The C&F European Offshore Wind Summit Preparing to be an OFTO
Overview • Transmission Capital • OFTO risks and requirements • Issues for new entrants Conclusions •
Leading Offshore Transmission Experience • New company but very experienced staff • Over 50 years experience in the development, procurement, construction and operation of offshore wind and transmission • Led several major successful offshore wind and transmission projects now in construction: – Greater Gabbard OWF – BritNed Interconnector – Robin Rigg OWF • Other roles on many other offshore transmission projects now operational: – Basslink Interconnector – Isle of Man Interconnector • Managing a team of international experts providing project management and specialist technical expertise Round 3 OWF Round 1/2 OWF • Recent development work includes grid connection aspects of OWF site bids Interconnector
Design & Development Service • We offer a full transmission development • Access to specific experience of onshore service in relation to the assets to be and offshore transmission assets: owned by the OFTO: – Front end engineering and design – Power system design engineers – Environmental Impact Assessment – Environmental & planning consultants – Stakeholder consultation – Land agents – Land right acquisition – Marine engineers – Crossing agreement negotiations – Sea-bed survey contractors – Sea-bed survey (and other site investigations – Cable installation contractors (onshore and as necessary) offshore) – Connection application and connection – Specialist directional drill contractors and agreement negotiation onshore cable ploughing contractors – Liaison with GBSO and onshore transmission – Equipment manufacturers (cables, companies substations, converters) – Advice on OFTO performance targets – Maintenance contractors – Advice on regulatory transmission issues – OFTO-of-last-resort
Asset Management & Investment Service • Full service for equity investors, working with specialist advisers to provide: – Bid management – Development and Design – Technical and legal due diligence – Arranging debt finance – Procurement and construction management – Operational management – Insurance – Industry and stakeholder liaison – Health & safety compliance – Regulatory compliance
OFTO Requirements & Risks – Financial & Bid • Balance sheet, net assets of: The OFTO revenue is fixed in accordance with – 120% of RAV the amount bid, but the cash actually comes • Project finance, net assets or from all consumers and generators (via National evidence of raising: Grid). There is no direct contract with the wind – 100% Equity spend farm and so minimal credit risk – 100% Debt spend National Grid Electricity Transmission plc Turnover test? • (in its role as “GB system operator”) • Credit risk minimal • 20-yr fixed revenue stream subject only to: All GB – RPI Indexation (full) generators & OFTO Wind Farm consumers – Availability (capped) associated • Exchange rate risk minimal with OFTO
OFTO Requirements & Risks – Regulatory & Legal • Timing – Regime first consulted on in 2004, first licence award not before Q2 2010 – 12 month tender process …. due to start in Q3 2009 • Codes & licences – Transmission Licence – SO-TO Code: governance arrangements and code change procedures – TO Construction Agreement – Technical: GBSQSS, Grid Code, STC • Unbundling – Directive due to enter force in summer 2009 – Post transposition into national legislation will require ownership unbundling of generation and transmission – Complicated, exemptions allowed, not particularly clear – But intention is to prevent control of one and influence in other: • Appointment of directors of supervisory and administrative boards • Exercise of control or any right including voting rights
OFTO Requirements & Risks – Technical - All projects • Health & safety (Health & safety at Work Act 1974 and underlying regulations): – The Construction (design & Management) Regs 2007 – Management of Health & safety at Work Regs 1999 – The Diving Regulations 1997 – Electricity at Work Regulations 1989 – Working at Height Regs 2005 – … and numerous others … • O&M, insurance – OJEU process for procurement (Utilities Contracts Regulation 2006) – Timing and cost of obtaining bids during tendering process – Some repairs may require OEM – Repairs: spares, access, vessels – needs a well-thought out strategy – Insurance, few brokers experienced in this area, significant recent claims history • Decommissioning – Cables can be left in situ, offshore structures to be removed – Decommissioning plan as part of tendering process
OFTO Requirements & Risks – Technical – Enduring only • Design & development – Regime still being devised in this area – Level of development risk to be taken not clear – who takes consent risk? – How much design and development has the offshore wind developer done? – Who takes design standards compliance risk: GBSQSS, Grid Code, Industry standards etc.? • Procurement – OJEU process (Utilities Contracts Regulation 2006) – Suppliers non-exclusive: implications? – Timing and cost of obtaining bids during tendering process – Limited suppliers in some areas (cables, VSC etc.) • Construction – Significant ground risk and weather risk to be managed – Requires experienced offshore transmission procurement and construction mgt – Requires experienced installation contractors, poor recent history on offshore cables – Turnkey v multi-contract: pricing, interface risk, delay risk etc.
Issues for New Entrants • Bid costs – Ofgem’s costs well structured – Important to keep bidders’ own costs under control: rely-upon information, only project specific at latter stages • Consortia and pre-qualification – New entrants likely to be forming consortia to meet requirements – Few management teams skilled in offshore transmission in the market – Regime must be structured to allow relevant experience and capabilities to be applied to PQ & QTT criteria • Level playing field – Unbundling restrictions appear to offer a window of opportunity for generator-affiliates to bid to be their own OFTO – Generator-affiliates are incentivised to do this as: • Inadequate compensation to generator for unavailability of OFTO assets • Cost advantage in carrying out O&M using capabilities required for offshore wind farm • Hedging effect of below-market bid coming through in lower offshore element of TNUoS charges – Key issue, if not addressed new entrants will not bid – Can be addressed: through generator making O&M services available to all on standard Ts and Cs and regulatory oversight of prices bid v costs of capital; or preventing generator from bidding – Transitional regime allows for non-balance sheet players, must be followed through into enduring regime
Conclusions • Potentially attractive short-term opportunity – Structured well for financial investors that can access offshore transmission management expertise – Transitional regime provides opportunity for entry into the market without construction risk – But need to be sure that not wasting time bidding against generator-affiliates • Longer term opportunity should be attractive – Large scale investment opportunity (circa £10-15bn up to 2020) – Regime broadly the same offering revenue certainty, but … – Bidders need to be brought in at the right stage – If asked to take on too much development risk and cost uncertainty will reduce number of bidders interested • Financial risks low • Regulatory and legal risk low but some aspects will need active management • Significant technical issues to be managed, limited available expertise
Contact details: Email: chris.veal@transmissioncapital.com Tel: 07768 036613 Web: www.transmissioncapital.com
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