Ofgem has issued its Decision on the Final Needs Case for the Hinkley-Seabank project and a further three documents which, taken together, outline Ofgem's position and next steps on competition in onshore transmission.
For background, see our article Competition in Electricity Transmission after CATO.
Ofgem has decided:
- Both models for competition (the SPV model and the Competition Proxy model) are appropriate
- The "new, separable and high value" criteria that a project must meet for it to be suitable for competition are appropriate for both models, and has produced draft guidance on the criteria, for consultation
- All SWW projects that are subject to a Needs Case assessment during RIIO-T1 and meet the criteria for competition could be developed using either the SPV or Competition Proxy model (if they are cheaper than the SWW process)
- It is minded to use the Competition Proxy model for the Hinkley-Seabank project and is consulting on this.
The Competition Proxy model will be used for Hinkley-Seabank, unless National Grid can convince Ofgem that the SPV model could work better in this case. The final decision and methodology for determining the allowed rate of return under this model for this project is due in spring 2018. National Grid has said it is "very disappointed" with Ofgem's proposals in its minded-to decision as it feels Ofgem has overestimated the potential consumer savings and placed too low a value on the financing cost and the construction risk.
Looking at the responses to the August consultation on the two new models, the SPV model was very well received by potential bidders, although a couple thought it was still not as good as a full CATO would be. Risk allocation is key and if project risks were not allocated appropriately before a competitive process, the SPV model approach could actually increase some costs.
Ofgem will develop the SPV model further over the coming months, including: the most effective incentives and obligations for the TOs to deliver an efficient tender (licence obligations may not be enough: TOs could be allowed to retain a proportion of the overall consumer saving); risk allocation; regulatory arrangements; and the end-to-end decision-making process. Look out for further information from Ofgem through early 2018.
Looking forward to RIIO-2, Ofgem will continue to extend the role of competition and will be looking at whether to introduce it at an earlier stage in project development.
We will continue to report on developments.