Final text of CATO Tender Regulations is approved

Background

On 4 April 2025, Ofgem published its policy decision on the Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2025 (the “Tender Regulations”) together with the final text of the Tender Regulations (see Legislation.gov.uk) which will come into force on 25 April 2025 and extend to England, Wales and Scotland.  The Tender Regulations establish a legislative framework for the competitive tendering process due to be adopted for certain onshore electricity transmission projects and the granting of Competitively Appointed Transmission Owner (CATO) licences.  An appointed CATO will manage the transmission infrastructure works identified within its respective licence and be responsible for financing, developing, consenting, operating and ultimately decommissioning the associated transmission assets.  

Currently, onshore transmission system works are exclusively carried out by or on behalf of three regional transmission system operators (National Grid Electricity Transmission; SP Energy Networks; and Scottish and Southern Electricity Networks). However, high levels of demand on the grid and a resulting need for ever increasing levels of transmission works has prompted DESNZ to introduce a competitive tendering process for certain onshore transmission works, with a stated aim to drive innovation and cost efficiency whilst supporting decarbonisation and fulfilment of Net Zero targets.  The previous Government’s Transmission Acceleration Action Plan (November 2023) anticipated a potential cost saving from onshore CATO use of £1 billion by 2050.

To this end, legislation was included in the Energy Act 2023 which made changes to the Electricity Act 1989 (the “Act”) that enabled GEMA to make regulations to facilitate competitive tendering. The Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024 (the “Criteria Regulations”) subsequently came into force on 12 March 2024 and specify the criteria an onshore transmission project must meet to be a “relevant electricity project” suitable for competitive tendering.  Separate criteria were identified for “early model” tender exercises being those held before any detailed design work is undertaken on the project (the “early model approach”) and “late model” tender exercises being those held after completion of preliminary works.  As the name implies, the Tender Regulations focus on the early model approach as Ofgem believes this will give end-to-end accountability to the CATO licensee, maximise innovation and technological advancement and allow for early supply chain engagement from bidders.  It will, however, continue to develop the process for late model tender exercises and has confirmed that it sees a role for both models going forward.

The criteria for the early model approach are set out below:

1. network need – eligible projects must be capable of addressing a network need;
2. novelty – eligible projects must be “wholly new” to the electricity transmission system; 
3. separability – eligible projects must be capable of being clearly distinguishable from any other part of the transmission system to which it relates and from any other electricity solution related to the transmission system and the ownership and control of the project’s electricity solution must also be equally separable; and
4. consumer benefit – a cost benefit analysis must demonstrate that the non-tendered consumer impact does not outweigh the tendered consumer impact.

The explanatory notes to the Criteria Regulations further clarify that the applicable criteria may differ on a project-by-project basis.

The Tender Regulations

The Tender Regulations set out a framework for the tender process for a CATO licence to be awarded for a specific project under the early model approach.  The tender process will be administered by Ofgem as the “Authority” and National Energy System Operator (NESO) as the “delivery body”.   The Criteria Regulations and the Tender Regulations are both relatively short legislation and more detailed aspects of the tender process will be set out in separate guidance to be published by NESO in due course.  

If NESO wishes to commence a CATO tender exercise, it will make a request to Ofgem who will then determine whether the proposed project is a “qualifying project” (regulations 6 and 7). Ofgem will be minded to confirm it is a “qualifying project” if the project meets each applicable criterion of the Criteria Regulations (see above) and the proposed tender will generate sufficient competition such that a CATO award will contribute to the protection of consumer interests.  If Ofgem confirms that the project is a “qualifying project”, NESO will as soon as reasonably practicable thereafter publish notice of its intention to commence a tender exercise together with a proposed commencement date (regulation 8). 

Each tender exercise will comprise the following stages (regulation 9):

1. a pre-qualification stage during which NESO determines which bidders become qualifying bidders (regulations 10 & 11); 
2. an invitation to tender (ITT) stage during which NESO determines which qualifying bidder is the preferred bidder (regulations 12 & 13);
3. a best and final offer stage – an optional stage during which NESO may require certain bidders to submit “best and final offers” (regulation 14); 
4. a delivery body functions assessment stage during which Ofgem reviews the exercise by NESO of its functions (regulation 15); and
5. a preferred bidder stage during which NESO identifies the successful bidder to be granted a CATO licence in respect of the qualifying project together with (if applicable) a reserve bidder (regulations 16-18).

As part of the ITT stage, NESO may require each bidder to make a payment to Ofgem of an amount deemed reasonable to cover the tender costs of NESO and Ofgem or provide Ofgem with security for these costs.  These tender costs will ultimately be recovered from the successful bidder subject to certain permitted deductions. 

Code Modifications and Outstanding Detail

To allow the early model approach to be implemented effectively, various competition processes, obligations, technical requirements, charges and remuneration principles need to be embedded within the relevant industry codes including the CUSC, Grid Code, STC and SQSS.   Of the various modifications proposed to date, CMP403 and CMP404 (CUSC modifications); GC0159 (Grid Code); CM086 and CM087 (STC); and GSR031 (SQSS) were implemented on 8 April 2025. 

Ofgem also published a consultation on 21 October 2024 which sought industry views on various commercial aspects of the early model approach including post-award security obligations during the preliminary works and construction stages; payments to CATO during the preliminary works stage; post preliminary works cost assessment; payment to CATO and performance incentives during the operational stage; additional works obligations on CATOs beyond the scope of work originally tendered; and the revenue period (including next steps following expiry of the revenue period).  This consultation closed on 2 December 2024 and Ofgem’s final decision (currently pending) is being eagerly awaited by industry as these commercial terms will determine the viability and attractiveness of the CATO role to interested parties.    

Next Steps

NESO has been keen to identify a pathfinder project for the initial roll out of the early model approach and requested in November 2024 that a sub-component of the WCN2 project (a new double circuit between NW England and SW Scotland) be the first competitively tendered project.  Ofgem consulted on this proposal in December 2024 together with NESO’s proposed approach to identifying additional projects that could potentially form a future pipeline of onshore work to be competitively tendered.  Ofgem published its decision on this consultation on 4 April 2025 and confirmed that in terms of its applicability to the Criteria Regulations, WCN2 would be a “novel” project, it can be designed to meet the separability criterion, and the cost-benefit analysis carried out indicates that onshore competition is likely to deliver consumer savings if applied to the project.  However, Ofgem was unable to confirm the needs case for WCN2 due to uncertainty of the impact of the refreshed Transitional Centralised Network Plan and Strategic Spatial Energy Plan (SSEP) which together aim to identify the optimal locations, quantities and types of energy infrastructure required to meet the UK’s future energy demand.  Notwithstanding this decision, Ofgem reiterated that the Government is committed to increasing competition in electricity networks and is keen that the first onshore competitive tenders can be launched as quickly as possible.  Ofgem and NESO have therefore committed to agree a timeline to select an alternative first project and establish a schedule of tenders for future projects. Ofgem has also confirmed its intention to publish a consultation on the generic CATO licence in Spring 2025 - this will set out a CATO’s obligations and the processes to apply the commercial framework.

As flagged within our previous article on this topic (Competition in Onshore Electricity Transmission: a 2024 Update - Burges Salmon), development of the onshore CATO regime clearly remains an area to keep a keen eye on during 2025.  As has always been the case, CATO investors and participants will be keen to understand the extent and frequency with which CATO tender processes will occur, the size of the potential prize and whether early or late tender processes become the norm. In the midst of the most significant reform to the grid connection regime in a generation, wider stakeholders will remain focused on the need to ensure that the delivery of significant transmission works, to help further unlock faster connections, is not held up by the new regime. 

This article was written by Rosie Lord, PDL and James Phillips, Partner in April 2025.