance. A late CATO build tender will start about four to five years before the assets are needed.
41.Under early CATO build, the SO will prepare a tender specification setting out the system performance requirements and bidders will set out their high-level asset design and Development Consent Order (DCO) application, including detailed route planning. The CATO will therefore carry out the preliminary works as well as the construction, operation and maintenance. Early CATO build tenders will start about seven to nine years before the assets are needed.
42.We heard that, irrespective of the tendering model chosen, the additional steps involved in encouraging competition could lead to delays in delivering projects. SPEN told us that:
there is a minimum 9 months period required to run the process compared to the existing arrangement and no proposals to recover this time have been presented by Ofgem. Depending on the model chosen, the introduction of new steps and interfaces into the design and construction process will substantially reduce the scope for parallel working… The impact of the additional steps and interfaces will mean that delays are likely to be between 12 and 24 months.
43.In response to concerns about delays, Steve Beel from Ofgem said “we are engaging with the transmission companies and with the supply chain, to make sure that we create processes that do not lead to any delays.” While John Fiennes from DECC said the Department believed there was scope to process a Development Consent Order and to manage the supply chain in parallel with the competitive tendering process. He added:
Of course, there is also the test in which you are putting confidence in Ofgem that they will pick assets for which this is a sensible way forward. They have certainly been clear to us that they are not going to be picking assets where this is going to introduce massive new delay in a way that is going to cause problems.
44.Ofgem has stated a preference for the late CATO model in the short term:
If we tender any RIIO-T1 SWW projects, then we will need to do so under late CATO build, as all the projects will be too far advanced for an early CATO build tender by the time we are ready to run the first tenders. We also think that late CATO build is closer to existing public infrastructure procurement models and therefore would be more attractive initially to potential bidders.
to obtain consents and land rights, the System Operator will have been required to undertake design and development activities to a detailed level. This includes substation designs and layouts, overhead line tower design, construction techniques, access arrangements and traffic management. This level of detail requires suppliers to be engaged and in some cases, contracts placed, in almost all high value and complex transmission projects. The proposed Late Model does not acknowledge this aspect of delivering works and the timing of the tender process. SPEN believes that the System Operator will not be able to obtain all consents and land rights without knowledge of the detailed design or construction techniques.
Chris Bennett, from National Grid Electricity Transmission (NGET), added that the early CATO model provides “more scope for innovation” and is “where the value would ultimately be to consumers.”
45.When we put it to the Government that the late model might not offer sufficient scope for innovation and, ultimately, savings to the consumer, the Minister said that he thought the regulator would consider such matters on a case-by-case basis. John Fiennes added:
If you can see you have a need you wish to meet and you do not know if the answer is a wire of one sort or a wire of a different sort, or maybe even a wire combined with a battery or something we have not even dreamt of, then the early competition is the way to do that because that maximises the innovation in the system. If you have a situation where the technical solution is pretty clear-cut, that what you are wishing to do is to see whether someone can surprise you about the efficiency with which they can put that asset in place or the way in which they can finance it, then the late model makes quite a lot of sense.
46.SPEN told us, based on its views about the late CATO tender model: “Further cost benefit analysis and scrutiny is required before Ofgem initiate any tender process.” Other witnesses called for further such analysis, given the Government’s existing impact assessment of the proposals. This assessment estimated, based on the experience of the offshore competition regime and taking into account tender costs incurred by Ofgem, that:
the introduction of this system could, in a medium scenario, provide overall net estimated savings of £380m […] In addition, competition will help bring on new technological solutions and more investment in research and development. It should also encourage new players into the market and drive up performance.
NGET said that there was too much reliance in the assessment on analogies to the offshore transmission (OFTO) regime. It added that the OFTO regime does not involve construction risk or “expose financiers to a large asset transfer risk at the end of the revenue stream”. The Energy Networks Association explained that the lack of construction risk or delay in the OFTO sector was because “the assets have in practice already been built and commissioned by the developer before the tender takes place.” And on asset risk the ENA told us:
The details we have seen to date do not provide sufficient clarity over what happens to residual value in CATO [Competitively Appointed Transmission Operator] assets at the end of the tender term [...] Under Ofgem’s current proposals, the revenue stream will be 25 years. Offshore transmission assets tend to have value for the same time as the wind turbine life (around 20 years). However, onshore assets will have value beyond 50 years and Ofgem are proposing to depreciate them over 45 years. This means that at the end of the 25 year revenue stream, there will still be value to be recovered from the assets. There are no firm proposals on what would happen to this value.
NGET also suggested that recent low interest rates had also helped to make offshore transmission project financing comparatively inexpensive; and that if investors in generators perceived a risk from the introduction of competition, the cost of capital might rise.
47.Given the concerns from industry on the one hand, and the reassurances from the Government and Ofgem on the other, we investigated how Ofgem when deciding whether to tender, and how, might take account of all those issues. NGET said, “it is critical that all relevant stakeholders are fully engaged in the decision making process as to whether an asset should be contested.” Chris Bennett from NGET elaborated:
One of the things that could be considered in the legislation is to include project specific impact assessments […] DECC […] have recognised […] once it has determined which projects meet the criteria for competition […] there should be a process to assess the costs, benefits and risks. But at the moment the impact assessment is a generic one […] If that suggestion was taken forward within the project-specific impact assessment the generator who might be connected would be part of that process, as would the local communities.
Mr Bennett added: “we need to really understand the potential risks of delay […] these are material sums, if risks do materialise […] there needs to be that assessment”.
48.We therefore asked the regulator what processes they would put in place to determine whether an asset should be tendered—and whether if necessary to abandon tendering. Maxine Frerk from Ofgem replied:
For the first projects we are doing that are part of the [RIIO-T1] price control, we will be looking in each case at whether or not it is appropriate to tender that particular project… if it is clear when we look at a particular project that it will lead to material delays we would not go ahead with tendering on that particular project.
Ofgem has also stated:
We recognise that project need may change over time, in terms of whether a project is required and its necessary outputs […] We propose to introduce tender checkpoints, mapped to key decision points in the project development lifecycle, to ensure that investment in the transmission network is required before progressing with the tender. The tender checkpoints will also help support an efficient tender process where bidders can be certain that a project being tendered will go ahead.
49.Competitive tendering for onshore transmission is in principle a positive step that should bring benefits to consumers and communities. But the process of determining whether and how to tender for onshore transmission has still to be finalised. In particular, we have heard concerns that Scottish transmission operators would be differentially exposed to competition compared with their English and Welsh counterparts. Before introducing the Bill in Parliament the UK Government should consult further with Scottish stakeholders to ensure that there is a level playing field for transmission projects across Great Britain.
50.Ofgem has consulted on a potential regime but it is clear from the responses to that work and from evidence we have received that stakeholders have ongoing concerns and further clarity is needed. Our main concern is to ensure that value for money is at the heart of any decision to take a project through the competitive tendering process. To that end, we recommend that Ofgem clarify, before the draft Bill receives its Second Reading, what exactly it will be doing to mitigate against the risk of delaying projects that are subject to tendering.
51.We also welcome the use of two different competitive tendering models for onshore transmission, which should provide different benefits for different projects. To ensure that efforts are concentrated on projects with the biggest potential benefits, we recommend that the legislation be amended to direct Ofgem to introduce project-specific impact assessments.
52.SPEN, among others, alerted us to specific challenges with the tendering regime if applied in Scotland:
The approach envisaged for the Late Model of the System Operator obtaining detailed planning consents and land rights on behalf of the (yet to be appointed) CATO [Competitively Awarded Transmission Owner], raises a number of practical problems that are likely to impact the design and construction process timescales. In Scotland, the section 37 process requires a detailed knowledge of the environmental impacts of the scheme together with the design of the infrastructure and the construction proposals. Whilst the package of information required to ultimately receive a Development Consent Order (i.e. in England in Wales) is similar in its detail the opportunities afforded to vary that consented scheme are substantially clearer with associated processes and timescales known. These opportunities do not exist under the section 37 process in Scotland.
Regarding Scotland, the Energy Networks Association added:
Under Section 4 of the Electricity Act, the necessary wayleaves are acquired and held by a named licence holder. If there is a change to the licence holder, the new licence holder must apply again for the necessary wayleaves. Our Scottish members are concerned that the legislation seems to be drafted in a way to impose new requirements in Scottish Law. DECC will need to be mindful of the precedent which this could set.
Land rights are already a major hurdle for delivery of new onshore transmission assets and the proposals effectively double the work and time required to achieve them. Any new regime of statutory land rights in Scotland will require access to some tribunal and compensation scheme for landlord’s losses. This will result in additional costs and risks (ultimately paid by consumers) and delay key energy infrastructure. Consequently, we think this is a critical issue which DECC need to consider further in the legislative framework.
The Scottish Government were also concerned that the proposals “will impact Scotland disproportionately.” In response the Minister told us:
We are aware of the potential for the different legal systems operating in different ways. Officials are already talking to Scottish officials about how this will pan out, so we are keeping a watching brief on that. It is nothing that can’t be fairly readily overcome, I think.
53.We were given a clear example of how the draft legislation does not take account of the planning regime in Scotland, which could lead in that part of Great Britain to project delays that do not occur elsewhere. We note the Minister’s evidence to us that officials in the Scottish and UK Governments are discussing the matter, and that he thinks it can be “fairly readily overcome”. We recommend that the Government set out in this or other relevant legislation how the potential delays to late model projects due to Scotland’s planning regime will be overcome.
54.The draft legislation also contains provisions to extend competitive tendering to distribution assets. Ofgem said:
we consider that there is logic in “future proofing” the legislation by including distribution networks, in particular given the potential for these boundaries to blur in future. Any decision to extend the approach to distribution networks would of course be subject to full consultation.
55.The Energy Networks Association told us, however, that the measure’s inclusion in the draft legislation had been “a surprise”:
DNOs [Distribution Network Operators] are now well into the process of implementing the business plans which were approved by Ofgem as part of the RIIO-ED1 price control settlement which runs until March 2023. Unlike in RIIO-T1, final determinations for ED1 did not include any proposals for distribution assets to be subject to competitive tender. Consequently, the legislative proposals have created some uncertainty which is not good regulatory practice and contribute to investment hold up or higher financing costs in future. It would be helpful for the Government to confirm within the legislative notes that it does not envisage any competitive tendering of distribution assets within ED1.
SSE noted that the impact assessment, “which is a pre-requisite to good policymaking”, does not consider any of the potential implications for distribution networks:
The UK Government’s Better Regulation Framework Manual (March 2015) states with regards to Primary legislation conferring Enabling Powers “[…] Ministers will want to be assured that there is a clear justification for the proposed intervention, and the supporting evidence regarding likely overall impacts of the proposed measure (including both primary and secondary legislation) is set out in the Impact Assessment at the primary legislation stage”.
56.The Minister confirmed that there would not be any competitive tendering for distribution assets during the current distribution price control period, up to 2023. He also confirmed that there would be a new impact assessment, were the provision on distribution to be initiated.
57.We welcome the Government’s reassurance that competitive tendering for distribution assets will not take place until the end of the current RIIO-ED1 price control period in 2023; and that an impact assessment will be published before it is decided to give effect to the provision in further legislation. This should be reiterated as a clear undertaking by the Minister during the Second Reading debate on the draft Bill.
58.The draft legislation also permits transmission of electricity during a commissioning period without a requirement for the operator to hold a transmission licence. This effectively allows electricity generators to build, test and operate transmission assets before they are transferred to a successful bidder. NGET said that generator build was a viable option offshore, “where the infrastructure was being developed for a single user.” But it thought the proposal was “much less likely to be effective within the meshed onshore network, where assets will be developed for a range of generators.” SPEN said that such assets would include wider works that might impact on other generators seeking to connect. It therefore recommended “further provision […] to deal with the interaction issues involved (ahead of the applicant becoming a licensee and so before they are subject to the normal rules)”. Tony Glover from the Energy Networks Association added:
Onshore you will be connecting into National Grid and Scottish Power’s network, you will be connecting into distribution networks […] If there is a problem with the CATO asset, how does that impact on the neighbouring network?
While SSE was concerned that the measure did not fall within the scope of Ofgem’s consultation on competitive tendering “as such, and as a particular type of infrastructure asset, it should be specifically justified through inclusion in DECC’s Impact Assessment”.
59.In response to these concerns, John Fiennes from DECC told us that:
this is an area where we are keen to get views from industry through the process that you [the Committee] are undertaking and we will be thinking very carefully about the points that they have made. I think we are more open-minded on this than on other points […] If people feel that having a generator temporarily owning this transmission is a serious problem for competition then of course we would factor that into the final decisions that we make.
60.The draft legislation includes a proposal to enable generators to build, test and operate, temporarily without a licence, onshore transmission assets. We welcome the Government’s willingness to think very carefully about the points that have been made to us during our inquiry. There are concerns about the impact of such work on the wider transmission and distribution networks, and on other generators that wish to connect to them; and that provision should be made to deal with these issues while the generator is operating without a licence. We recommend that the Government undertake to consult further with the industry on, and to carry out a dedicated impact assessment of, this specific proposal before it is commenced through legislation.
61.Regarding onshore transmission, there are three other issues on which we would like the Government’s response.
62.Paragraph 4 of the schedule would amend the Electricity Act 1989 so that if, after a competitive tender, Ofgem decided to award a licence to an existing licence holder, it could modify that licence to give effect to that decision. NGET pointed out that normally licence modifications are made under section 11A of the Electricity Act 1989 and a statutory right of appeal to the Competition Commission is provided for under section 11C. Where licence modifications are made to an existing licence under the draft legislation, however, no such right of appeal is provided for, meaning that “an affected licensee (or other interested party) will have no recourse (save for judicial review) should it object to any proposed licence modifications.” NGET suggested:
Rights of appeal to the Competition Commission similar to those provided for in sections 11C–H Electricity Act 1989 should be provided for by the new legislation in order that appropriate and proportionate rights of appeal exist regardless of which statutory provision is relied upon by the Authority in order to introduce the licence modifications.
63.We ask the Government to explain why under the draft legislation an existing licence holder, whose licence Ofgem seeks to modify as a result of the holder being awarded a competitive onshore transmission or distribution licence, has no right of appeal to the Competition and Markets Authority against the proposed modification.
64.Paragraph 18 of the schedule amends the Electricity Act 1989 so that, in the event of insolvency, a transmission licence holder would be directed to act as transmission owner of last resort. SPEN said the legislation:
may be interpreted as requiring the Transmission Owner of Last Resort to deliver the project mirroring the winning CATO’s bid costs. SPEN presumes that Ofgem will create a new licence condition which will permit the Transmission Owner of last resort to recover costs plus a reasonable return.
Frank Mitchell, from SPEN, added: “You can’t pick up something at a cost that was probably undeliverable to start with, so we need to make sure we address that in some of the legislation to clarify it.”
65.We ask the Government to clarify whether, in the event of a licence holder being directed to act as a transmission owner of last resort, it would modify the licence to reflect any difference in costs required to deliver the project.
66.The explanatory notes state that the regulations made by the Secretary of State in relation to the high-level criteria for competitively tendered onshore transmission assets “will be statutory instruments and subject to negative resolution procedure.” This means the regulations will become law without debate unless a Member of either House tables a motion that they be annulled. A motion put down by the Official Opposition will often be accommodated although there is no absolute certainty of this. The avenue for consideration of any annulment motion that a Backbench MP puts down, usually through an early-day motion (EDM), is less clear, but a debate may be arranged if there are a large number of signatories to the EDM. John Fiennes from DECC said the Government was following the process established for the offshore regime and the assets and process were “sufficiently similar to justify the same treatment.” The Minister said he would look again at the question of the negative resolution.
67.Given the concerns we have highlighted earlier, about the potential for the legislation to create an uneven playing field for transmission operators and consumers in Scotland and those in England and Wales, we recommend that the regulations setting out the criteria for those onshore transmission assets that may be competitively tendered, which the Secretary of State introduces under her powers in the schedule, be subject to the affirmative resolution procedure to ensure adequate scrutiny.
68 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, Foreword
69 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, pp35-36
70 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, p37
71 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, p37; See also Q116 [Maxine Frerk, Ofgem]
72 Q61 [Frank Mitchell], [Tony Glover]; Q62 [Chris Bennett]
73 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, pp 35-36
74 Paragraph (3) of the schedule
76 The RIIO-T1 price control sets out the outputs that the gas and electricity transmission network companies need to deliver for their consumers, and the associated revenues they are allowed to collect, for the eight-year period from 1 April 2013 until 31 March 2021. RIIO stands for Revenue = Incentives + Innovation + Outputs. See Ofgem, , accessed 18 April 2015
77 Ofgem, October 2015, p 6
78 SP Energy Networks, , para 34. Scottish Hydro Electric Transmission (SHE) and Scottish Power Transmission (SP) are the two Transmission Operators (TOs) permitted to develop, operate and maintain transmission systems in Scotland—SHE in northern Scotland and the Scottish islands groups, SP in southern Scotland. National Grid Electricity Transmission is the TO for England and Wales. See also SHE Transmission, , p 4
79 Scottish Government,
81 Qq161, 162
82 Ofgem, October 2015, p 6
83 Energy Networks Association, , s.1
84 Addleshaw Goddard, November 2015, accessed 1 April 2016
85 Addleshaw Goddard, November 2015, accessed 1 April 2016
86 National Grid Electricity Transmission, , paras 2.2, 2.12. Scottish Government, , ch.3
87 SPEN, , paras 14, 15
90 Ofgem, October 2015, p 7
91 SPEN, , para 19; see also National Grid, , para 2.7
95 SP Energy Networks, , para 8
96 DECC, , January 2016, p1
97 National Grid Electricity Transmission, , para 2.5
98 Energy Networks Association, , para 4
99 Energy Networks Association, , s.4
100 National Grid Electricity Transmission, , paras 2.3, 2.5, 2.11
101 National Grid Electricity Transmission, , para 2.13. See also National Grid Electricity Transmission,
102 Qq72, 73, 74
105 Ofgem consultation, pp47, 48
106 SP Energy Networks, , para 16
107 Energy Networks Association, , s.2
109 Ofgem, , para 2
110 Energy Networks Association, , s. 4
111 SSE, , para 14
114 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, p36
115 National Grid Electricity Transmission, , para 2.8
116 National Grid Electricity Transmission, , para 2.8
117 SP Energy Networks, , para 29
119 SSE, , para 18
121 National Grid Electricity Transmission, , para 3.4
122 SP Energy Networks, , para 27
124 Department of Energy and Climate Change, Draft Legislation on Energy, January 2016, p45
125 House of Commons Library, , December 2012, pp6-7
126 Qq155, 156
3 May 2016