uk’s offshore transmission · pdf file• offshore transmission owner (ofto) ... what...
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Stephanie McGregorDirector Offshore Transmission
June 2011
UK’s Offshore Transmission Regime:
A case study for financing a low carbon future
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www.ofgem.gov.uk
Today’s presentation
1. Big picture
2. The OFTO
3. Making the opportunity real (aka fundable)
4. Opportunities/challenges ahead
All you can see in 30 mins!
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www.ofgem.gov.uk
Critical developments & debates…
Climate change targets
Electricity Market Reform
Retail Market Review
European Intergration
EU Renewable
Energy Directive
RO review
Significant challenges ahead
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www.ofgem.gov.uk
…grand ambitions…
Similar aspirations across Europe
UK energy policy aspirations:
• Meeting the 2020 Renewable energy commitment;
• Decarbonisation of electricity by 2030;• 2050 carbon pathways;• Marine renewable generation – potentially up to
67GW installed by 2030;• Nuclear – could have a significant role in
decarbonisation.
This will require significant new transmission infrastructure.
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www.ofgem.gov.uk
….and a universal challenge for a low carbon future…
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www.ofgem.gov.uk
….securing investment!
Estimates - £200bn +
Market players seeking certainty(investors, funders, developers, operators,
suppliers….)
Capital markets fragile
Challenges & opportunities ahead
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www.ofgem.gov.uk
OFTO regimeImplementing a model which
is…
...attracting/delivering investment
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www.ofgem.gov.uk
What is the OFTO opportunity?
• So what is an OFTO again?
• How do we select an OFTO?
• How does the OFTO licence work?
• Market activity to date
• Offshore Transmission Owner (OFTO)
• An entity licensed to provide transmission services
• The owner and operator of the assets relevant to provide the transmission services
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www.ofgem.gov.uk
What is an OFTO (2)?
Offshore SubstationPlatform
Offshore Transmission Owner (OFTO)Licencee
Onshore TO
Generator
Connection to onshore network
Subsea cable132 kV 33 kV Inter Array Cables
Onshore Substation
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How do we appoint an OFTO ?
www.ofgem.gov.uk
Pre-qualification (PQ) Pass/fail
Long list of bidders
Qualification to Tender (QTT) Scored
Short list of 3-5 bidders
Invitation to tender
(ITT) Scored
LicenceGrant
Preferred Bidder & Successful Bidder
• Developer project qualified by Ofgem
˜ financial commitment˜ detailed data provision
• Ofgem run a competitive process - defined stages & requirements
• Project specific & revenue (20 year) based bidding
• Identified project, known transfer value & clear licence obligations
• Accessible to range of funding approaches
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The OFTO Licence - how does it work?
www.ofgem.gov.uk
1. ObligationsOFTOs are required to:
• achieve the broad obligation to operate assets in line with industry best practice to minimise the effect and duration of any transmission outage
• report details of any service reduction over 21 days
• provide written statement of compliance with best practice if availability below 75% in a year or 80% over two years
This creates an obligation to repair assets
If does not comply, enforcement action could be significant - licence revocation
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OFTO Licence - how does it work?
Xx
www.ofgem.gov.uk
2. Incentives
• Not to compensate generator for lost revenue – disproportionate
• Incentive designed to encourage behaviour to maintain availability
• OFTO faces reduced revenue if it fails to meet availability target
• Incentive significantly reduces equity returns in case of major outage – does not put OFTO at risk of breaking minimum cover ratios
• Availability target set at 98%
• Revenue uplift for good performance
• Monthly weighting
• 50% of OFTO revenue is at risk for performance below the target in a year
• Revenue impact is spread over five years
Design
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OFTO Licence - how does it work?
www.ofgem.gov.uk
3. Enforcement
Authority can take enforcement action against licensees that:
• Contravene licence conditions• Are likely to contravene licence conditions
Enforcement actions can include:
• Enforcement orders• Fines• Licence revocation
Therefore up to 100% of revenue is at risk!
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www.ofgem.gov.uk
Making the opportunity real (aka fundable)
• Clear commercial & regulatory structure
• Transparent & clear process
• Accessible to different funding approaches
• Project pipeline
KEY = CERTAINTY
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www.ofgem.gov.uk
Commercial & regulatory structure
OFTO
NETSOO&M
Contract
Government Ofgem
Offshore Generator
Crown Estate
Lease
Generation Licence
Consents
Codes
Sale & Purchase
Agreement
Lease
Transmission Licence
Licence
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www.ofgem.gov.uk
Key investment features
Attractive investment sector
Strong UK political & regulatory support
Rare opportunity for new entrants to UK transmission sector
Relatively low risk asset class
Transparent competitive process
Well defined tender process,
Structured to ensure level playing field & transparency
2 qualification stages followed by ITT stage with M&A data rooms
Long term opportunity
A number of phases over several years: potentially £15 bn of assets
Early participation will provide valuable experience
Enduring regime offers design & construction opportunities
Robust new regulatory regime
20 year revenue stream with limited regulatory intervention
Pass through of certain key costs
OFTO protected from wind farm operating risk & risk of stranding
Upside potential: opex, non-regulated services, increased capacity
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www.ofgem.gov.uk
Project pipeline
• Linked to Crown Estates R1, R2 & R3 Zones • Early tender rounds transitional rounds (TR1, 2a & 2b)• Under enduring regime it will be developer/generator
requirements & choices that influence timing & model for opportunities come to market.
• Enduring regime = generator choice of generator build or ofto build.
• Extensive engagement with generation developers on developing plans
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5
10
15
20
25
30
35
Final Consultation
First TransitionalTender Process (£1bn+)
2nd Transitional Tender (up to £2bn+)
2009 20202011
Go-Active
Go-Live
Enduring Regime Tender Process(£12bn+)
2010
Cumulative UK Offshore
Wind Capacity
(GW)
OFTO pipeline
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www.ofgem.gov.uk
Tender Round 1
Project Preferred Bidder/OFTORobin Rigg (FC/Licensed March ‘11)
• Transmission Capital Partners (TCP)
G.Sands (S.8A con closed June ‘11)BarrowOrmonde
Thanet • Balfour BeattyWalney 1
• MacquarieWalney 2Sheringham ShoalGreater Gabbard • Green Energy Transmission
(Equitix, Balfour Beatty, AMP)
Value = £1.1bn & circa 2GW Savings forecasts positive
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www.ofgem.gov.uk
Tender Round 2
London Array(630MW £476m)
Gwynt-y-Mor(576MW £306m)
West of Duddon Sands(389MW £255m)
Race Bank(up to 620MW c.£500m)
Lincs(250MW £311m)
Humber Gateway(300MW £218m)
Tranche 2a Projects(1.5GW & £975m est. value)
Expected Tranche 2b Projects(1.3GW & £1m+ est. value)
TR2a bidders:• TCP• Blue Transmission
(Macquarie/Mitsubishi)
• Green Energy Transmission (Balfour Beatty & Equitix)
• National Grid Offshore Ltd
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www.ofgem.gov.uk
Opportunities & challenges ahead
• Rapid market development
• Moving into the enduring regime – generator choices
• Co-ordination – enhancement
• Wider policy landscape
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www.ofgem.gov.uk
Market development
• Market evolving rapidly on bidder & developer sides
• Interest strong to date
• Bidder/consortium configurations evolving
• Market awareness & understanding increasing, breadth & depth in growing
phase – bidders & generators
• Particular interest in larger asset opportunities – interest expressed from
potential future new entrants
• Bidder/partnering approach may need to evolve for enduring depending on
how projects come to market
• Understanding of technology options, innovations & constraints
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www.ofgem.gov.uk
Coordinated offshore transmission development
• Ofgem/DECC announced coordination workstream in August 2010 to focus on opportunities for enhancing co-ordination within the offshore transmission regime
• Offshore Transmission Coordination Advisory Group (OTCG) established & work underway with inputs from Stakeholder Community
• Ofgem/DECC conclusions to be informed by a range of evidence & analysis
• Assessment of options which emerge will relate to how they perform against Ofgem & Government objectives & statutory obligations
• Any proposals that are set out in our conclusions report would be subject to public consultation
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www.ofgem.gov.uk
Investment challenge:• Significant capital requirement - £200 billion+ over the next decade to meet our
aspirations;• Capital markets fragile;• Investors need certainty and stability
• Impact on developers?• Impact on supply chain?
Future still very uncertain:• Political uncertainty – eg impact of EMR proposals;• Scale and timing of onshore development – what role will nuclear play;• Scale and timing of offshore development – ODIS scenarios has a broad range 25-
67GW.
Network development:• Long lead time to deliver new capacity;• Supply chain readiness – volume of new tech.
What is the appropriate network configuration?
…and there are major challenges ahead
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THANK YOU