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A review of the OFTO regime? Yes please!17 December 2020

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Those of you following our OFTO series will know that we have been calling for action from the UK Government to help industry meet ambitious goals for offshore wind deployment by 2030. Well, Ofgem and the Department for Business, Energy and Industrial Services (BEIS) have been listening, and have given the industry in Great Britain (GB) a few gifts to keep them occupied this holiday season:

"The policy activity demonstrates, at the very least, the Government’s desire to respond to the needs of offshore wind asset owners."

  • Ofgem is currently consulting on:

– changes to the seventh OFTO tender round (TR7), which was launched in November 2020; and

– the implementation of changes to OFTO licences that are likely to have an impact on network charges for offshore wind generators.

  • BEIS is currently consulting on changes to Allocation Round 4 (AR4) of the Contracts for Difference (CfD) scheme, which is expected to launch in late 2021 and will have a separate pot of funding allocated for offshore wind.

With responses to consultations due in January 2021, and the licence changes also taking effect in January 2021, time is short to prepare your responses!

"The scope of this consultation is separate to our work in the Offshore Transmission Network Review (OTNR) that was launched by the Department of Business, Energy and Industrial Strategy (BEIS) in July this year. As part of that review, we are looking at whether and how offshore wind connections could be better coordinated in order to deliver the government’s ambition whilst minimising social and environmental impacts."
Ofgem, 18 November 2020 consultation

On 18 November 2020, a few days before the launch of TR7, Ofgem issued a consultation entitled Offshore Transmission Owner (OFTO) Regime Tender Process – Consultation concerning developments to the tender process within the current OFTO regime. Views are sought by 8 January 2021 on:

"With responses to consultations due in January 2021, and the licence changes also taking effect in January 2021, time is short to prepare your responses!"

  • Part A – Targeted changes to:

– the tender process, with a view to attracting more entrants and new sources of finance – this includes proposed changes to the cost assessment process and the development of key transaction documents, which will no doubt be of interest to offshore wind developers;

– reference rates, namely the switch from LIBOR to SONIA;

– indexation of OFTO revenue, and in particular, whether CPI should be adopted instead of RPI as the most appropriate measurement of inflation; and

– insurance requirements for OFTO bids – again, this is a key area of interest for developers as they will want to ensure proper coverage for their route to market.

  • Part B – Wider regime development, including:

– cost assessment and the treatment of innovative design proposals;

– offshore co-ordination between projects;

– increasing information sharing from OFTOs on O&M and asset health to help developers determine whether an existing wind farm should be repowered;

– an “end of TRS” policy (with a more detailed approach to be set out in a further consultation in early 2021).

Decision on modifications to OFTO licences

The issue of how Income Adjusting Event (IAE) claims are handled has been rumbling on in the industry for several years now. In November 2018, Ofgem clarified its policy on the treatment of such claims where the IAE was caused by latent defects and the assets were uninsurable, and set out its intention to make licence changes.

The current modification decision, published 17 November 2020, follows an earlier statutory consultation, with licence changes coming into effect on 14 January 2021. As Ofgem states, these modifications fall into three groups:

  1. Modifications to implement the decision set out in the Decision Document published by the Authority in November 2018;
  2. Clarificatory modifications for all OFTO licences to amended standard condition E12-J3; and
  3. Modifications to certain OFTO licences to amend particular conditions to align with other OFTO licences.

"BEIS’s consultation response confirms that there will be a separate dedicated pot three budget for offshore wind, and that CfD delivery years will be extended to 31 March 2035 instead of 31 March 2030."

So, what does that actually mean?

The first category of changes covers treatment of IAE claims, and in particular:

  • applies a deductible in circumstances where the assets were uninsurable. Different levels of deductibles are applied for different licensees;
  • imports the System Operator Transmission Owner Code (STC) definition of force majeure into the licence; and
  • confirms various process mechanisms, including the provision of information and timing of decisions.

The second category of changes covers related issues that were not included in the November 2018 decision – mainly typographical changes for consistency and other minor clarifications, and the inclusion of an explicit power for Ofgem to amend IAE determinations.

The final category of changes makes minor alterations across OFTO licences to bring various conditions into alignment on approval of charging statements, provision of information to Ofgem, and cross references in the STC.

BEIS Consultation on changes to the CfD scheme

On 24 November 2020, BEIS published its response to the March 2020 consultation, alongside a further consultation, Contracts for Difference (CfD): changes to Supply Chain Plans and the CfD contract. Consultation responses are due 18 January 2021.

BEIS’s consultation response is worth a read, as it confirms, among other things, that there will be a separate dedicated pot three budget for offshore wind, and that CfD delivery years will be extended to 31 March 2035 instead of 31 March 2030.

"In parallel to this response the government has also published a second, follow-up consultation on the CfD scheme, which builds on some of the proposals consulted on earlier in the year. This second consultation, available on gov.uk, seeks views on several drafting changes to the CfD contract to implement decisions taken on the following policies: floating offshore wind, negative pricing, coal-to-biomass conversions and milestone delivery date. Respondents are asked for their views on new proposals on Supply Chain Plans, which build on the responses received to the March consultation. It also proposes several minor and technical contract changes. Readers are strongly recommended to read the consultation in conjunction with this government response."
BEIS, Contracts for Difference for Low Carbon Electricity Generation: Government response to consultation on proposed amendments to the scheme

"The key test of the policies’ success will be whether the changes encourage deployment of offshore wind at the rate required to meet our ambitious targets."

The March 2020 consultation sought views on Supply Chain Plans; the current consultation builds on that and sets out more detailed changes to the Supply Chain Plan policy, which, according to BEIS, “are designed to increase the clarity, ambition, and measurability of developers’ commitments, and ensure that those commitments are delivered.” Amendments include:

  • introduction of a Supply Chain Implementation Report, to be prepared by generators and approved by BEIS – failure to gain approval by a longstop date could result in termination of the CfD; and
  • ongoing monitoring by BEIS of Supply Chain Plans on at least a six-monthly basis.

The consultation also invites views on several proposed drafting changes to the CfD contract to implement decisions taken on various policies, including:

  • floating offshore wind;
  • negative pricing;
  • milestone delivery date; and
  • minor and technical changes to improve the operation and clarity of the contract.

Next steps

The policy activity demonstrates, at the very least, the Government’s desire to respond to the needs of offshore wind asset owners. The key test of the policies’ success will be whether they encourage deployment of offshore wind at the rate required to meet our ambitious targets.

To discuss any of the issues raised, or any questions about consultation responses, do get in touch – we would be happy to hear from you!

This article was authored by Partner Martin Lucas, Senior Associate Marianne Anton and Darius Meehan, a trainee solicitor in our London office.

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