United Kingdom

United Kingdom

UK Offshore - Transmission - Competitive route to transmission build

Some £15 billion of investment is needed to connect wind farms in British waters over the coming decade if the government's aim for up to 33 GW of offshore wind capacity by 2020 is to be achieved. The timely delivery of the offshore transmission system necessary is a crucial element in meeting that goal. There are, all agree, some issues that still need to be resolved, although for a disgruntled few only a total rethink of the regime design will suffice.

 

For the UK's energy regulator, Ofgem, the government's strategy - four years in the making and developed in full consultation with the industry - will work "to ensure that offshore cable connections are delivered on time and at reasonable cost ... and to maintain an effective and secure grid." Ofgem notes that of 19 responses received in the latest public consultation on the transmission regime design, just two expressly did not support the regime. There are some critics still, but the feedback Ofgem is getting is general acceptance, it says.

At the heart of the regime is a competitive tender process for offshore transmission licences, with a 20-year revenue stream up for grabs. Companies will soon be invited to submit bids to own and operate (for a 20-year period) the transmission lines. The bid process applies only to lines rated at 132 kV or above, so some existing connections to a few of the offshore wind farms already operating, which are "embedded" at lower voltages in the local electricity distribution network, are not included. Successful bidders will then become official Offshore Transmission Owners (OFTOs).

Significantly, and to the industry's relief, generators can also bid for an OFTO licence, but they will need to comply with EU unbundling legislation when it comes into effect by the end of 2012. This will require large vertically-integrated energy firms which control both electricity production and distribution assets to be broken up, although there are two opt-out clauses. These opt-outs allow European energy companies to retain their network assets, with either an independent systems operator overseeing network activities, or the day-to-day grid management being put in the hands of an independent transmission operator. Under the UK regime, generators can also carry out strategic investments in advance of future tender rounds and recover the costs. The Great Britain system operator (GBSO) National Grid, meanwhile, has been tasked with looking at where offshore developments will feed into the onshore system to identify the grid reinforcements needed. In doing this it will give the onshore network preparations a head start, says Ofgem's Robert Hull.

The starting gun for the first round of bids will be fired this month. This will cover £750-1000 million of offshore transmission assets for an initial eight wind farms, all either existing or under construction. The winners will be awarded licences in June 2010. From then transmitting electricity from an offshore location without a licence will be illegal. A second request for tenders will be issued next year for the OFTO licences relating to another six or so offshore projects that will have reached financial close by June 2010.

Further rounds will follow for projects that get the go ahead for development under the government's third round of site lease concessions. Up to 25 GW of wind capacity could be built in Round 3 in nine development zones, most of them far out to sea beyond the UK's 12 mile territorial limit. The grid network for Round 3 developments is estimated to cost £10-12 billion.

Hull reports a healthy level of interest from prospective investors. These include existing UK and overseas network operators and financial investors, such as pension and infrastructure funds, interested in the long term, low risk, profile of the investment. One firm planning to bid is independent transmission company Transmission Capital. As part of a consortium, it will provide the management capability while its financial investor partners will provide the capital, says the company's Chris Veal. "Introducing competition in the provision of offshore transmission will bring innovation and a more entrepreneurial approach," he says, insisting it will reduce offshore developers' costs and produce more timely connection for projects than has been seen so far. Agreeing with Hull, he adds, the regime "is encouraging investors to come in who do not have the high return aspirations that the offshore developers themselves have."

 

Concerns

While OFTO's will, in most cases, foot the upfront bill for new transmission connections, the offshore wind farm generators will actually pay for the cost of the offshore wires through price regulated transmission charges. In adopting this approach government hopes to ease the upfront burden on generators by spreading grid connection costs over a number of years, rather than the alternative plan considered of the generator paying for the connection up front. As the UK proposals have progressed, a number of wind industry players have suggested the regime has become too complex, however.

"It is trying to square a circle that cannot be squared," says Matthew Knight of Siemens Transmission and Distribution. In opting for a competitive tender process, he says, the government is aiming to be price competitive while at the same time looking for innovation to bring costs down. Concurrently, it wants to give developers certainty that their project timescales will be met. "All these things are fighting against each other." The competitive regime makes the connections process lengthier and more expensive than if generators were simply to build the connections themselves, he says. "But we will make it work because we have to," he adds.

In Germany and Denmark, rather than companies bidding to build and operate the networks, existing transmission system operators (TSOs) are instead obliged to provide the wires out to offshore wind farms, with the costs then "socialised" among all electricity network users. The TSO must, under German law, have the grid connection to shore ready for when a planned offshore wind farm needs to use it. Criteria to decide how advanced the development of a project is, such as whether the turbines have been ordered, are used to make sure no cable investments are made until necessary. While some have called for a similar system in the UK, legal firm Herbert Smith, in its summer 2008 Energy Exchange Quarterly, notes that anecdotal evidence suggests the German system has led to wrangling between TSOs and the regulator over the cost of capital to undertake these works. The German government is expected to legislate on remuneration rates for the transmission system operator shortly. There are also capacity problems, especially in northern Germany, which could affect the economic viability of offshore projects (Windpower Monthly, June 2009).

The competitive bid system adopted by the UK has, says Ofgem, been applied successfully in other countries. This includes the US as well as Australia, where competition was used for the Basslink electricity transmission interconnector linking the state of Victoria on the Australian mainland with the island of Tasmania.

For Guy Phillips of offshore developer E.ON UK, and chair of the wind industry's offshore grid group, the challenge for Britain now is making sure that the metaphorical meat is put on the bones of the new transmission regime. "It is not proven that the competitive tender process can be made to work for the enduring regime. Much work is needed to flesh out the detail," he says. "That is not to say it cannot work. We think it can."

 

Greater flexibility

Knight meanwhile welcomes the fact that Ofgem is listening to concerns - Ofgem and the Department of Energy and Climate Change (DECC) revised the rules for Round 3 to give greater flexibility in response to feedback, confirms Hull. "Most positive is the greater role of the wind farm developer in specifying the network," says Knight, suggesting this gives some of the co-ordination that was missing from earlier proposals. "There is an enormous task here. Anything that government and the regulator can do to help us pull in the right direction is welcome."

Specifically, under the Round 3 revision, developers of offshore zones, together with the Crown Estate, as co-developer for Round 3 projects, will call the shots on the OFTO process. "We would anticipate the winning bidder (in the Crown Estate's competition for zone developers) will trigger investments in connections," says Hull. It is up to the zone developer whether these investments are planned and added to incrementally over a long period of time to connect phased wind farm developments within the zone, or whether it prefers to opt for tenders on a piecemeal basis, he explains. "So we could end up with one OFTO per zone, but that depends on the Crown Estate and the generators."

Peter Madigan of the British Wind Energy Association (BWEA) says the one OFTO per zone scenario is its preferred option, as this will allow greater forward planning. "There is currently no incentive for OFTOs to plan ahead," he says, noting that, in contrast, onshore transmission owners will receive a higher return on their assets for building out the grid early to meet the anticipated increases in generating capacity. "We would like to see something similar (for) offshore," he says. "We think there are ways of doing that without distorting the competitive process." While yet to be introduced, Ofgem is talking to the industry to see how it can be done, so incentives are on the cards.

 

Onshore obstacles

BWEA is anxious to see more progress on suitably expanding the onshore network. A report from the cross-industry Electricity Networks Support Group identifies the onshore upgrades needed to connect 30% of UK electricity from renewables in addition to new nuclear capacity, says Madigan. It also recommends two major north-south subsea transmission links to bypass bottlenecks on the British onshore system. "While you are bringing that power down, you could connect some offshore wind farms in the process," Madigan says, suggesting the idea is a good example of strategic thinking across both onshore and offshore networks.

Developer Warwick Energy is also concerned about the development of the onshore network. Less conciliatory than others, it believes the government and Ofgem have got the offshore development regime wrong. Rather than relying on a competitive bid system, Warwick would prefer to see an extension of the existing onshore transmission franchises offshore under a "connect and manage" approach to system operation. Offshore wind farms could then be connected to the mainland grid without having to wait for new grid capacity to be built, it says.

The increased power flows would be managed more actively by the system operator and some generation plant, be it renewable or fossil fuel, would be constrained off at times of high generation and low consumer demand. This "would provide a more strategic and co-ordinated solution to this critical challenge for the UK and better facilitate interconnections with other grid systems in the EU," it says. The company's Mark Petterson says the UK's onshore grid system needs to be completely revamped if it is to cope. "This must be planned together with the offshore network as a whole," he says. "We can no longer think of them as two separate regimes with different regulatory regimes and different objectives."

Ofgem insists that is not what it or the government is doing. Both Ofgem and DECC are, it says, seeking to ensure that "the GBSO is proactive in its approach to facilitating offshore network development." Hull, however, admits that while these provisions attempt to ensure connections are delivered on time, the problem of gaining consents for onshore grid reinforcements remains. Unless this planning issue is resolved, it could, he warns, significantly delay the offshore connection process.

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