United Kingdom

United Kingdom

Changes ahead for UK offshore transmission licensing

Consumers exposed to excessive risk, says National Audit Office

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Future competitions for long-term leases of the electricity transmission systems linking UK offshore wind farms with the land-based national grid should be designed to shift more of the financial risk away from taxpayers and onto companies who win licenses.

This is a primary conclusion of an "early examination" by the UK’s National Audit Office (NAO) of the current method used to allocate offshore transmission licenses.

The NAO’s view appears to contrast with the situation in Germany, where the government is proposing that taxpayers carry some of the risks associated with offshore cable failures (Windpower Offshore 06-Jun-12).

Click here to find out more!Reviewing the way four licenses have been awarded since 2009 for offshore transmission assets worth £254m (€318m), the NAO generally approves of the licensing model that was employed. However, there are concerns that taxpayers have been left carrying too much of the long-term financial risk for these deals and that future licensing rounds should be amended to reduce this.

Under terms agreed for the first four licence allocations, licence holders have been guaranteed an annual fee for twenty years from National Grid, which is fully indexed against inflation. This means that "the cost of the inflation risk…[is] borne by consumers," notes the NAO report, entitled Offshore electricity transmission: a new model for delivering infrastructure.

The way financial risks are shared between licence holders and taxpayers should be revisited, as should the opportunity for taxpayers to receive some gain from the sale of an offshore transmission asset. Given that one of the four recently-licensed assets has already been sold for an undisclosed sum, the NAO argues that at the very least licence holders should be made to "disclose the price at which any interests in the licence are sold".

In addition, the NAO notes that current licenses do not include any incentives for the operators of offshore transmission infrastructure "to minimise power losses". This should be amended in future licensing rounds, says the report, in a recommendation that is likely to garner favour from offshore wind generators.

Another criticism of the first licensing rounds is that they took far too long to complete, thus increasing transactions costs. "The lengthy periods between submitting tenders and closing deals raised transaction costs and risk losing value for consumers," states the NAO.

While the NAO does not recommend an overhaul of the current system of offshore transmission licensing – which combines competitive bidding with price control – implementation of its recommendations could impact on the financial returns likely to be achieved by investors in offshore transmission assets. Current returns are about 10-11%.

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