Competition in Onshore Electricity Transmission: a 2024 Update

For over a decade there has been policy intent to compete the ownership, construction and operation of new onshore electricity transmission infrastructure. Whilst firm developments in this area feel as though they have been on the backburner for some time, momentum is now well and truly behind the Competitively Appointed Transmission Owner (CATO) regime.

In this article, we explain what CATOs are, describe the status of implementation of the regime and explain how CATOs are intended to be used. We also highlight the potential opportunities for investors and what to keep an eye on during 2024 as the detail of the new regime emerges.

What are CATOs?

In brief, a CATO is an entity competitively appointed to construct, own and operate part of the GB electricity transmission network.

The basic legal architecture required for the CATO regime to be implemented was included in the Energy Act 2023. Arguably this has been overshadowed by headlines relating to carbon capture and storage, hydrogen production, nuclear energy, offshore energy and low-carbon heat networks, but the CATO regime could become a significant feature of the energy landscape too.

According to the Government’s Transmission Acceleration Action Plan (TAAP) of November 2023, CATOs have the potential to save consumers up to £1 billion by 2050. They also offer electricity network asset developers and funders new revenue generating opportunities in the transmission market. The opportunities lie in assets that are:

• new: this refers to the construction of a transmission asset where none currently exists or where the new assets will completely replace existing ones;
• separable: this means there will be clearly delineated ownership boundaries so responsibility for each asset can be clearly established; and
• high value: where the initial cost benefit analysis shows early competition is likely to benefit consumers or (for projects competed after receiving planning approval) where the expected project capital expenditure is £100m or more.

The intention is that rather than such infrastructure projects defaulting to being developed by the current transmission licensees, these opportunities can be opened up to competition at different stages, depending on the nature of the project:

• “early model” competition: this refers to a competition between asset bidders that happens before the detailed asset design work has been done;
• “late” competition: this is where a tender takes place after planning consent approval is obtained for the asset in question;
• “very late” competition: this is an OFTO-style competition which takes place for the operation and maintenance of existing assets.

Implementation of the CATO regime

While the CATO regime is now provided for in the Energy Act, we still await the full set of regulations which will dictate exactly how the regime will be implemented. Whist the regime for offshore electricity transmission asset ownership (OFTOs) provides some significant potential insight, the learnings from OFTOs in practice generally apply to the “very late” competition model. We note that the OFTO regime is also the subject of a Call for Evidence and it will be interesting to see how that feedback shapes not only the future OFTO model, but the elements which are “borrowed” by the detailed CATO regime. The full set of regulations, expected later in 2024, will help all those interested in CATOs to fully ascertain the proposals at all of the competition stages. 

What is the outlook for 2024?

Ofgem issued an Early Competition Onshore Transmission Update in December 2023 which highlights the expected outlook for 2024. In summary:

• Ofgem will focus on finalising an “early model” framework of competition in 2024, with a view to commencing a first tender process by the end of the year. The rationale is that early competition can maximise the level of innovation delivered and allow for earlier supply chain engagement.
• The Electricity System Operator (ESO) will publish the second Transitional Centralised Network Plan (tCSNP2) in early 2024, identifying the reinforcement projects required on the electricity transmission network (which meet the early competition eligibility criteria).
• There will be a consultation on a number of outstanding policy issues in early 2024. These policy issues will need to be settled before Ofgem can establish the “early model” competition framework mentioned above. They include the competition Cost Benefit Analysis methodology, transmission owner conflict mitigation measures, the CATO of last resort arrangements, and cost and revenue recovery processes.
• Ofgem aims to finalise the outstanding regulations before the end of 2024 (notably the Tender Regulations which will set out the various obligations, roles, and responsibilities of incumbent transmission asset owners, potential bidders, the ESO and Ofgem at various stages of the tender process). Ofgem has set out its intention to engage with the ESO and Government on this ahead of an initial stakeholder consultation in Spring 2024.
• Ofgem has also set out its intention to modify the TO and ESO licences and consult on these from Summer 2024. The aim is to incorporate TO and ESO obligations in support of early competition and create a new licensing framework for successful CATOs.

What are the opportunities?

Ofgem has highlighted the TAAP’s ambition to identify the first eligible onshore transmission projects for competition in Summer 2024. This is something for all interested parties to keep an eye out for.

In the meantime, an indication of the current set of proposed onshore transmission projects is available on Ofgem’s website. It remains to be seen whether any of these projects might be competed under the CATO regime, but Ofgem has set out its expectation that a large majority will continue to be designed and procured by the existing transmission licensees during Ofgem’s next electricity transmission price control period (RIIO-ET3), which is expected to apply from April 2026 to 2031.

While Ofgem’s current focus is on “early model” (pre-detailed design projects) opportunities, the “late” (post-planning approval projects) and “very late” (operation & maintenance) opportunities for participants interested in transmission asset projects could also be significant. The latter could be especially important at the outset of the CATO regime, particularly in light of Ofgem’s expectations for RIIO-ET3 and the current connection climate, with some connection dates already into the late 2030s as a result of the need for network reinforcement.

If deployed successfully the regime could play a key role in delivering the transmission infrastructure we need to help deliver our Net Zero targets in a timely and cost effective manner and also save significant costs for consumers. However, the industry will be looking for reassurance that the regime will be used optimally and not create additional risks of delay to key transmission reinforcement projects going forward.

The commercial and revenue model for CATOs should also offer revenue-generating opportunities to investors but remains in development. It is currently envisaged that a CATO would generate its revenue during the lifecycle of the asset, with ESO paying the revenue stream agreed as part of the CATOs tender bid. However, it may be that bespoke revenue generation approaches are agreed on a project-by-project basis, particularly where construction periods are lengthy. Getting the model right will drive the level of investor participation in the competitive tender process, and in turn drive the success of the CATO regime.

These are all points to keep a keen eye on during the course of 2024.