OFTO build: early and late competition models

What this is about

Ofgem is proposing to change how offshore transmission links get built and paid for. The current model, running since 2009, works like this: the offshore wind generator designs and builds the transmission asset (the cable and substation connecting the wind farm to shore), then Ofgem runs a competitive tender to select an Offshore Transmission Owner (OFTO) to buy, own, and operate it for a 25-year revenue term. Competition happens after construction, so it only determines the transfer price, not the build cost.

The problem is structural. Under the existing "late competition" model, the generator bears construction risk but knows the asset will be transferred to an OFTO at a price reflecting its costs. The competitive pressure acts on financing and operation, not on construction. Generators have limited incentive to minimise transmission build costs because those costs are ultimately passed through to consumers via the OFTO's revenue stream, funded by Transmission Network Use of System (TNUoS) charges. Ofgem's September 2025 call for input tested the appetite for an "early competition" model, where the OFTO is selected before construction begins and takes responsibility for designing, building, and operating the transmission link. This consultation sets out the detailed design.

The timing reflects scale. The next wave of offshore wind projects, driven by the government's 2030 clean power targets and successive CfD allocation rounds, will require substantially more offshore transmission capacity. Ofgem's stated goal is to introduce competitive pressure on the build cost itself, not just the financing cost, before these projects commit to construction. If the thresholds for mandatory application are set correctly, this shifts the incentive structure: the entity that builds the asset is the entity competing on cost to build it.

Options on the table

#### Early competition OFTO build

The OFTO is competitively selected before construction begins. The winning bidder designs, finances, builds, and operates the offshore transmission asset for the full revenue term. This is the core proposal.

The mechanism works by running a tender process at an earlier stage of project development. Rather than the generator building the asset and then finding an OFTO buyer, the generator specifies its transmission requirements and Ofgem tenders for an OFTO to deliver the whole package. The OFTO bidder competes on total cost of delivery: construction cost, financing cost, and operational cost combined. The winning bid determines the revenue stream the OFTO will receive over the licence term, funded by TNUoS charges on consumers.

Ofgem proposes mandatory application of early competition in certain circumstances, though the consultation does not fully specify the threshold. The logic is that if early competition is optional, generators with established supply chain relationships and a preference for controlling construction will default to the existing model. Mandatory application forces the question: is competitive construction cheaper than generator-led construction? The consultation covers tender process design, evaluation criteria, and the commercial framework governing risk allocation between the generator and the OFTO during the construction phase.

Who wins: Consumers, if competitive pressure on construction costs exceeds the transaction costs of running earlier, more complex tenders. OFTO bidders with strong construction capability gain an advantage over pure financial buyers who dominated the late competition model. Supply chain firms that can offer integrated design-build-operate packages.

Who loses: Generators lose control over a critical piece of their project infrastructure. Developers who previously treated transmission build cost as a pass-through now face interface risk with a third-party builder on a tight schedule. Financial investors who bought into the OFTO regime as a low-risk infrastructure play may find the construction risk unattractive. The model also adds coordination complexity: the generator's offshore wind farm construction and the OFTO's transmission construction must align, and neither party fully controls the other's timeline.

The real question is whether the mandatory application threshold captures enough projects to generate genuine competitive tension among OFTO bidders, or whether it applies only to the largest projects where a small number of firms can bid credibly.

#### Updated late competition OFTO build

The existing model is retained and updated. The generator builds the transmission asset, then Ofgem tenders for an OFTO to acquire and operate it. The updates aim to keep this route viable alongside early competition, providing flexibility for projects where early competition is not mandatory or not suitable.

Ofgem frames this as ensuring the late competition model is "fit for purpose for the future offshore transmission landscape." The practical content will be in the detail: whether the transfer price methodology changes, whether the revenue term or risk allocation is adjusted, and whether generators retain the same degree of design freedom they currently have.

Who wins: Generators who want to control their own transmission build, particularly those with existing supply chain contracts or integrated capabilities. Projects that are already too far advanced in development to switch to an early competition process.

Who loses: Consumers, to the extent that the late competition model continues to pass through construction costs without competitive pressure on the build itself. The risk is that updating the late model makes it a comfortable default, reducing the number of projects that go through early competition.

The tension between these two options is deliberate. Ofgem wants early competition to be the primary route for new projects, but needs the late model as a backstop. The design challenge is ensuring the backstop does not become the norm. If generators can choose, most will prefer the model where they control construction. Mandatory application of early competition is the mechanism that prevents this, and its calibration is the most consequential decision in this consultation.

How to respond

Deadline: 2 July 2026

Submission method: Email responses to OFTObuild@ofgem.gov.uk

Consultation document: Available on the Ofgem website as a PDF (1.10MB). The full document contains the detailed proposals, tender process design, evaluation criteria, and commercial framework that this summary draws from.

Who should respond: Generators, potential OFTOs, investors, supply chain participants, and consumer groups. Ofgem explicitly welcomes responses from all stakeholders. Given the mandatory application proposal, generators with projects in the development pipeline have a direct commercial interest in the threshold definition. OFTO bidders need to understand whether the shift to construction risk changes the investability of the asset class. Consumer groups should focus on whether the competition design is robust enough to deliver the cost savings Ofgem claims.