Offshore Electricity Transmission
Summary and Background
176.The Government is putting in place a framework intended to encourage the development of generation of electricity from offshore renewable energy sources, for example offshore generating stations driven by wind. Offshore generating stations tend to consist of a device (for example, wind turbines placed on towers driven into the seabed) which powers a generator to convert the (wind) energy into electricity. These offshore generating stations will need to connect to the main onshore electricity network (transmission and distribution) in order for the electricity generated to be supplied to end-users, including domestic consumers.
177.Electricity transmission generally constitutes the movement of electricity around a national grid system using high voltage networks, whilst electricity distribution generally constitutes the delivery of electricity on local low voltage networks to end users.
178.The Energy Act 2004 provides powers for the Secretary of State to make changes to the codes, agreements and licences – which regulate onshore electricity transmission and distribution – for the purposes of regulating offshore electricity transmission and distribution.
Since the Energy Act 2004 was passed, the Government has been working with the Gas and Electricity Markets Authority (“the Authority”) to establish an offshore transmission licensing regime to regulate:
the conveyance of electricity along high voltage lines offshore (defined in the 2004 Act as those with a nominal voltage of 132kV or more), and
associated plant and equipment which connect offshore generating stations to the onshore electricity network.
the high voltage lines and associated plant and equipment together make up the “transmission assets”.
179.The overall objective of the regulatory regime for these transmission assets is to enable large amounts of electricity from renewable sources generated offshore to connect to the onshore electricity network in a safe, economic and efficient manner, whilst maintaining the integrity of the electricity system as a whole.
180.To date, the transmission assets for offshore generating stations have been built and operated by generator-developers.
181.The new offshore transmission regime will:
require the transmission assets to be owned and operated by a separate licensed entity (not the generator).
extend National Grid’s role as the onshore transmission system operator offshore.
introduce a competitive tender process for determining to whom the Authority will grant a transmission licence to build, maintain and finance the transmission assets for a project. The Authority will make regulations under section 6C of the Electricity Act 1989 to enable it to run competitive tender processes and determine the successful bidders. The regulations will need to be approved by the Secretary of State. The Government anticipates that the Authority will consult on the way in which these provisions will be implemented, before the regulations under section 6C are made.
182.The new offshore transmission regime will come into force on commencement of section 89 (which makes changes to the Electricity Act 1989 so that certain activities offshore require a licence) and section 180 (which adds a new definition of “high voltage line” in the Electricity Act 1989) of the Energy Act 2004. From that date, those participating in offshore transmission will require a licence.
183.In addition to the powers contained in the Energy Act 2004 for offshore transmission, two further areas have been identified where powers are necessary to ensure the effective operation of the new licensing regime.
184.The Authority’s new function of carrying out tender exercises will cause it to incur additional costs beyond those incurred in exercising its existing functions. The Act contains new provisions relating to cost recovery. These will ensure that the Authority is able to use alternative mechanisms to cover its costs in running the tender process. These will include mechanisms to ensure commitment to the tender process from different parties.
185.The combination of the offshore generating station and the transmission assets are described in these explanatory notes as the “offshore project”. Some of the earliest projects for which a tender exercise for an offshore transmission licence will be required are offshore projects where the generator-developer will either:
have funded and already built the transmission assets; or
have funded and be part way through building the transmission assets; or
be ready to construct the assets (in that it has all necessary funding in place to do so),
at the time the offshore transmission regime comes into force.
186.These offshore projects will require the transfer of property, rights and liabilities (which might include the transmission assets) from the existing owner (e.g. the generator-developer) to the successful bidder (as a result of the tender exercise for an offshore transmission licence) in order for that successful bidder to be able to perform its licence and statutory functions. For offshore projects where the transmission assets will have already been built when the new regime comes into force, and where a transfer to the successful bidder has not taken place by that time, a generator-developer will be “stranded” since it will not be authorised to convey its electricity lawfully to the onshore network. Although in the majority of cases it is anticipated that the transfer will be agreed via commercial negotiations between the parties, the Government considers that a mechanism is needed to cover the possibility of such negotiations failing. This will enable the Government to ensure that property is transferred in a fair, timely and effective way, and avoid generator-developers being “stranded”. The Act enables the Authority to make a property scheme in those cases.
187.There is an amendment to the definition of “relevant offshore line”, which is set out in section 180(2) of the Energy Act 2004 (which has not yet been commenced), and will be inserted into section 64 of the Electricity Act 1989. The amendment to this definition through the Act clarifies that any line built for the purpose of transmitting electricity from an offshore generating station and which is wholly or partly in internal waters, the territorial sea or an area designated under section 1(7) of the Continental Shelf Act 1964 (which currently includes the Renewable Energy Zone) is a “relevant offshore line”, even if only a small proportion of the line is situated offshore. The definition in section 180(2) of the Energy Act 2004 is being repealed.
Commentary on Sections
Section 44 and Schedule 2: Offshore electricity transmission and property schemes
188.This section and Schedule amend Part 1 of the Electricity Act 1989 so as to confer on the Authority:
power to recover costs related to competitive tenders for determining to whom offshore electricity transmission licences will be granted, and
power to make property schemes to transfer property, rights and liabilities from the existing owner to the successful bidder for an offshore transmission licence.
189.Subsection (2) inserts a new section 6D into the Electricity Act 1989. It supplements section 6C which (as mentioned in the summary and background above) gives the Authority the power to make regulations to enable it to run competitive tender processes and determine the successful bidders. These regulations can include provisions about the process the Authority will follow in making such determinations.
190.New section 6D of the Electricity Act 1989 gives the Authority the ability, in making regulations under section 6C, to create new mechanisms to recover its costs in carrying out and administering tender exercises, including the ability to:
seek payments from the participants in a tender exercise to cover its tender costs for a particular tender exercise (this is set out in section 6D(1)(a)). The participants are identified in sections 6D(2) to (4), being:
a person who made a connection request to a transmission system or, if a project connects to shore at 132kV, a distribution system; this may include the generator-developer; and
applicants for the offshore transmission licence.
require the person who made a connection request to pay a deposit of an amount set by the Authority or require that person to provide other such security in respect of the Authority’s tender costs (such as a letter of credit or bond) as the Authority agrees (set out in section 6D(1)(b)). The Authority will also accept payment of the deposit or other such security by an approved party, for example a parent company. This power could be used to obtain a financial commitment from a generator-developer to the tender process. For example, the Authority could use this power on the basis that such security would only be realised if the generator-developer withdrew from the tender exercise before the process was complete.
require costs incurred by the Authority, in assessing the expenditure which has been incurred – or which in the Authority’s view ought to have been incurred if done in an economic and efficient manner – on certain assets, to be met by the owner of the assets – see section 6D(1)(c). The Authority will need to undertake such assessments in cases where transmission assets need to be transferred to the offshore transmission licence holder from, for example, the generator-developer. The assessment will enable the Authority to determine the appropriate transfer value of assets for the purpose of arrangements between the parties for the transfer itself, and also for the purpose of calculating the offshore transmission licence holder’s regulated revenue stream. This power applies to projects which are eligible for a property transfer scheme under the new Schedule 2A for the Electricity Act 1989. More details on how this property transfer scheme will operate and the specific circumstances in which interested parties can apply are given below;
set out the timing of payments under these provisions;
provide mechanisms for refunding payments to, or withholding payments (or deposits or other security) from, the persons providing the payments; and
specify the consequences for the tender exercise or any participant in it should that participant fail to make a specified payment, or provide deposits or security, as required in new subsection (1) (a) or (b).
191.The Authority’s tender costs will include the costs which are incurred in relation to a specific tender exercise and an appropriate proportion of costs incurred in relation to tender exercises generally (and which are not specific to that tender exercise). The detail of how amounts will be determined will be set out in the regulations but they would reflect the direct and indirect costs of running tender exercises.
192.New section 6D(5) prevents the Authority from recovering costs that are greater than those that it has incurred in carrying out each specific tendering exercise (with the proviso that it can also still recover in each case an appropriate proportion of costs incurred in relation to tender exercises generally). At any particular time during a tender exercise the Authority may hold amounts which exceed the amount of its tender costs. However, at the end of the exercise, it must ensure (for example, by making refunds) that it retains no more than its tender costs. In other words, the Authority’s powers to recover costs are cost-reflective.
193.New section 6D(6) and (7) would enable the Authority to charge for an assessment of whether someone wishing to participate in a tender exercise would be able to meet specified requirements (which might include, for example, general technical competence to undertake the activity of offshore transmission) before a tender exercise takes place.
194.New section 6D(9) provides for all payments received by the Authority in respect of the tender exercises to be paid into the Consolidated Fund
195.Subsection (3) clarifies the scope of the regulatory regime for offshore transmission as set out in the Electricity Act 1989. It aims to make clear that the regime encompasses all offshore lines of 132 kilovolts or more which are:
built wholly or mainly for the purpose of conveying electricity generated by an offshore generating station, and
wholly or partly in an area of GB internal waters, an area of the territorial sea adjacent to the United Kingdom or an area designated under section 1(7) of the Continental Shelf Act 1964.
196.The definition of “relevant offshore line” is set out in section 180(2) of the Energy Act 2004 (which has not yet been commenced). Once commenced, the definition will be inserted into section 64 of the Electricity Act 1989. Section 64 of the Electricity Act contains the definition of “high voltage line” which is used to determine which electricity lines are considered, and regulated, as transmission lines.
197.Subsection (3) amends the definition of “relevant offshore line” so that any line built for the purpose of transmitting electricity from an offshore generating station is a “relevant offshore line”, even if only a small proportion of the line is situated offshore. The definition in section 180(2) of the Energy Act 2004 is being repealed.
198.Without such an amendment through the Act, the definition of "high voltage line" in section 64 of the Electricity Act 1989 (once amended by the Energy Act 2004) would not cover a line of 132 kilovolts connecting an offshore generating station to the onshore grid in England and Wales, if the majority of the electric line was onshore. This is because such lines would not fall within the definition of “relevant offshore line” as set out in the Energy Act 2004. Such a line would therefore not be regulated as transmission.
199.Subsection (3) also extends the definition of “relevant offshore line” so as to include electric lines which are located within GB internal waters (in addition to lines located in the territorial sea adjacent to the United Kingdom and an area designated under section 1(7) of the Continental Shelf Act 1964 (which currently covers the Renewable Energy Zone)). As a result of this amendment, electric lines which are located in internal waters and which convey electricity from an offshore generating station will be categorised as “high voltage lines”, i.e. transmission, if they are 132 kilovolts or more. Without this amendment, any such lines located in England and Wales would only be “high voltage lines” if they had a nominal voltage of more than 132 kilovolts. This amendment will not affect the treatment of lines in internal waters which do not convey electricity from an offshore generating station, for example a line which forms part of an onshore system and which crosses internal waters to connect one side of a river estuary to another.
Property Schemes
200.Subsection (4) introduces Schedule 2, which gives effect to a new Schedule (Schedule 2A) to the Electricity Act 1989, (see also the new section 6E to that Act inserted at the end of subsection (2)). The new Schedule enables the Authority, in certain circumstances, to make a scheme transferring property, rights and liabilities from the existing owner to the successful bidder for an offshore transmission licence. The Authority can only make provision in such a scheme where it is necessary or expedient for the purposes of the successful bidder performing its licence and statutory functions as an offshore transmission licence holder. The property scheme could, for example, include the transfer of electrical plant equipment together with rights and liabilities which are necessary for operation of the transmission system.
Scheme making power
201.Paragraphs 1(1) and (3) of Schedule 2A sets out a limit on the situations in which the power for the Authority to make a property scheme under this Schedule is available. The Schedule applies in cases where there is a tender exercise to select an offshore transmission licence holder, and the transmission system (or part of it) is transferred, or needs to transfer, to the successful bidder. The new Schedule does not apply where the successful bidder or its affiliate constructs or installs the relevant transmission assets (or where it procures the construction or installation of transmission assets by another party, e.g. a sub-contractor).
202.Paragraph 1(2) enables the Authority, upon application, to make a property scheme which transfers property, rights and liabilities to the successful bidder.
203.Paragraph 2 sets out other provisions which may be included in a scheme, for example, provisions creating joint interests or rights in property between the asset owner and the successful bidder. A scheme may also provide for compensation to be paid to the parties and to third parties who are affected by the scheme (that is, a person whose consent would be required to the making of the provision if there was no scheme – see paragraph 38(2)).
Applications for schemes
204.Paragraphs 3 to 10 set out rules governing applications for a property scheme including: the timing of applications; the giving of notice of an application to relevant persons; and the making of representations on an application to the Authority.
205.Paragraph 3 states the parties who may apply for a scheme, namely the preferred bidder, the successful bidder or an asset owner. The definitions of preferred bidder and successful bidder are set out in paragraphs 35 and 36. In essence, a preferred bidder is a particular person to whom the Authority has announced it will grant the offshore transmission licence if certain matters are resolved to the Authority’s satisfaction.
Timing of applications
206.Section 92 of the Energy Act 2004 gives the Authority the power to run competitive tender processes for the purpose of identifying to whom to award an offshore transmission licence. Under paragraph 5 of this new Schedule, applications for a property scheme must be made within 4 years of section 92 of the Energy Act 2004 coming into force. However, the Secretary of State may by order extend the period for applications by a maximum of a further 3 years in respect of specific projects or groups of projects.
Notifying the non-applicant party
207.Notice of an application must be given to the non-applicant party (i.e. whichever of the asset owner and preferred or successful bidder has not made the application for a scheme) (paragraph 6) and also to any third parties who may be affected by the scheme (paragraph 7). There is also a requirement for the Authority to publish notice of the application (paragraph 8).
208.The non-applicant party may modify the application by adding further property, rights or liabilities to be considered by the Authority for inclusion in the scheme (paragraph 9). If the application is modified, there are further requirements for notice to be given to the other party and affected third parties. There are also publication requirements in relation to a modification notice (paragraph 10).
209.The parties and third parties are given the opportunity to make representations to the Authority on an application and any modifications to it.
Restricting or withdrawing the application
210.Under paragraph 11, the applicant and the non-applicant party may jointly withdraw an application in whole or in part. This situation may typically arise if the parties have successfully negotiated the transfer of property, rights and liabilities before a property scheme has been made. If this is done, the Authority may require the applicant or the non-applicant party to pay costs incurred by either the Authority or any third party in connection with the application.
The Authority’s functions in relation to applications
211.Paragraph 12 contains provisions governing the Authority’s consideration of an application. The Authority must consider the application on the basis of whether a property scheme is necessary or expedient for the performance of the successful bidder’s functions as offshore transmission licence holder. The paragraph also sets out a procedure for the Authority to propose alternative arrangements in cases where it decides that the proposed treatment of particular property, rights or liabilities is not necessary or expedient, but that some other kind of provision should be made. For example, the Authority might decide that transfer of ownership of a particular piece of equipment was not justified, as the granting of access rights would be sufficient. Before making alternative arrangements, the Authority must inform the parties and affected third parties, who have the opportunity to make representations to the Authority on the proposal.
212.In order to ensure that property is not transferred prematurely, paragraph 13 provides that the Authority may not make a scheme until:
the offshore transmission licence has been awarded to the successful bidder; and
the System Operator (described as the co-ordination licence holder in the Schedule) issues a notice of completion to the Authority in respect of the relevant transmission system. (Some large projects are being built in phases, with a working transmission system being in place as each phase of the generating station is completed, so that electricity can be transmitted to shore as and when each phased part of the project is ready. For such projects, it is envisaged that separate completion notices might be issued in respect of the transmission systems in place for each phase (and ultimately form part of a larger transmission system for the entire project once all phases had been completed).
Terms of a property scheme
213.Paragraphs 14 and 15 set out rules governing the terms of a property scheme. In particular, the Authority may not set terms which adversely affect a third party (that is, a party whose consent would normally be required to the proposed provision if made other than by a property scheme but who has not consented to it) unless it concludes that it is necessary or expedient for the performance of the successful bidder’s functions. In such a case, it must also consider including provision for compensation to be paid to the adversely affected third party. In addition, a scheme can include a requirement for the successful bidder and/or asset owner to pay costs incurred in connection with the scheme by each other, the Authority and affected third parties.
214.Any decisions by the Authority on terms which relate to financial matters (for example, compensation to be paid) must be on the basis of what is fair. Decisions on other matters must be on the basis of what the Authority considers is appropriate in all the circumstances of the case.
Additional powers of the Authority
215.Under paragraph 16(1), the Authority may require certain persons to provide it with information and assistance in connection with the Authority’s functions in relation to the property scheme power. Sub-paragraph (2) allows the Authority to seek information in respect of any provision of a property scheme (or proposed scheme) from any other person, as may be necessary. For instance, if information or assistance provided by a person under sub-paragraph (1) alerts the Authority to relevant information held by someone else (e.g. a parent company), the Authority would be able to approach that person for a copy of that document. The Authority is also able to engage consultants to advise it for the purposes of making a property scheme under this Schedule (paragraph 17).
Notification of property scheme
216.Paragraph 18 sets out the provisions for notification and publication of a scheme once made, including notification of affected third parties.
Refusal of application or part of an application
217.Paragraph 19 sets out a requirement for the Authority to notify the parties and affected third parties of any decision to refuse an application for a scheme in whole or in part. If it refuses an application (in whole or in part), the Authority may direct the parties to pay costs incurred in connection with the application by each other, the Authority or affected third parties.
Effect of property scheme
218.Paragraphs 20 and 21 provide for the transfers and other matters provided for in a scheme to take place by operation of law, according to the terms specified by the Authority, subject to any statutory requirements for registration of a particular transaction. Paragraph 22 provides that where compensation is payable to a person, it may be recovered by that person if unpaid.
Review of determinations
219.Paragraphs 23 to 27 provide for appeals against the Authority’s determinations in relation to an application. Affected parties can appeal to the Competition Appeal Tribunal within 21 days of the scheme being made and coming into force or, if the scheme has not yet been made, the determination being made (paragraph 23). The Competition Appeal Tribunal has discretion to allow an appeal which is lodged after the 21 day period has expired.
220.Paragraphs 24 to 27 set out the types of order the Competition Appeal Tribunal may make having considered an appeal. The Tribunal has, among other things, the power to overturn or amend the Authority’s determination of any property scheme, or require the Authority to reconsider any financial matter.
Interim arrangements pending review of determination
221.Paragraphs 28 to 32 provide for the Tribunal to have the power to make interim arrangements (such as the suspension of a scheme, or the granting of interim access to property included in a scheme) pending the outcome of an appeal. For example, if a successful bidder is appealing the Authority’s decision not to transfer a particular asset, it could apply to the Tribunal for emergency interim access to that asset.
Appeal on a point of law
222.Paragraph 33 provides a further appeal to the Court of Appeal or Court of Session on a point of law.
Change of asset owner
223.If transmission assets are transferred to a new asset owner after an application is made, paragraph 34 ensures that any reference in the Schedule to the asset owner applies to the new asset owner.
