Early Competition in onshore electricity transmission networks: policy update

What this is about

Ofgem is progressing its framework for competitively tendering new onshore electricity transmission projects — a structural shift away from the default where incumbent Transmission Owners (NGET, SPT, SSEN Transmission) automatically deliver all onshore network reinforcement. The model creates a new class of licence holder, the Competitively Appointed Transmission Owner (CATO), selected through a tender process run by NESO.

This consultation is a policy update following Ofgem's March 2022 decision to introduce early competition. "Early" means the competition happens at the needs-identification stage — before detailed design — so bidders compete on both the engineering solution and the commercial terms. NESO published an Early Competition Implementation Update (ECI-Update) proposing changes to its cost-benefit analysis model and the methodology for identifying which projects go to tender. This consultation responds to those proposals and addresses four supporting policy areas that were flagged for further work in the 2022 decision: the CBA model, TO conflict mitigation, TNUoS revenue recovery for CATOs, and what happens when a CATO or a tender process fails.

The context is the £58bn transmission investment programme needed for net zero. The incumbent TO model delivers projects under RIIO price controls, where Ofgem sets an allowed return on capital. Competition, in theory, reveals a lower cost of delivery by forcing bidders to compete on price, innovation, and risk allocation. The OFTO regime for offshore transmission assets has delivered savings of around 20-30% versus counterfactual costs. Ofgem wants to replicate this onshore, where the projects are larger, more complex, and politically more sensitive.

Options on the table

#### CBA model and project identification

NESO proposed a revised cost-benefit analysis to determine which projects are suitable for early competition. The CBA compares the expected cost of competitive delivery against the counterfactual of incumbent TO delivery under RIIO. Projects are flagged for competition where the expected consumer savings exceed the transaction costs of running a tender.

The critical design choice is the threshold. Set it too high and only the largest projects qualify, limiting competition to a handful of tenders. Set it too low and the transaction costs of running competitions — legal, technical, procurement — eat into the savings. NESO's update also addresses how to handle projects that interact with each other on the network, where tendering one project in isolation could create coordination problems with adjacent reinforcements still being delivered by the incumbent TO.

Winners: new entrants (infrastructure funds, international transmission developers) who gain access to a market previously closed to them. Consumers, if competition delivers lower costs. Losers: incumbent TOs, who lose the automatic right to deliver — and earn a regulated return on — new transmission assets.

#### TO conflict mitigation

Incumbent TOs have a structural conflict of interest. They are potential bidders in early competition tenders, but they also hold the existing network that any CATO must connect to. They control the technical data that bidders need, the connection points, and the operational interface. Without mitigation, TOs could advantage their own bids through preferential access to information, design specifications that favour their existing assets, or non-cooperation on interface arrangements.

Ofgem's proposals address information barriers (ensuring all bidders get equal access to network data), behavioural requirements (preventing TOs from using their operational role to disadvantage competitors), and structural options for how TO participation in tenders should be governed. The question is how far to go: full structural separation (TOs cannot bid) would eliminate the conflict but lose their engineering expertise; behavioural remedies preserve competition but rely on monitoring and enforcement.

Winners under strong mitigation: new entrants who compete on a level playing field. Losers: TOs who face restrictions on bidding for projects they would otherwise deliver automatically.

#### TNUoS revenue recovery for CATOs

CATOs need a revenue stream. Transmission infrastructure is funded through Transmission Network Use of System charges, collected from generators and demand users. Under the incumbent model, TOs recover their allowed revenue through TNUoS as part of the RIIO settlement. CATOs sit outside RIIO — their revenue is determined by whatever they bid in the tender — so the TNUoS framework needs a mechanism to pass through CATO costs to network users.

The design choice is whether CATOs receive a fixed revenue stream (based on their tender bid, adjusted for inflation and performance) or a variable one that exposes them to some demand or utilisation risk. Fixed revenue reduces the cost of capital for CATOs (lower risk = lower bid prices) but transfers all volume risk to consumers. Variable revenue aligns CATO incentives with network utilisation but increases financing costs and may deter bidders.

Who pays: consumers, via TNUoS. The question is whether the competitive process delivers enough savings to more than offset the transaction costs and any risk premium that CATOs require compared to incumbent TO delivery under RIIO.

#### CATO and tender failure

What happens when things go wrong? Two failure modes: a tender fails to attract sufficient bidders or produces bids that do not represent value for money; or a CATO wins, starts delivering, and then fails (financial distress, construction delays, inability to complete).

For tender failure, the fallback is reversion to the incumbent TO — the project gets delivered under RIIO as if competition had never been attempted. This is necessary but creates a moral hazard: if TOs know they are the backstop, they have less incentive to cooperate with the competitive process and every incentive to ensure tenders fail.

For CATO failure, the options range from step-in rights (Ofgem or NESO takes over the CATO's assets and obligations), transfer to another party, or reversion to the incumbent TO. The chosen mechanism affects how much equity CATOs need, how lenders price construction risk, and ultimately what consumers pay. A credible failure regime is essential for financiers — without it, the cost of capital for CATOs rises and the consumer savings case weakens.

Questions being asked

The consultation document contains detailed questions across the four policy areas. Based on the published scope:

#### Cost-benefit analysis and project selection

- Views on NESO's revised CBA methodology for identifying projects suitable for early competition. [Whether the model correctly captures the costs and benefits of competition versus incumbent delivery.] - Views on the threshold for referring projects to competition. [How large or complex a project needs to be before the savings from competition outweigh transaction costs.] - How to handle interdependent projects where tendering one affects the efficient delivery of others.

#### Conflict mitigation

- Whether proposed information barriers and behavioural requirements are sufficient to ensure a level playing field for non-TO bidders. - Whether TOs should face structural restrictions on bidding, or whether behavioural remedies with monitoring are adequate. - How to ensure TOs cooperate on interface arrangements with successful CATOs.

#### Revenue recovery

- Views on the TNUoS revenue mechanism for CATOs — fixed versus variable revenue models. - How CATO revenue recovery should interact with the existing TNUoS charging methodology.

#### Failure and contingency

- What arrangements should apply when a tender fails to deliver value for money. - What step-in, transfer, or reversion arrangements should apply when a CATO fails during delivery. - How to design the failure regime without creating moral hazard for incumbent TOs.

How to respond

Deadline: 20 March 2024 (now closed — decision issued)

Method: Email responses to the consultation questions to OnshoreCompetitionTeam@ofgem.gov.uk

Contact: Thomas Johns, Head of Onshore Competition — 0207 901 7046

Decision: Ofgem has published its decision: *Decision on Early Competition in onshore electricity transmission networks: policy update*, linked from the consultation page.

`★ Insight ─────────────────────────────────────` This consultation sits at the intersection of two of the analytical framework's core principles. Property rights are prior to prices (Principle 2): the right to build and own transmission assets is currently an automatic entitlement of incumbent TOs under their licences. Early competition redefines that right — making it contestable rather than conferred. Regulation is demanded by its beneficiaries (Principle 8): expect incumbent TOs to argue for high CBA thresholds (fewer projects tendered), weak conflict mitigation (preserving their information advantage), and generous failure-reversion terms (ensuring they remain the backstop). The design of the failure regime is where this consultation will be won or lost — if reversion to the TO is too easy, the competitive threat is not credible, and bidders will price accordingly. `─────────────────────────────────────────────────`