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14 | 20TH - 26TH NOVEMBER 2015 | UTILITY WEEK Policy & Regulation Market view L ast month, Ofgem unveiled plans to competitively tender for the develop- ment of new onshore assets, something that until now has been restricted to offshore transmission assets. The introduction of the competitively appointed transmission owners (Cato) regime is aimed at ensuring onshore trans- mission needs are met in an efficient and cost-effective way. The changes may affect developers of new generation projects seek- ing connection dates, while the timing of competitive tenders for important reinforce- ments will be critical to many generation projects. What projects will be eligible? Onshore transmission projects that are "new, separable and high value" will be eli- gible for competitive tendering. The criteria include: • expected capital expenditure of £100 mil- lion or more; • brand new or complete replacement transmission projects such as a new over- head line; • it must be possible to establish ownership boundaries of the assets, although there is no requirement for electrical separation (such as via a circuit breaker); • the project must form an overall coherent package. During the RIIO-T1 transmission price control period (2013-21), Ofgem anticipates only RIIO-T1 strategic wider works projects will be eligible for competitive tendering, and it is considering which of those proposed by the transmission owners are suitable. From the start of RIIO-T2, Ofgem antici- pates that any new assets will be eligible for competitive tendering. The system operator is expected to be responsible for identifying these tender projects based on the needs of the transmission system through a network options assessment. Ofgem will ultimately make the final decision, based on the system operator's analysis, as to whether a tender should be held for a project. Ofgem proposes a core package of regu- lated revenue for a Cato as follows: • a fixed annual revenue stream for con- struction and operation of the assets for a period of 25 years, with no periodic review; • partial depreciation of assets over the 25-year revenue term to mirror the cost- recovery period of 45 years under RIIO; • a proportion of revenue to be index linked to inflation with the Cati proposing the percentage in its tender bid; • refinancing gain-share mechanism to pass benefits of any lower cost of debt financing achieved during the 25-year period to consumers; • a mechanism to allow Catos to make additional investments for upgrades and extensions during the 25-year term. There will be incentives aimed at ensur- ing effective and efficient delivery of the new assets. To encourage system reli- ability, the regulator is considering an availability-based performance incentive and penalties for energy not supplied to custom- ers. The proposal is that the Cato's exposure to revenue risk due to underperformance is capped at 10 per cent of its annual revenue. To encourage asset delivery, Ofgem con- siders that revenue should only start on asset delivery. The SO and incumbent TOs Ofgem is mindful of ensuring a level play- ing field for all potential Catos. The precise nature of managing any actual or perceived conflicts of interest arising from National Grid's role as system operator or the par- ticipation of incumbent transmission own- ers in competitive tenders has not yet been set out. Given the enhanced role of the systems operator in identifying transmission projects and carrying out preliminary works under the late Cato build model, Ofgem expects that if National Grid seeks to participate in competitive tenders it will need to do so through a business which is sufficiently sep- arated from the system operator. Ofgem also anticipates that the participa- tion of incumbent transmission owners will have to be managed. Transmission owners will also be able to participate in the com- petitive tenders, however Ofgem highlights potential conflicts of interests and the need to ensure there is no cross-subsidy under RIIO or unfair treatment of Catos where they wish to connect to the networks of incum- bent transmission owners or use their pre- liminary works. The consultation on the proposals closes on 11 January 2016. Ofgem intends that fur- ther consultation will be held in 2016 and expects the first competitive tender will take place in 2017. Patricia Hawthorn, partner, and Liz McRobb, partner, at law firm Shepherd and Wedderburn Transmission up for grabs Ofgem plans to open up the development of onshore transmission links to competitive tender, mirroring the Ofto regime for offshore transmission. By Patricia Hawthorn and Liz McRobb. Tender models Early Cato build Under this model, the Cato is responsible for all necessary preliminary works including consenting, surveys, and initial high level asset design. It will also be responsible for construction and operation of the assets. The tender would be held around seven to nine years before expected commissioning of the assets. Due to a large degree of uncertainty as to how project costs might develop, Ofgem proposes a re-opener mechanism. Late Cato build The system operator is responsible for all necessary preliminary works and the Cato's responsibilities relate to detailed design, sup- plier engagement, procurement, construction and operation only. The tender would be held around four to five years before expected commissioning of the assets. In the short to medium term, where only RIIO-T1 strategic wider works projects are likely to be tendered, Ofgem anticipates the late Cato build model will be most appropri- ate, as incumbent transmission operators will already have carried out significant preliminary works.