Anticipatory Investment Update

Clarity on OFGEM’s Early-Stage Assessment process sets the stage for Offshore Co-ordination.

OFGEM recently published an updated consultation on their evolving regulatory thinking to unlock Anticipatory Investment (AI). It builds upon last year’s decision to shift costs invested by one developer (an initial user) in offshore transmission infrastructure to accommodate the needs of a later user or users onto the consumer.  

To give early confidence to all parties, an Early -Stage Assessment (ESA) was proposed whereby the value of the AI could be agreed as an eligible cost of co-ordination, returned to the Initial User when the transmission infrastructure ‘a shared asset’ transfers to an Offshore Transmission Owner (OFTO). 

This consultation specifically focuses and provides clarity on the requirements of that Early-Stage Assessment and this update summarizes the thinking and its applicability to Celtic Sea projects. 

Purpose & Timescales 

The Early-Stage Assessment (ESA) seeks to provide developers with confidence that any Anticipatory Investment spent on coordinated infrastructure will be a sensible and necessary cost; and will be treated as an allowable cost in any future cost assessment process and will meet the needs of the Holistic Network Design. 

It will be a mandatory process and will be used to inform cost profiles to the Electricity System Operator so that User Commitment Arrangements for the potential later user(s) can be established.  

There is no specific milestone in the development cycle when an ESA can be submitted but puts the onus of the developers to apply when most suitable for them. Critically and welcoming is that OFGEM recognise the need for flexibility and need to adapt as projects evolve their understanding of the techno-economic implications.  

The Early-Stage Assessment Process

The ESA has two parts to it, eligibility and technical assessment, which need to be submitted together to OFGEM. If there are gaps in the submission deliverables, discretion can be applied if there is suitable explanation and there is understanding in the process that costs will be estimates and subject to change, with process to notify OFGEM of changes as cost certainty improves or a material change occurs. 

The Eligibility Assessment requires evidence of the Projects and both Initial and later Users willingness to support the submission through a joint letter. A further requirement is a statement confirming the later user’s willingness to become the Initial User (and take responsibility for the construction of the Shared Asset) if the original Initial User’s project is materially delayed.  

Each project must also have a valid and enforceable lease with the Crown Estate and an appropriate grid connection agreement aligned with its respective Offshore Transmission Network Review (OTNR) workstream. 

This will be reviewed within 28 days following submission. Once approved, the review moves to a Technical Assessment, which asks for more detail about the respective projects, existing and planned commercial arrangements and structures between the companies with a requirement for a breakdown of the proposed infrastructure solution that is subject to Anticipatory Investment with those costs clearly identified. A Risk Register, Schedule and options analysis are also requested along with a breakdown on the monetary benefit to consumers because of the solution.  

Decision on the Technical Assessment is expected within four months of submission which includes consideration of the need for ongoing dialogue to answer queries and provide clarifications.  

The outcome of a successful application is to confirm in writing to the applicants an agreed Anticipatory Cost figure that includes interest during cost of construction.  

Relevance to the Celtic Sea

A lack of clarity around the details of what would need to be submitted to OFGEM under any potential early-stage assessment process was a point CSP made in our response to the original Anticipatory Investment consultation, last year. Clarity is helpful, clearly listing the requirements and setting the expectation but what is also helpful is the understanding that change is likely to happen and implementation of the process by which change can be managed is equally welcome.  

Whilst focusing on the Early Opportunities and Pathway to 2030 projects, This ESA process is open and invites applications from projects outside of the OTNR pathways meaning an opportunity for both the test and demonstration phase and the commercial phase projects to make a case that serves to deliver the total ambition in way that delivers commercial savings and minimizes impact to the environment and communities.  

Test and Demonstration 

With the preference in the test and demonstration phase for radially connected projects, the evidence that CSP have collated through our engineering studies have concluded that cost savings would result in a significant (£90m+) lifetime saving associated with connecting the projects to grid, with a £22m+ saving on CAPEX. This combined with 50% less cable requirement, a single landfall and cable corridor versus 3 or 4 independent connections on paper make the option a compelling one. However, bringing those developers together to seriously consider this as a viable option is challenging. There is no mandate on these projects to co-ordinate and it’s uncertain whether stakeholders of influence have an appetite to encourage the developers to progress a coordinated option through the provision of a supportive environment. It is also uncertain what the impact of these projects will have on the ability to connect commercial projects into Pembroke 400KV substation. CSP’s studies conclude Pembroke has space and capacity to feed power into the grid but significant issues in the nearshore and onshore environment as well as limited options for landfall constraining the potential for this to be realised. Connecting projects further east will place significant costs on the shoulders of developers driving up the cost of energy and Contract for Difference Bid.  

Commercial Phase 

For these Commercial Phase projects, The Crown Estate’s recent announcement with the minded to PDA’s are (due to capacity of PDA area and their proximity to land and each) pointing the way towards coordinated grid solutions that could come in a few technical solutions with Pembroke and Indian Queens being the closest points of connection. The Holistic Network Design Follow Up Exercise (HNDFUE) output will further refine the offshore coordination options and the preferred points of connection, but the PDA winners will be able to make the case for a different solution if the technical options appraisal identifies a more positive solution.  

Distance logically leads to the thinking that the likely solutions will be AC although if network upgrades like a DC link between South Wales and the Southwest is needed it could mean a DC multi-purpose  interconnector-esque solution that meets both the needs of the generation projects and the network for operational management. The Guidance only refers to Developers (as users) on the joint application and this solution would benefit from an ability to include transmission owner / operator as a co-signatory in any joint letter to ensure full alignment with the requirements of this ESA. 

Focusing on users, the guidance does not specify the potential integration of early OFTO involvement. This may be deliberate, saying to the market that developers are the drivers of the process. As offshore co-ordination gets more complex, independent OFTO involvement could be beneficial to address any potential conflicts of interest, providing an independent party delivering the needs of developers and Wider Network Benefit Works (I.e., infrastructure required for operational grid management). 

Important to note here that if coordinating developers are bidding into the same CFD round, then AI is not relevant and OFGEM expects the developers to come to a commercial arrangement outside of the AI process. This might become material if PDA winners are applying for their respective 1 GW CFD in a single bid regardless of phasing delivery in parallel with each other.  

Award of the minded-to Project Development Areas (PDA) are dependencies that under this ESA process must be passed for the developers to have the valid and enforceable lease and understand who they could be collaborating with. Following that, joint letters can be submitted. Technical cost/benefit areas could be addressed sooner if OFGEM allowed for consideration of technical assessment following the HNDFUE and PDA outputs, potentially OFTO led If backed by the Celtic Sea Developers Alliance, who make up over 25 developers with active interest in the Commercial Celtic Sea leasing round, a significant proportion of the potential PDA winners would be covered satisfying (in principle) the requirements of the joint letter needed for the eligibility assessment. This approach could save time and avoid duplicative costs whilst the leasing round process evolves, providing an oven ready solution to the ultimate winners when announced.  

Through our Future Opportunity and MoU process, CSP have committed to supporting commercial lease round developers with the benefit of our technical, environmental, and commercial assessments undertaken over the last 18 months.  

At a concept engineering level, CSP have costed designs for shared assets that range in scale from 400MW, 1GW to 2.4GW and Pre-feed level design for two 1GW projects coordinating through two separate 1GW substations daisy chaining together with the closer substation housing shunt reactors for the farther project. All these studies have appropriate levels of technical and commercial consideration in relation to Anticipatory Investment costs that could meet the majority of the requirements of the technical assessment. Our technical experts are working to provide information at an appropriate level of detail to the developers who have signed up for the ‘Future Opportunity’ and we welcome approaches from others who would also like to benefit from it. 

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