Written evidence submitted by Transmission Investment (NTC0013)

Executive Summary

• Transmission Investment is one of several companies that have taken part in the competitive tender rounds run by Ofgem to seek investment in and operation of offshore transmission networks at least cost.
• This competition in the ownership and operation of offshore networks has already provided savings for consumers in the UK and is being developed further.
• Experience overseas, where there is a now a 15 year track record in the competitive delivery of networks, has demonstrated that savings of 25% in costs to consumers can be achieved though competition, and that there is no barrier to this competition taking place in the expansion of onshore networks as well as offshore networks.
• There is a need to significantly expand both the offshore and onshore networks in the UK to accommodate the switch to low carbon generation and around £26bn is expected to be invested in these networks over the next seven years.
• Much of this investment requirement could be delivered through a competitive process to the benefit of consumers.
• The government should seek to extend the scope of competition in UK networks to include the delivery of onshore as well as offshore networks.

Introduction

1. Transmission Investment, through its joint venture Transmission Capital Partners, manages four offshore transmission networks in the UK and will shortly take over a fifth.  These networks connect around 800MW of offshore wind generation capacity to the onshore GB transmission and distribution network.
2. The ownership and operation of these networks has been competitively procured by Ofgem, with the award criteria being predominantly least cost.  In aggregate thirteen offshore networks have been tendered by Ofgem to date comprising assets worth £2.5bn.  Nine of these have already transferred to the offshore transmission owners (OFTOs) who have been licensed to operate transmission under the Electricity Act 1989.  A further two offshore networks will be tendered later this year worth £400m.
3. Three OFTO consortia have been successful in this process so far [ref 1]: Transmission Capital Partners (Transmission Investment, Amber Infrastructure Group and International Public Partnerships); Blue Transmission (comprising Macquarie Capital Group, Mitsubishi and Barclays Infrastructure Funds Management); and various guises of a consortium led by Balfour Beatty.
4. Whilst some of the established monopoly onshore transmission companies have taken part in this competitive process, none of them has been successful to date, presumably because their costs are too high.
5. With 23% of dual fuel bills being made up of network costs, it is timely to consider whether extending competition into the delivery of networks could significantly reduce bills to consumers.

Competition in networks – UK performance to date

6. Ofgem’s own analysis [ref 2] of the first nine offshore networks that have been tendered estimated savings of £350m for consumers in present value terms compared to the notional alternative of extending onshore transmission monopolies offshore.
7. The National Audit Office’s review [ref 3] of the competitive process concluded that:

• The Authority [Ofgem] secured good competition for licences in challenging circumstances but transaction costs have been high.
• Further work is needed to establish robust benchmarks for transmission construction costs
• Competition can encourage innovative and efficient maintenance, but generators offering maintenance services below cost will discourage independent entrants to the maintenance market.
• Some of the initial costs of debt and equity offer potentially favourable outcomes for consumers but there is scope for improving financing costs
• Whether the regime will definitely yield savings, and the possible amounts involved, depend heavily on assumptions about the comparator

8. Some of the NAO’s conclusions have been addressed in the design of forthcoming tender rounds (for example a refinancing gain share and biddable RPI indexation) and therefore these tender rounds have the potential to further increase savings to consumers.
9. To date these offshore networks have been tendered as already commissioned assets, constructed by the owners of the relevant offshore wind farm which the offshore network serves.  Whilst the offshore wind farm owner has the option of requesting Ofgem to run a tender for an OFTO to construct as well as own and operate the offshore network, so far they have chosen not to do so.  Whilst there may be varying reasons for this the most obvious seems to be that the offshore wind farm owner would not receive any significant compensation for any of delay to delivery of the offshore network and therefore prefers to remain in control of this activity.
10. However, it is reasonable to conclude that were this element to be opened up to competition it also could yield further savings for consumers in present value terms compared to the notional alternative of extending onshore transmission monopolies offshore.   Further evidence of this can be found outside of the UK.

Competition in non-UK networks

11. Competition in the delivery of onshore high voltage transmission networks is well established.  Successful competitions have been run in the US, Canada, Brazil and Chile [ref 4].
12. Brazil provides the greatest evidence base as competitions for the delivery of transmission networks have been held there since 1999.
13. By the beginning of 2013 some 179 Build-Own-Operate concessions had been granted for new substations and overhead lines through 31 public auctions.  The size of this competitive program has been very large comprising 50,000 km of new transmission lines (above 230 kV) and a total investment of circa U$28bn (£17bn) [ref54].
14. The success of this competitive process is also impressive with the Brazilian regulator, ANEEL, estimating that the annual revenues payable to the providers of these networks is some 25% lower at US$3.35bn pa (£2.7bn pa) than they would have been if there had not been a competitive process, i.e. US$4.45pa (£2.0bn pa) [ref 5].

Application to the UK

15. It is unlikely to be possible to bring competition into the ownership and operation of the existing onshore networks and therefore regulation will continue to be needed to keep the costs of these networks down.
16. However, there is a need for a large expansion of both offshore and onshore transmission and distribution networks to cope with the expected change in generation mix as we move to low carbon sources of electricity (whether they be from renewables, nuclear or potentially from fossil fuelled plant equipped with carbon capture and storage facilities).
17. Estimates vary for the required expenditure in offshore networks but the NAO cited a figure of £8n to 2020 in its analysis [ref 2].  These networks could be delivered through competition if regulatory arrangements allowed offshore wind farm owners to mitigate the risk of delays to delivery of the networks.
18. The regulatory plans of the three GB monopoly onshore transmission system owners (National Grid Electricity Transmission, Scottish Hydro Electric Transmission and SP Transmission) submitted under the “RIIO” price review process forecast a total of some £18bn of capital expenditure in the period 1 April 2013 to 31 March 2021 [refs 6 & 7].
19. Whilst some of this onshore expenditure will be required for asset refurbishment or will be incremental additions to existing sites, a significant proportion of it could be opened up to competition for delivery by third parties.
20. The Electricity Networks Strategy Group, an industry group co-chaired by Ofgem and DECC, produces a list of major transmission projects being progressed that it publishes on the DECC website [8].  Whilst most, if not all, of these projects could have been competitively tendered for third party delivery many have already been approved by Ofgem to be constructed through the established regulatory model.  However, there are still some which have not and these projects could be put out to competitive tender.  Of course more projects will also come forward to be added to this list in due course.
21. Perhaps it is useful to describe an example of a high voltage transmission project that would be suitable for competition.  Of particular note are the high voltage direct current (HVDC) links which have not yet been approved by Ofgem.  One example is the Eastern HVDC link, a proposed 2000MW link between Peterhead in northeast Scotland and the northeast of England, expected to be implemented via offshore cables.  This project is likely to have a capital cost in excess of £1bn and could be easily separately procured as a discrete network with defined interfaces to the existing network.  Competitively procuring this project alone could in theory save consumers around £25m per annum (based on a 25% saving through competition).  There are many other projects on the ENSG list which could similarly benefit the consumer if they were procured competitively rather than delivered by monopoly network companies.

Conclusions

22. Competition in the ownership and operation of networks has already provided savings for consumers in the UK.  Even greater savings can be gained through competition in the delivery of these networks as evidenced by experience overseas, most notably in Brazil.
23. There is a need to significantly expand the offshore and onshore networks to accommodate the switch to low carbon generation and around £26bn is expected to be invested in these networks over the next seven years.
24. The government should seek to extend the scope of competition in networks in the UK to cover the delivery of onshore as well as offshore networks.

References

[1] Offshore Transmission: An Investor Perspective – Update Report, prepared by KMPG for Ofgem, January 2014; see https://www.ofgem.gov.uk/ofgem-publications/85943/offshoretransmission-aninvestorperspective-updatereport.pdf

[2] Ofgem Press Release, 5th August 2010; see https://www.ofgem.gov.uk/press-releases/three-bidders-selected-run-first-%C2%A3700-million-transmission-links-seven-offshore-wind-farms

[3] Offshore electricity transmission: a new model for delivering infrastructure, report by the Comptroller and Auditor General, National Audit Office, 22nd June 2012; see http://www.nao.org.uk/report/offshore-electricity-transmission-a-new-model-for-delivering-infrastructure/

[4] Competition in Transmission Planning and Development: Current Status and International Experience, present by the Brattle Group to the EUCI – Transmission Policy: A National Summit, Washington, 31st January 2014; see http://www.brattle.com/system/publications/pdfs/000/004/977/original/Competition_in_Transmission_Planning_and_Development.pdf?1391196850

[5] Building Transmission – How We do it now and how We could do it in the future: Basic View of Electric Power Transmission in Brazil, Experience of ANEEL, Kellogg School of Management, 30th January 2013; see http://www.isen.northwestern.edu/events/kemi/jan2013/docs/Coelho.pdf

[6] RIIO-T1: Final Proposals for National Grid Electricity Transmission and National Grid Gas, Ofgem, 17th December 2012; see
https://www.ofgem.gov.uk/ofgem-publications/53599/1riiot1fpoverviewdec12.pdf

[7] RIIO RIIO-T1: Final Proposals for SP Transmission Ltd and Scottish Hydro Electric Transmission Ltd, Ofgem, 23rd April 2012; see https://www.ofgem.gov.uk/ofgem-publications/53746/sptshetlfp.pdf

[8] See https://www.gov.uk/government/policy-advisory-groups/electricity-networks-strategy-group

April 2014