Offshore Transmission Regulatory Regime

1
Offshore TransmissionRegulatory Regime

• DECC / Ofgem External Communications Workshop
• 8 December 2008

2
IntroductionDuarte Figueira

• Director, Renewables Deployment Team
• DECC

3
Welcome and Aims of the dayOffshore
Transmission overview of proposed regulatory
regime

• Provide further clarity on
• Offshore Transmission project status
• EU Third package
• Design of the regime (as set out in the November
  08 joint DECC/Ofgem consultation document)
• Implementation issues
• The key stages, next steps and dates in the
  implementation process
• Encourage discussion
• Questions

4
Agenda

• Arrival / Coffee
• Welcome and aims of the day Duarte Figueira
  (DECC)
• Offshore Transmission overview and context view
  from DECC Duarte Figueira
• Overview of EU Third Package of Legislative
  measures for the Gas and Electricity Markets
  Sue Harrison (DECC)
• Questions
• Overview of regulatory regime and latest
  consultation Robert Hull (Ofgem)
• Questions
• Implementation of Regime key changes Bridget
  Morgan (Ofgem) John Greasley (National Grid)
• Questions
• Next Steps Duarte Figueira (DECC)
• Close

5
Offshore Transmission overview and context view
from DECC

• Duarte Figueira
• Director, Renewables Deployment Team
• DECC

6
New Offshore Transmission Regime

• Provision of offshore grid connection to offshore
  wind farms key to delivery of our targets.
• Developers need a grid connection they can afford
  on time.
• Up to 15 billion of new offshore grid needed to
  connect Rounds 1, 2 3 offshore wind.

7
Offshore Wind - Background

• Major contributor to UKs 2020 renewables target
• UK already no. 1 in offshore wind 598 MW
  installed
• Ambitious plans for up to 33 GW of offshore wind.

8
SEA Round 3 timeline

• Offshore Energy SEA launched December 07
• SEA scoping Spring 08
• Crown Estate launch of Round 3 June 08
• SEA workshops September/October 08
• Crown Estate Invitation to Negotiate issued late
  Sept 08
• SEA Environmental Report published Jan 09
• Environmental Report Consultation January-April
  09
• Crown Estate ITN closes 3 March 2009
• Government Decision on SEA Spring 2009
• Crown Estate finalises zones, awards complete by
  end 2009
• Earliest projects construction could begin 2014
  onwards

9
Regulating Offshore Transmission

• First R1 projects and some R2 projects grid
  connections built by developers
• But scale of offshore wind planned means we
  need a regulatory regime in place to support
  offshore wind development ensure secure
  supplies
• Govt therefore took powers in Energy Act 2004 to
  regulate offshore transmission.

10
New Offshore Transmission Regime - benefits

• Will provide offshore grid companies OFTOs
  with a secure income stream for 20 years.
• Means developers will not have to fund cost of
  cables upfront.
• NG will co-ordinate onshore and offshore grid.
• Competition will lower cost of assets and allow
  new players to bring new solutions funding.
• Amended grid codes will provide secure supplies.

11
Current Consultation

• Now consulting on implementation of high level
  policy decisions
• Refinement of policy positions
• Further update on changes to codes and licences
• OFTO of last resort result of EU Unbundling
  requirements.

12
Overview of EU Third Package of Legislative
Measures for the Gas and Electricity Markets

• Sue Harrison (DECC)

13
Third package unbundling requirements - Context

• Third package is the latest step towards the
  creation of a single EU energy market
• Aim is to deliver choice for consumers and more
  cross-border trade so as to achieve efficiency
  gains, competitive prices and higher standards of
  service, and to contribute to security of supply
  and sustainability
• Key plank is effective unbundling, ie separation
  of transmission networks from generation and
  supply without this, there is an inherent risk
  of discrimination not only in the operation of
  the network but also in the incentives for
  vertically integrated companies to invest
  adequately in their networks

14
Third package unbundling requirements - Process

• Ministerial agreement on third package was
  achieved on 10 October 2008
• Package must now be agreed with the European
  Parliament. Wording of some provisions will
  inevitably change, but the unbundling
  requirements are unlikely to change
  significantly.
• Third package is expected to enter into force in
  mid-2009
• Third package must be implemented in Member
  States at the latest 18 months after that date,
  ie around end-2010
• However, Member States have one extra year to
  implement the unbundling requirements, ie by
  around end-2011

15
Third package unbundling requirements in text
agreed by Ministers in October 2008

• Member States can choose any of the following
  three options
• - Ownership unbundling, where the same
  person must not exercise control over a
  transmission system and over a generation or
  supply business
• Or, where the transmission system belongs to
  a vertically integrated undertaking (VIU) on the
  entry into force of the package
• - Independent system operator, where the
  system operator is in separate ownership from the
  rest of the VIU and the VIU retains ownership of
  the transmission network but performs none of the
  functions of the transmission system operator or

16
Third package unbundling requirements in text
agreed by Ministers in October 2008

• - Independent transmission operator, where
  the system operator remains part of the VIU but
  in a separate legal entity. There are very
  detailed and strict requirements on both the ITO
  and the parent VIU to ensure effective
  independence of transmission system operation, eg
  supervisory body, compliance programme, close
  regulatory oversight to ensure compliance, rules
  on investment, rules on transfer of staff
• - By way of derogation, arrangements which
  guarantee more effective independence of the
  transmission system operator than the third
  option may be certified as compliant by the
  regulator and the Commission

17
Questions
18
Overview of the Regulatory Regime and latest
consultation

• Robert Hull
• Head of Offshore Transmission Policy Incentives
• External communications Session
• 8th December 2008

19
Update on the Proposed Offshore Transmission
Regime
20
Introduction

• Update on the Regulatory regime
• Offshore transmission background
• Key regulatory proposals, including key
  developments in the November consultation
• Update on the Tender process
• Projects that are likely to be tendered in the
  transitional regime
• Key features of the tender process
• Next steps

21
Offshore Transmission

• Government expects that up to 33GW of offshore
  renewables will be developed, within the entire
  offshore area for the UK
• It will cover offshore projects, including wind
  and future tide based generation
• There will be a regulatory regime for offshore
  transmission connections
• As for onshore generator pays transmission
  charges
• Risks and costs shared with consumers
• The first two rounds alone (South East North
  West) cover up to 8 GW and this is likely to
  require more than 2.5bn of transmission assets

22
From Principles to practice
23
Key Regulatory Proposals (1)

• The offshore generator connection requirements
  will set the scope and trigger the selection of
  an Offshore Transmission Owner (OFTO)
• The OFTO to undertake this investment will be
  appointed by competitive tender with the winner
  awarded a transmission licence.
• Tender will offer opportunities for innovation in
  delivering fit for purpose, value for money
  assets
• Open-ended licences with 20 year initial
  regulated revenue period
• The tender process will be run by Ofgem,
  resulting in selection of a preferred bidder and
  approval of a long term regulated revenue stream.
• Tenders will be run to in early years to select
  OFTOs for transmission assets that are in
  service or being constructed by the offshore
  developer (transitional regime)

24
Key Regulatory Proposals (2)

• The OFTOs annual income received from the GB
  System Operator (GBSO) is based on asset
  availability not utilisation
• Availability incentive
• Aim incentivise rectification of short- and
  long-term outages
• Proposal includes a banking mechanism coupled
  to the 10 penalty
• OFTO accrues credits if availability gt target,
  debits if lt target
• Credits earned for good performance offset
  penalties payable
• Aim to incentivise consistent high performance,
  while maintaining viability of OFTO proposal

25
Key Regulatory Proposals (3)

• Post construction revenue adjustments
• Incremental capacity increases up to 20 by
  existing OFTO
• Further tender exercise for major capacity
  increases
• Adjustment mechanisms to address unexpected or
  uncertain cost changes
• End of the revenue stream
• If there is an ongoing generator demand for the
  asset
• Extension of revenue stream Where limited
  additional investment is required (up to 20).
• Retender Where ongoing use of the asset requires
  significant new investment (over 20).
• Performance bond towards the end of the period to
  maintain incentive properties over the asset life
• If there is no ongoing demand the licence would
  be revoked

26
Key Recent Policy DevelopmentsNovember Joint
Consultation

• Implementation proposals
• updated change proposals for standard framework
  documents
• change proposals for special conditions of NGETs
  transmission licence
• propose for changes to licences and industry
  codes to be designated by Secretary of State and
  become part of the standard framework
• EU unbundling requirements
• OFTO of last resort consulting on revised
  position developed in light of unbundling
  announcement
• NGET business separation requirements
• Published proposed text for NGET to support
  business separation of the GBSO from OFTO arms
• Performance incentives
• Published proposals for an OFTO operational
  availability incentive framework

27
Update on the tender process
28
Overview of offshore projects likely to be
tendered in the transitional regime
29
Tender Process

• A generator meeting certain pre-conditions will
  trigger a notice inviting expressions of interest
  from prospective OFTOs
• Means that the tender is based on high level
  generator requirements
• Pre-conditions include the developer holding a
  connection agreement with NGET and entering into
  lease arrangements with The Crown Estate
• The tender process will be co-ordinated through
  annual competition windows this will be kept
  under review
• A four stage tender process is proposed i.e.
  Pre-Qualification, Invitation to Tender, Best and
  Final Offer, and Preferred Bidder
• Bidders will be required to comply with industry
  codes, technical standards, and licences
• Ofgem will grant a licence to the winning bidder
• Seeking value for money, fit for purpose bids
• Licence sets out obligations and entitlements
• Ofgem will recover tender costs from bidders and
  generators

30
Tender process Transitional Arrangements

• Transitional arrangements will apply where
  transmission assets have been or will be
  constructed by the offshore developer
• Ofgem will determine efficient asset values in
  advance
• OFTO will adopt assets post construction
• Phased projects will be adopted as phases are
  completed
• Arrangements will apply where the developer meets
  certain pre-conditions ahead of Go Active or Go
  Live
• Pre-conditions include that the offshore
  developer has completed the construction or has
  secured financing to construct the assets
• Bidders will be able to bid for more than one
  project in a tender round
• Ofgems evaluation strategy will be to seek the
  most economically advantageous bid for each
  project
• The key factor will be the long-term revenue
  stream, subject to evidence of suitable technical
  and managerial capability

31
OFTO Qualification Criteria

• Evidence of a suitable ownership structure for
  the OFTO
• evidence of a suitable approach for financing the
  OFTO, demonstrating adequate financial standing
  and an understanding of the investment economics
  
• evidence of suitable management capability for
  operating the OFTO and
• evidence of relevant technical and specialist
  capability for OFTO operation, including but not
  limited to
• Evidence of an understanding of the key Health
  Safety requirements (including policies and
  experience) and
• Evidence of an understanding of key environmental
  requirements.

32
Key Features of the Tender Process

• Certainty for OFTOs and Generators over
  Technical, Licence and Regulatory Requirements
• Stable regulated income for project lifetime
• Pre-agreement on risk allocation
• Transparent bidding process
• Greater flexibility on choice of design,
  procurement, operational management, insurance,
  financial structure, etc.
• OFTO bids a 20 year revenue stream based on its
  view of costs, returns, scope for future
  developments.
• We will develop our process in the light of
  responses received to the October tender
  consultation

33
Who Can Participate?

• The tenders will be open to all interested
  parties, including consortiums of companies,
  banks, investment groups, manufacturers as well
  as existing network companies
• EU rules on unbundling will apply to the regime
  and interested parties will need to be compliant

34
Risk Allocation
35
Summary of Regime Key Benefits

• For Generators
• Deliver cheaper and more timely offshore grid
  connections
• Be more focused on generators requirements
• Flexibility for future offshore generation needs
• For OFTOs
• Encourage innovation through competition and
  enable new entrants to compete in the market
• Long term regulatory certainty and lighthanded
  regulation
• Low risk - OFTO protected against generator
  failure and credit risk

36
Summary of Regime Key Benefits

• For Generators
• Deliver cheaper and more timely offshore grid
  connections
• Be more focused on generators requirements
• Flexibility for future offshore generation needs
• For OFTOs
• Encourage innovation through competition and
  enable new entrants to compete in the market
• Long term regulatory certainty and lighthanded
  regulation
• Low risk - OFTO protected against generator
  failure and credit risk

37
Next Steps

• Ongoing consultations on regime details
• Industry codes and technical standards
• Transmission licence conditions
• Further consultations expected early in the New
  Year on
• Tender regulations
• Tender documentation
• Final joint consultation
• Preparation for first tender round (transitional
  projects)
• Go-Active June 09 (with tenders expected to
  start during Summer)
• Go-Live June 10 (Prohibition extend offshore
  and applies to offshore developments at 132kV and
  above)

38
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39
Questions
40
Implementation Proposals

• Bridget Morgan
• Head of Standard Framework Development Offshore
  Transmission
• 8 December 2008

41
Introduction

• Summary of legal framework change proposals
• Ongoing development of change proposals
• Next steps
• Impact on the role of the GBSO

42
Why are Changes Being Made?

• To extend the existing frameworks offshore
  (majority of changes).
• To implement different arrangements offshore (in
  limited circumstances where justified).
• To maintain consistency within the regulatory and
  contractual frameworks.

43
What Changes have been Proposed?

• There are detailed change proposals within our
  current consultation for
• Transmission Licence (Annex 1)
• Balancing and Settlement Code - BSC (Annex 2)
• Connection and Use of System Code - CUSC (Annex
  3)
• Distribution Connection and Use of System
  Agreement - DCUSA (Annex 4)
• Distribution Code (Annex 5)
• Grid Code (Annex 6)
• System Operator Transmission Owner Code - STC
  (Annex 7)
• GB Security Quality of Supply Standard - GBSQSS
  (Annex 8)
• NGET Special Conditions (Annex 9)

44
Why are Changes Being Made?

• To extend the existing frameworks offshore
  (majority of changes).
• To implement different arrangements offshore (in
  limited circumstances where justified).
• To maintain consistency within the regulatory and
  contractual frameworks.

45
Existing Contractual Arrangements Required for
Generator Connection to GB Transmission System
In Scotland
Transmission Owner
Generator
NGET
STC
CUSC
Grid Code
This is how it works now
46
Proposed Contractual Arrangements required for
Offshore Generator Connection to GB Transmission
System
Same structure of arrangements with new type of
transmission licensee (OFTO)
47
Proposed Contractual Arrangements required for
Offshore Generator Connection to GB Transmission
System
Offshore connecting to transmission system in
Scotland
Offshore Generator
Offshore Transmission Owner
NGET
CUSC
STC
Grid Code
Transmission Owner
NGET may need to seek transmission services from
more than one transmission licensee
48
Proposed Contractual Arrangements required for
Offshore Generator Connection to GB Transmission
System
Offshore connecting via onshore distribution
system
STC
Offshore Transmission Owner
Offshore Generator
NGET
CUSC
DCUSA
Grid Code
Distribution licensee
NGET may seek services from a distribution
licensee
49
What has changed since June 2008?

• We have identified policy proposals whose
  implementation would require changes to a number
  of the relevant documents in our current
  consultation.
• We have provided further detail about
  implementation proposals for
• Connection application process
• 20 limit on development of offshore transmission
  system without further competitive tender
• Standard transmission access products for
  offshore generators
• 132kV connected licence exempt offshore generators

50
What has changed since June 2008? 2

• Changes across all documents to
• Take account of responses to our June document.
• Improve drafting of change proposals (eg
  correction of consistency issues and
  typographical errors).
• Remove any parts of previous change proposals not
  considered appropriate for the offshore
  transmission regime.
• Reflect changes implemented under normal
  governance arrangements (updated baseline)
• Specific changes to each relevant document
• Highlighted in chapter 4 and the introduction to
  each Annex

51
Current Consultation Standard Framework
Development

• Areas where we would particularly welcome input
  from industry participants
• Commercial treatment of OFTO provided reactive
  power services.
• GBSQSS security criteria for offshore transformer
  equipment, offshore cable circuits and busbars
  forming part of an offshore transmission system.
• Development of NGET Seven Year Statement (SYS).
• Revised OFTO of last resort proposals.
• Proposed NGET business separation obligations.

52
Ongoing Development Work

• Drafting review to check change proposals are
• Consistent
• Appropriate for revised OFTO of last resort
  proposals
• Correctly aligned with proposed change to
  Schedule 1 of NGETs transmission licence
• Further consideration of
• Commercial treatment of OFTO provided reactive
  power capability
• Proposed offshore transmission security criteria
• Changes implemented under normal governance
• Review of consultation responses

53
Next steps

• Second consultation on tender regulations planned
  for New Year 2009.
• Further consultation on tender process planned
  for February 2009.
• Final consultation on licence and code change
  proposals planned for spring 2009.
• Go-Active planned for June 2009.
• Go-Live planned for June 2010.

54
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55
Implementation of regime impact on the role of
NGET

• John Greasley, NGET

56
National Grids Role in GB Electricity
Transmission

• National Grids System Operator obligations under
  its current licence terms are to
• Operate the GB Transmission System
• Ensure GB Transmission frameworks are in place
• CUSC users rights and obligations with respect
  to the transmission system
• Bilateral Connection Agreement Site specific
  agreement between User and NGET
• Grid Code technical and operational
  requirements for users
• GBSQSS security and quality of supply standard
  joint obligations with the Scottish TOs
• BSC Balancing and Settlement Code
• STC requirements between NGET and TOs - joint
  obligation with the Scottish TOs
• Co-ordinate and produce the Seven Year Statement
• Offer terms for connection to and use of the
  transmission system
• Have charging methodologies in place
• Comply with distribution codes

57
Operating the GB Transmission Networks

• Under current arrangements the TOs in Scotland
  provide a transmission service in accordance with
  the STC, which means
• Making their transmission systems available
• Providing National Grid with a means to direct
  configuration of the Scottish networks
• Providing real-time information to National Grid
• Configuring their networks to National Grids
  direction in accordance with agreed procedures
• National Grid is in turn obliged to
• Ensure networks are operated within licence
  standards
• Ensure networks are operated within specified
  limits
• Operational limits are set out in the TOs
  Services Capability Specification

58
Relationship between TO and SO
Current Arrangements
Transmission Owner
System Operator
Scottish Hydro
Scottish Power
System Design Project Management Engineering
and Maintenance
System Planning System Operation Market
Facilitation Contractual interface with Users
National Grid
National Grid
59
Ensure GB Transmission Frameworks are in place
Code change proposals to extend the current
framework to accommodate offshore transmission
are currently being consulted on
60
Co-ordinate and produce the Seven Year Statement

• The Seven Year Statement (SYS) provides
  information from which prospective transmission
  users can evaluate connection opportunities
• Published annually by National Grid (plus a
  quarterly update)
• Covers the GB Transmission System
• By default will extend to cover offshore area
• We also publish other information, for example
  the Transmission Networks Quarterly Connections
  update
• What information would be useful to an offshore
  developer?

61
Offer terms for connection to and use of the
transmission system

• NGET is the contractual counterparty for all
  users of the GB Transmission system
• Two-stage process proposed for offshore
  transmission regime
• Initial connection offer at three months
• Tender process
• Agreement to Vary
• NGET manages the relationship with other TOs
  (Scotland and Offshore) via the STC

62
Overall Connection Application Process
Tender
Preferred
Process continues to licence award
Window
Bidder
Starts
Identified
Tender Process
Offshore network
Preferred
Connection
Connection
design options
Bidder
(including distribution
Offer
Offer
accedes to
options)
Connection
Connection
Agreement
Information
Information
STC
Application
Offer
Assessment of
to Vary
onshore impact
Acceptance
Acceptance
Connection Process
Connection Process
Connection
Connection
Construction,
Terms
Commissioning and
Offer

varied to
Accession proceed
Onshore
under STC
include
Works and
Governance

Final

Assumed
offshore
Offshore
works
Works
Stage 1
Stage 2
63
Have Charging Methodologies in place

• NGET puts in place Charging Methodologies in
  accordance with Transmission Licence Obligations
• Facilitate competition
• Cost reflectivity
• Take account of developments in TOs transmission
  businesses
• All users of the GB Transmission System pay
  Connection Charges and/or Use of System Charges
  to NGET
• NGET pays TOs in accordance with their own
  Charging Methodologies

64
Offshore charging proposals

• Offshore charging consultation closed on 24
  November
• Eight responses received
• Mixed views
• Report to be provided to Ofgem in December
• Deadline for veto will be prior to 1 April 2009
• NGET intends to publish further information
  relating to indicative charges based on its
  recommendations

65
Comply with Distribution Codes

• Offshore transmission can connect to DNO onshore
• Will only arise if offshore generator requests
  such an option
• Will be reflected in the input data to the tender
  process
• NGET will investigate options for DNO connection
  after the initial connection offer
• This will involve applying to the relevant DNO
• Terms of DNO offer will be reflected through to
  the User

66
Transition - impact on NGET

• Transitional projects may already have
  agreements with
• NGET and/or
• A DNO
• These agreements will need to change
• Impacts will be considered on a case by case
  basis
• Ultimately these agreements will transit to
  Bilateral Connection Agreements with NGET
• Exact timing of the process is yet to be
  finalised
• We also need information from yourselves for
  operational purposes

67
Getting Connected Workshop

• Workshop held on 1 December 2008
• Good level of attendance/engagement on the day
• Issues considered
• Information useful to prospective developers
  (SYS)
• Walking through the Connection Application
  Workshop
• NGET will document and publish output from the day

68
Where is more information available?

• Your Customer Account Manager
• For general queries please contact
• gbso.offshore_at_uk.ngrid.com
• NGET website for offshore transmission
• http//www.nationalgrid.com/uk/Electricity/offsho
  reProject/

69
Questions
70
Next Steps

• Current Consultation Closes January 9 2009
• Further Final Consultation
• Go-Active June 2009
• First Tenders Summer 2009 Transitional
  Projects
• Go-Live June 2010