Onshore electricity transmission early competition: first project

What this is about

Ofgem is consulting on NESO's request to put a sub-component of project WCN2, a new circuit between South West Scotland and North West England, through the onshore early competition regime. This is the first GB onshore transmission project to be tendered competitively rather than handed by default to the incumbent transmission owner. The relevant TOs are SP Transmission in southern Scotland and National Grid Electricity Transmission in North West England, both of whom would otherwise build and own the asset under their existing licences and the standard RIIO-T price control settlement.

The legal scaffolding arrived in 2024. The Energy Act 2023 amended the Electricity Act 1989 to give Ofgem the power to run competitive tenders for onshore transmission licences. The Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024 set the thresholds (broadly new, separable, high-value projects) and the draft Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2024 set the procedural rules for early-model tenders. Ofgem also has a parallel consultation open on the commercial framework. WCN2 is the test case that turns the regime from paper to practice. The question Ofgem is asking is narrow but consequential: does this specific sub-component meet the early competition criteria, and is the cost-benefit analysis good enough to proceed.

The wider design point sits behind it. The TO model pays a regulated return on a regulated asset base. Averch and Johnson predicted that this incentivises overinvestment in capital. Early competition is one of the few mechanisms in the British transmission stack that runs a market test against that incentive. If a CATO can design, finance, build and operate a sub-component for less than the incumbent TO's allowance, consumers benefit directly through lower transmission charges. If the CATO route is more expensive once tendering costs, interface risk and split-asset operation are priced in, the regime erodes its own justification. WCN2 will produce the first GB data point on which way that comparison runs.

Options on the table

The consultation document itself does not present a slate of distinct policy options. It asks a yes/no question on a specific NESO request, supported by a cost benefit analysis briefing note. The implicit options behind that question are worth naming because they are what respondents are actually being asked to weigh.

Approve the sub-component for early competition tender

NESO's preferred route. A defined sub-component of WCN2 is carved out of the incumbent TO scope and put to competitive tender under the early-model regime. Bidders compete on design as well as delivery, so the technical solution is not fixed in advance. The winning CATO takes a transmission licence for that asset and earns its revenue under a separately negotiated framework rather than the incumbent's price control. Winners: consumers if the tender clears below the counterfactual TO allowance, independent infrastructure investors looking for a UK entry point comparable to the OFTO regime, and the credibility of the early competition policy. Losers: SPT and NGET to the extent their RAV growth is foregone, and potentially delivery timetables if interface design between CATO and TO assets adds programme risk.

Reject the request and leave WCN2 in the incumbent TO scope

The fallback. WCN2 proceeds entirely through SPT and NGET under the standard RIIO-T3 settlement, with cost recovery via TNUoS and a regulated return on the RAV. Winners: the incumbent TOs (continued RAV growth), and arguably delivery certainty if Ofgem is not confident the tender process can run inside the project's required timeline. Losers: the early competition regime, which needs a live project to validate the model; and consumers, if the counterfactual cost is genuinely higher than a competitive tender would deliver. This is not a stated option in the consultation but it is the implied alternative if respondents successfully challenge the CBA or the suitability of the sub-component.

Approve with modified scope or conditions

A middle path that is open to Ofgem even though it is not formally tabled. The sub-component as proposed by NESO could be enlarged, shrunk, or split differently between CATO and incumbent TO scope. The tender could be approved subject to conditions on interface arrangements, programme alignment, or treatment of stranded asset risk. This is the route most likely to emerge if respondents accept the principle of early competition on WCN2 but contest the specific carve-out NESO has proposed.

Questions being asked

The consultation document does not list numbered formal consultation questions in the page text Ofgem has published. The substantive questions Ofgem is putting to respondents, drawn from the body of the document and the supporting NESO CBA briefing note, group as follows.

Suitability of the sub-component for early competition

Does the proposed sub-component of WCN2 meet the criteria in the Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024 (new, separable, high-value, capable of being competitively tendered without compromising the wider project)? Are the boundaries of the sub-component drawn in a way that creates a workable interface with the incumbent TO assets? (This is the gatekeeping question. If the sub-component fails the criteria test, nothing else matters.)

Cost benefit analysis

Is NESO's CBA a robust basis on which to conclude that competitive tendering offers expected consumer benefit relative to the incumbent TO counterfactual? Are the cost assumptions for the CATO route and the TO counterfactual realistic and consistent? Has the CBA properly accounted for tender process costs, interface and integration costs, and the cost of any delay that early competition might introduce? (The CBA is the load-bearing analytical document. Respondents who think the regime is being approved on optimistic numbers should engage here.)

Deliverability and timing

Can the early competition tender process run inside the timetable that WCN2 requires to meet system needs (connection of new generation, network capacity for cross-border flows)? What is the risk that the tender slips and the project as a whole is delayed? How should that risk be allocated between consumers, the CATO and the incumbent TOs? (Deliverability is the standard objection from incumbents to any competitive regime. The question is whether the risk is real or rhetorical on this specific project.)

Interface with incumbent TOs

How should the operational and asset boundary between the CATO sub-component and the incumbent TO assets be defined and managed during construction and through life? What arrangements are needed for outage coordination, fault response and asset replacement at the boundary? (This is the practical question that will determine whether the model is replicable. A clean interface design on WCN2 becomes the template.)

Commercial framework fit

How does the WCN2 sub-component sit within the broader onshore Early Competition commercial framework Ofgem is consulting on separately? Are there features of the WCN2 case that argue for adjustments to the framework? (Respondents who care about the regime as a whole should answer this question to keep the two consultations aligned.)

How to respond

The consultation closed on 9 January 2025. The deadline for responses was 8 January 2025. Responses were submitted to onshorecompetitionspolicy@ofgem.gov.uk, and respondents could attach PDF, Word or Excel documents to that email. Ofgem has since published a decision on this consultation (the page is marked "Closed (with decision)"), so this memo is reference material for a closed process rather than a live opportunity to respond. Anyone wanting to engage on the wider regime should look at Ofgem's parallel consultation on the onshore Early Competition commercial framework and at the draft Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2024.