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Stephanie McGregorDirector Offshore Transmission

June 2011

UK’s Offshore Transmission Regime:

A case study for financing a low carbon future

www.ofgem.gov.uk

Today’s presentation

1. Big picture

2. The OFTO

3. Making the opportunity real (aka fundable)

4. Opportunities/challenges ahead

All you can see in 30 mins!

www.ofgem.gov.uk

Critical developments & debates…

Climate change targets

Electricity Market Reform

Retail Market Review

European Intergration

EU Renewable

Energy Directive

RO review

Significant challenges ahead

www.ofgem.gov.uk

…grand ambitions…

Similar aspirations across Europe

UK energy policy aspirations:

• Meeting the 2020 Renewable energy commitment;

• Decarbonisation of electricity by 2030;• 2050 carbon pathways;• Marine renewable generation – potentially up to

67GW installed by 2030;• Nuclear – could have a significant role in

decarbonisation.

This will require significant new transmission infrastructure.

www.ofgem.gov.uk

….and a universal challenge for a low carbon future…

Xx

www.ofgem.gov.uk

….securing investment!

Estimates - £200bn +

Market players seeking certainty(investors, funders, developers, operators,

suppliers….)

Capital markets fragile

Challenges & opportunities ahead

www.ofgem.gov.uk

OFTO regimeImplementing a model which

is…

...attracting/delivering investment

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www.ofgem.gov.uk

What is the OFTO opportunity?

• So what is an OFTO again?

• How do we select an OFTO?

• How does the OFTO licence work?

• Market activity to date

• Offshore Transmission Owner (OFTO)

• An entity licensed to provide transmission services

• The owner and operator of the assets relevant to provide the transmission services

www.ofgem.gov.uk

What is an OFTO (2)?

Offshore SubstationPlatform

Offshore Transmission Owner (OFTO)Licencee

Onshore TO

Generator

Connection to onshore network

Subsea cable132 kV 33 kV Inter Array Cables

Onshore Substation

How do we appoint an OFTO ?

www.ofgem.gov.uk

Pre-qualification (PQ) Pass/fail

Long list of bidders

Qualification to Tender (QTT) Scored

Short list of 3-5 bidders

Invitation to tender

(ITT) Scored

LicenceGrant

Preferred Bidder & Successful Bidder

• Developer project qualified by Ofgem

˜ financial commitment˜ detailed data provision

• Ofgem run a competitive process - defined stages & requirements

• Project specific & revenue (20 year) based bidding

• Identified project, known transfer value & clear licence obligations

• Accessible to range of funding approaches

The OFTO Licence - how does it work?

www.ofgem.gov.uk

1. ObligationsOFTOs are required to:

• achieve the broad obligation to operate assets in line with industry best practice to minimise the effect and duration of any transmission outage

• report details of any service reduction over 21 days

• provide written statement of compliance with best practice if availability below 75% in a year or 80% over two years

This creates an obligation to repair assets

If does not comply, enforcement action could be significant - licence revocation

OFTO Licence - how does it work?

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www.ofgem.gov.uk

2. Incentives

• Not to compensate generator for lost revenue – disproportionate

• Incentive designed to encourage behaviour to maintain availability

• OFTO faces reduced revenue if it fails to meet availability target

• Incentive significantly reduces equity returns in case of major outage – does not put OFTO at risk of breaking minimum cover ratios

• Availability target set at 98%

• Revenue uplift for good performance

• Monthly weighting

• 50% of OFTO revenue is at risk for performance below the target in a year

• Revenue impact is spread over five years

Design

OFTO Licence - how does it work?

www.ofgem.gov.uk

3. Enforcement

Authority can take enforcement action against licensees that:

• Contravene licence conditions• Are likely to contravene licence conditions

Enforcement actions can include:

• Enforcement orders• Fines• Licence revocation

Therefore up to 100% of revenue is at risk!

www.ofgem.gov.uk

Making the opportunity real (aka fundable)

• Clear commercial & regulatory structure

• Transparent & clear process

• Accessible to different funding approaches

• Project pipeline

KEY = CERTAINTY

www.ofgem.gov.uk

Commercial & regulatory structure

OFTO

NETSOO&M

Contract

Government Ofgem

Offshore Generator

Crown Estate

Lease

Generation Licence

Consents

Codes

Sale & Purchase

Agreement

Lease

Transmission Licence

Licence

www.ofgem.gov.uk

Key investment features

Attractive investment sector

Strong UK political & regulatory support

Rare opportunity for new entrants to UK transmission sector

Relatively low risk asset class

Transparent competitive process

Well defined tender process,

Structured to ensure level playing field & transparency

2 qualification stages followed by ITT stage with M&A data rooms

Long term opportunity

A number of phases over several years: potentially £15 bn of assets

Early participation will provide valuable experience

Enduring regime offers design & construction opportunities

Robust new regulatory regime

20 year revenue stream with limited regulatory intervention

Pass through of certain key costs

OFTO protected from wind farm operating risk & risk of stranding

Upside potential: opex, non-regulated services, increased capacity

www.ofgem.gov.uk

Project pipeline

• Linked to Crown Estates R1, R2 & R3 Zones • Early tender rounds transitional rounds (TR1, 2a & 2b)• Under enduring regime it will be developer/generator

requirements & choices that influence timing & model for opportunities come to market.

• Enduring regime = generator choice of generator build or ofto build.

• Extensive engagement with generation developers on developing plans

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Final Consultation

First TransitionalTender Process (£1bn+)

2nd Transitional Tender (up to £2bn+)

2009 20202011

Go-Active

Go-Live

Enduring Regime Tender Process(£12bn+)

2010

Cumulative UK Offshore

Wind Capacity

(GW)

OFTO pipeline

www.ofgem.gov.uk

Tender Round 1

Project Preferred Bidder/OFTORobin Rigg (FC/Licensed March ‘11)

• Transmission Capital Partners (TCP)

G.Sands (S.8A con closed June ‘11)BarrowOrmonde

Thanet • Balfour BeattyWalney 1

• MacquarieWalney 2Sheringham ShoalGreater Gabbard • Green Energy Transmission

(Equitix, Balfour Beatty, AMP)

Value = £1.1bn & circa 2GW Savings forecasts positive

www.ofgem.gov.uk

Tender Round 2

London Array(630MW £476m)

Gwynt-y-Mor(576MW £306m)

West of Duddon Sands(389MW £255m)

Race Bank(up to 620MW c.£500m)

Lincs(250MW £311m)

Humber Gateway(300MW £218m)

Tranche 2a Projects(1.5GW & £975m est. value)

Expected Tranche 2b Projects(1.3GW & £1m+ est. value)

TR2a bidders:• TCP• Blue Transmission

(Macquarie/Mitsubishi)

• Green Energy Transmission (Balfour Beatty & Equitix)

• National Grid Offshore Ltd

www.ofgem.gov.uk

Opportunities & challenges ahead

• Rapid market development

• Moving into the enduring regime – generator choices

• Co-ordination – enhancement

• Wider policy landscape

www.ofgem.gov.uk

Market development

• Market evolving rapidly on bidder & developer sides

• Interest strong to date

• Bidder/consortium configurations evolving

• Market awareness & understanding increasing, breadth & depth in growing

phase – bidders & generators

• Particular interest in larger asset opportunities – interest expressed from

potential future new entrants

• Bidder/partnering approach may need to evolve for enduring depending on

how projects come to market

• Understanding of technology options, innovations & constraints

www.ofgem.gov.uk

Coordinated offshore transmission development

• Ofgem/DECC announced coordination workstream in August 2010 to focus on opportunities for enhancing co-ordination within the offshore transmission regime

• Offshore Transmission Coordination Advisory Group (OTCG) established & work underway with inputs from Stakeholder Community

• Ofgem/DECC conclusions to be informed by a range of evidence & analysis

• Assessment of options which emerge will relate to how they perform against Ofgem & Government objectives & statutory obligations

• Any proposals that are set out in our conclusions report would be subject to public consultation

www.ofgem.gov.uk

Investment challenge:• Significant capital requirement - £200 billion+ over the next decade to meet our

aspirations;• Capital markets fragile;• Investors need certainty and stability

• Impact on developers?• Impact on supply chain?

Future still very uncertain:• Political uncertainty – eg impact of EMR proposals;• Scale and timing of onshore development – what role will nuclear play;• Scale and timing of offshore development – ODIS scenarios has a broad range 25-

67GW.

Network development:• Long lead time to deliver new capacity;• Supply chain readiness – volume of new tech.

What is the appropriate network configuration?

…and there are major challenges ahead

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THANK YOU