Consultation on the onshore electricity transmission Early Competition commercial framework

What this is about

Ofgem is consulting on the commercial framework for the Early Competition regime, the third strand of the onshore competitive transmission package that runs alongside the September 2024 draft Regulations and the December 2024 first-project consultation. The framework determines what a Competitively Appointed Transmission Owner (CATO) is paid for, what risks it carries, and how its performance is measured across the preliminary works, construction and operational stages of a project.

The trigger is NESO's Early Competition Implementation Update (ECI-Update), which set out a set of design choices that need regulatory endorsement before tenders can be run. The CATO route is meant to introduce competitive pressure into transmission delivery, which has historically been built by incumbent TOs under the RIIO price control. The commercial terms in this consultation are the substance of that reform: a strong post-award security obligation, narrow cost pass-through and clear performance incentives produce something close to a fixed-price tender; weak versions of these produce something closer to incumbent RIIO economics with a different counterparty. The decision shapes whether Early Competition actually lowers consumer cost or simply rebadges the existing model.

Options on the table

The consultation is structured as a set of design choices rather than discrete A-or-B options. The substantive choices are:

Post-award security obligation

NESO proposes that the CATO post security after award to cover preliminary works and construction. The size of the bond, the triggers for drawdown and the duration are the live questions. A larger bond filters out bidders who cannot stand behind their tender price, which raises bid quality and reduces the option-value problem that has bedevilled the connections queue. A smaller bond widens the bidder pool but transfers more delivery risk to consumers, because a CATO that walks away with limited consequences leaves the project to be re-tendered or absorbed back into the incumbent TO at consumer cost. The trade-off is bidder pool size against credibility of the tender price.

Payments during the preliminary works stage

The CATO incurs design, consenting and pre-construction costs before any asset earns revenue. The framework has to decide whether these costs are paid as they are incurred, paid on milestone completion, or rolled into the operational revenue stream. Pay-as-you-go reduces CATO financing costs and therefore bid prices, but transfers timing risk to consumers and weakens the discipline on the CATO to manage the preliminary works efficiently. Milestone payments preserve some discipline but require the milestones to be specified tightly enough that they cannot be gamed. Rolling preliminary works costs into the operational tariff puts the full financing burden on the CATO and produces the strongest cost discipline, at the price of a higher headline bid.

Post preliminary works cost assessment

After preliminary works, Ofgem proposes to assess the costs incurred and confirm the construction cost allowance. The question is how prescriptive this assessment should be. A light-touch assessment that largely accepts the tendered figure preserves the competitive tension created at bid stage. A detailed RIIO-style cost assessment effectively re-opens the bid and converts a competitive tender into a regulated price review, which is what Early Competition is meant to displace. Where the line is drawn here is the difference between a real competition and a procurement exercise that becomes a price control by another route.

Operational stage payment and performance incentives

The CATO earns revenue across the operational period. The framework needs to specify the fixed component (availability-based), the variable component (output-linked) and the incentive properties (rewards and penalties for performance against defined metrics). The harder a CATO is held to delivered availability, the more its incentives align with system value rather than capital deployment. The Averch-Johnson critique of rate-of-return regulation applies directly: a CATO paid on capital deployed will deploy capital; a CATO paid on delivered availability and throughput will optimise for delivery. The incentive design here matters more than the headline strike.

Additional works obligation

A live tension in any competitive transmission regime: what happens when the network need changes after award, or the CATO's asset needs to be extended or modified for a reason that was not foreseen at tender. NESO proposes that the CATO carry an obligation to deliver additional works on defined terms. The design choice is between a broad obligation (which preserves system flexibility but exposes the CATO to scope creep and therefore raises bid prices) and a narrow obligation (which keeps bids low but creates a future renegotiation problem every time the system evolves). This is the classic Williamson holdup problem, and the contractual answer matters because the alternative is a re-tender every time scope shifts.

Revenue period and end-of-period treatment

The consultation covers how long the CATO earns revenue and what happens at the end. Options range from a defined revenue period followed by hand-back to a system operator or incumbent TO, through extension on regulated terms, to re-competition for the asset's residual life. A defined period with clear hand-back terms keeps the original competition meaningful; open-ended extension converts the CATO into a perpetual incumbent and erodes the case for competition in the first place.

Questions being asked

Ofgem has not published a numbered question list in the publicly visible consultation summary; the substantive questions sit in the main consultation PDF. The themes the consultation invites responses on, as set out on the landing page, are:

Security and risk allocation

Views on the appropriate scale, triggers and duration of the post-award security obligation on the CATO during preliminary works and construction. [In effect: how much skin in the game does the CATO need to make the tender price credible.]

Preliminary works payments

Views on the structure and timing of payments to the CATO during the preliminary works stage. [In effect: who finances the pre-construction period and on what terms.]

Cost assessment

Views on the post preliminary works cost assessment process. [In effect: how prescriptive should Ofgem be in re-checking the tendered cost after the design has matured, and what is the test for accepting or challenging the figure.]

Operational payment and incentives

Views on the structure of payment to the CATO during the operational stage and the design of performance incentives. [In effect: what proportion of revenue is availability-based, what proportion is performance-linked, and how strong are the penalties for under-delivery.]

Additional works

Views on the additional works obligation on CATOs beyond the scope of work originally tendered. [In effect: what is the contractual answer to the holdup problem when system needs evolve mid-project.]

Revenue period and end-of-period

Views on the length of the revenue period and the arrangements that apply when it ends. [In effect: does the asset return to competitive tender, revert to the incumbent TO, or stay with the CATO on regulated terms.]

Respondents are asked to address NESO's proposals as set out in the ECI-Update and Ofgem's own views as expressed in the consultation document.

How to respond

The consultation was published on 21 October 2024 and closed on 3 December 2024. It is now closed, and Ofgem has published a decision and updated policy position alongside the original document; responses received are available in the subsidiary EC Commercial Framework consultation responses bundle.

Contact for queries on the framework:

- Jon Sharvill - Telephone: 020 3263 9623 - Email: OnshoreCompetitionsPolicy@ofgem.gov.uk

Documents:

- Main consultation: Consultation on the onshore electricity transmission Early Competition commercial framework (PDF, 970 KB) - Subsidiary: EC Commercial Framework consultation responses (ZIP, 2.03 MB) - Decision: Decision and updated policy position on the onshore electricity transmission Early Competition commercial framework, published alongside the closed consultation

For follow-up policy work on Early Competition, the relevant companion documents are the September 2024 draft Regulations and the December 2024 first-project consultation, which together with this commercial framework determine the operating economics of the CATO regime.