The OFTO Regime: A Retrospective11 November 2020

The purpose of the OFTO regime

The separation of interests in the electricity market in GB started in the 1980s culminating in the Electricity Act 1989. Throughout the 1990s, the separation of generation, transmission, distribution and supply as separate licensable activities followed. It is sometimes said that this “unbundling” of activities came from EU legislation, but GB was a world leader in liberalising its electricity market, with the first “package” of EU legislation for electricity adopted in 1996, well after domestic implementation in GB.

The foundations for the offshore transmission regime were laid in the Energy Act 2004, followed by various consultations in 2007, 2008 and 2009. From the start, the intention expressed by Ofgem and BERR was that OFTOs “would have responsibility for designing, building, financing and maintaining the offshore transmission network required to connect an offshore generator”, and that the OFTO “would be selected by competitive tender”. In the same document, it was acknowledged that a transitional regime would be needed for those projects “where the offshore generator is already constructing or undertaking steps towards constructing the offshore transmission assets”.

In its November 2009 Open Letter, Ofgem referred to the need “to ensure that the offshore electricity transmission regime was sufficiently flexible to respond to the potentially changing needs of network users and deliver a co-ordinated offshore grid as economically and efficiently as possible”.

So what was the vision? A coordinated offshore transmission grid, providing redundancy, reinforcement, and connection between offshore generating stations.

Industry voices sway the design

The first two OFTO tender rounds were intended to capture projects in the “transitional regime”, with generators continuing to build out the transmission assets required to connect them to the national grid. Notwithstanding public statements earlier this year, the intention was that from the third tender round onward, the regime would be OFTO build only, with no generator build option.

Outcry from the industry resulted in a series of consultations, with generator build included as an option for the “enduring regime” in a December 2010 decision paper. OFTO build was not abandoned as a model but relegated to a choice for developers to make. A December 2014 policy paper introduced different OFTO build models in the hope that generators would choose OFTO build rather than generator build.

With the seventh tender round expected to launch later this year, none of the projects tendered to date have followed the OFTO build model.

Where are we now?

a) What has the regime delivered?

i) TR1 and TR2 – the first two tender rounds were transitional and operated under partially commenced legislation. Licence exemptions and legislative definitions allowed Ofgem and the industry to kick off the regime, learning and refining the process as they went. The National Audit Office (NAO) review of the new regime resulted in the publication of a report in June 2012. A number of the recommendations made by the NAO in that report were implemented for TR2;

ii) TR3 – this was the first tender round of the “enduring regime”, with the offshore transmission regime fully commenced on 10 June 2014. The hoped-for OFTO build model did not materialise, though policy work continued (see above on the new OFTO build variations introduced in December 2014); and

iii) TR4 to TR6 – the most recent tender rounds have included much larger projects, which are further out at sea, and both of these factors have introduced complexities. Newer technologies have been developed for longer cables and more powerful turbines. The tripartite challenges of distance, depth and technology mean these projects are taking longer to design and build, but conversely, they also present a huge opportunity for the UK industry.

b) Impetus for change

i) The electricity industry has changed significantly since the OFTO regime was introduced. With rapid advancements in technology, electrification of transport well under way and electrification of heat on the horizon, energy demands are rising. At the same time, coal plants are due to come offline by 2025 and gas reserves are dwindling.