The UK government and energy regulator Ofgem are considering allowing generators to build their own offshore links, following heavy lobbying from the wind industry. This signals a move towards more flexibility in the rules governing grid access for the next generation of offshore wind farms.
The change of heart comes as three preferred bidders have been selected to own the first wave of offshore links to be sold off under Britain's new offshore transmission regime. According to EU rules, from 2011, generators will not be allowed to own and operate the transmission assets connecting their offshore projects to the mainland grid.
In the first transitional round of transmission asset sales, six potential offshore transmission owners (OFTOs) have been bidding to own and operate links to nine existing or in-construction wind farms that have been built by the generators. A further six or more wind farms due to enter construction over the coming year will be transferred under a second transitional tendering round due this summer.
However, for the enduring regime, covering wind farms at earlier stages of development - including those to be built under the third and largest tranche of offshore development (Round 3), Ofgem initially proposed that OFTOs should compete to design, build and operate the links. This early involvement would bring innovation into the sector, increase competition and bring down costs to consumers, claims Ofgem.
But the generators want the option to build the connections themselves before transferring them to an OFTO, continuing the practice under the transitional regimes.
In an open letter to the industry in July, Ofgem and the Department of Energy and Climate Change (DECC) admitted that all the generators, who responded to their December 2009 consultation on the enduring regime, unanimously stated that the regulator's initial proposals would increase risk for offshore projects, making them more costly to finance. Consultation responses pointed out that generators would have little control over the design and delivery of connections, and would have more to lose than the OFTO if connections are delayed.
Generators also claimed that investment in their offshore projects might not be approved at board level due to uncertainties about the identity and capability of the OFTO. All the generators called for the option of building the offshore connections themselves.
The generator's view
Building the connections themselves would give generators a greater level of control and certainty, states Graeme Cooper, policy, regulatory and compliance manager at Fred Olsen Renewables, which is developing the 415MW Forth Array project in Scottish territorial waters.
He believes that savings and competition will come in the financing of the connections and in reducing the level of risk associated with their construction. "Who knows most about the seabed conditions in which the assets are going? The wind farm developer - they are closest to the risk and better able to de-risk it than anybody else," Cooper says.
He predicts there will be more scope for competition from bidders for the completed assets rather than among companies bidding to build the connections. The low risk but low regulated return on a completed asset would appeal to many investors, such as infrastructure funds and pension funds "who want something rock solid", he says. "And there is nothing more rock solid than a 20-year regulated return," Cooper adds.
It is not only developers who have lobbied vigorously for the generator-build option. Supply chain companies, including those who would supply the equipment for the connections, warn of a two- or three-year "OFTO gap" in the market while the tendering process for building the first enduring connections takes place. This could be a particular problem for extensions to Round 1 and Round 2 projects, which the seabed landlord, the Crown Estate, stipulates must be completed by 2016.
Cooper points out that the generator-build option would allow the supply chain to plan ahead. "They can see who their customer is," he says, adding that there is a longer lead time for suppliers to discuss and scope a project with the developer and pencil in build slots.
The OFTO view
Potential OFTOs, on the other hand, argue that they are best placed to bring innovation in design and technology into the sector. This includes new installation methods and HVDC (high voltage, direct current) and higher voltage AC (alternating current) technologies that have not yet been deployed in the UK.
And there would be innovation in design of grids, points out Chris Veal, managing director from Transmission Capital, one of the preferred bidders in the first transitional asset sale. Such design innovation would create economies of scale as offshore networks are shared by more than one wind farm. He adds that OFTOs will be more incentivised to bring new supplier entrants into the market.
OFTOs such as Transmission Capital and National Grid are also looking at the bigger picture. Links to Round 3 wind farms sited far out in the middle of the North Sea could be combined with interconnectors between the UK and mainland Europe.
"It is very economic," states Veal. "Wind farms only use the grid infrastructure about 40% of the time; the other 60% it is unused." But despite the economic savings an interconnected offshore network could bring, wind farm developers are focused solely on getting their projects built and connected to the UK market, he says, adding: "That is an area where specialists can come in and add value to the arena."
Ofgem was due to launch a six-week consultation in August on whether generators should be allowed to build all, some or none of the work association with their connections.