1
A case study for financing a low carbon future
Stephanie McGregor
Director Offshore Transmission
June 2011

www.ofgem.gov.uk
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
Electricity
Market
Reform
Climate change targets
Retail
Market
Review RO review
EU
Renewable
Energy
Directive
European
Intergration
Significant challenges ahead

www.ofgem.gov.uk
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.
Similar aspirations across Europe

www.ofgem.gov.uk

www.ofgem.gov.uk
!
investors, funders, developers, operators, suppliers….
Xx

www.ofgem.gov.uk

www.ofgem.gov.uk
• So what is an OFTO again?
• How do we select an OFTO?
• How does the OFTO licence work?
• Offshore Transmission Owner
(OFTO)
• An entity licensed to provide transmission services
• The owner and operator of the assets relevant to provide the transmission services
• Market activity to date
Xx

Onshore
TO
Offshore Transmission Owner (OFTO)
Licencee
Connection to onshore network
Onshore
Substation www.ofgem.gov.uk
Generator
Offshore Substation
Platform
Subsea cable
132 kV
33 kV Inter Array Cables

www.ofgem.gov.uk
• 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
Pre-qualification (PQ)
Pass/fail
Long list of bidders
Qualification to Tender
(QTT)
Scored
Short list of 3-5 bidders
T) (IT
Sco er nd to te on ati vit In
Preferred Bidder &
Successful Bidder
Licence
Grant

The OFTO Licence - how does it work?
1. Obligations
OFTOs 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 www.ofgem.gov.uk

www.ofgem.gov.uk
OFTO Licence - how does it work?
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
Design
• 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
Xx

OFTO Licence - how does it work?
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

(aka fundable) www.ofgem.gov.uk
• Clear commercial & regulatory structure
• Transparent & clear process
• Accessible to different funding approaches
• Project pipeline
KEY = CERTAINTY

www.ofgem.gov.uk
Licence
NETSO
O&M
Contract
Government
Consents
Sale &
Purchase
Agreement
Code s
OFTO
Offshore Generator
Transmissio n Licence
Lease
Lease
Crown
Estate
Generation Licence
Ofgem

www.ofgem.gov.uk
Attractive investment sector
Robust new regulatory regime
Transparent competitive process
 Strong UK political & regulatory support
 Rare opportunity for new entrants to UK transmission sector
 Relatively low risk asset class
 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
 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

www.ofgem.gov.uk
• 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

35
2009 2010
Final
Consultation
30
Go-Active
25
20
First Transitional
Tender Process (£1bn+)
2011
15
10
5
Cumulative
UK Offshore
Wind
Capacity
(GW)
Go-Live
2nd Transitional
Tender (up to £2bn+)
Enduring Regime Tender Process
(£12bn+)
2020
0

www.ofgem.gov.uk
Project
Robin Rigg (FC/Licensed March
‘11)
G.Sands (S.8A con closed June ‘11)
Barrow
Ormonde
Preferred Bidder/OFTO
• Transmission Capital Partners
(TCP)
Thanet
Walney 1
Walney 2
Sheringham Shoal
Greater Gabbard
Value = £1.1bn & circa 2GW
• Balfour Beatty
• Macquarie
• Green Energy Transmission
(Equitix, Balfour Beatty, AMP)
Savings forecasts positive

Humber Gateway
(300MW £218m)
Race Bank
(up to 620MW c.£500m)
West of Duddon Sands
(389MW £255m)
Lincs
(250MW £311m)
Gwynt-y-Mor
(576MW £306m)
London Array
(630MW £476m) www.ofgem.gov.uk
Tranche 2a Projects
(1.5GW & £975m est. value)
TR2a bidders:
• TCP
• Blue Transmission
(Macquarie/Mitsubishi
)
• Green Energy
Transmission (Balfour
Beatty & Equitix)
• National Grid
Offshore Ltd
Expected Tranche 2b Projects
(1.3GW & £1m+ est. value)

www.ofgem.gov.uk
• Rapid market development
• Moving into the enduring regime – generator choices
• Co-ordination – enhancement
• Wider policy landscape

www.ofgem.gov.uk
• 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
• 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
…and there are major challenges ahead
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?

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