Offshore electricity transmission

The Government has a target that, by 2020, 15 per cent of the UK's energy will come from renewable sources and forecasts, to 2020, that investment of around GBP8 billion will be needed to connect the offshore sites to the onshore grid. This report examines the new model for using competition to license the transmission of electricity from offshore wind farms to the onshore network. The licensing model has already delivered benefits and has the potential to deliver more. There were good levels of interest in the first four licences, with competition holding down prices in these deals which were for assets worth a total of GBP254 million. In establishing this new market, however, the Authority guaranteed the licensees a 20-year inflation-proof income. This may help to attract interest from long-term investors but it also protects licensees and generators of offshore electricity from reductions in usage of the transmission assets and leaves consumers with long-term inflation risk. In addition, transaction costs have been high and the extent of savings from the new arrangements is not clear cut.
Further work is also needed to establish robust benchmarks to ensure the amounts paid for transmission construction costs are not excessive. For the initial four competitions, costs of debt were 2.1 per cent to 2.2 per cent above the relevant rates offered by 15-year UK gilt yields which represents a competitive deal. But the NAO highlights the scope for improving financing costs and notes that there is no provision for claw-back in the event of refinancing gains.