The C&F European Offshore Wind Summit Preparing to be an OFTO - - PowerPoint PPT Presentation

The C&F European Offshore Wind Summit

Preparing to be an OFTO

Overview

• Transmission Capital
• OFTO risks and requirements
• Issues for new entrants
• Conclusions

Leading Offshore Transmission Experience

• New company but very experienced staff
• Over 50 years experience in the

development, procurement, construction and

• peration of offshore wind and transmission
• Led several major successful offshore wind

and transmission projects now in construction:

– Greater Gabbard OWF – BritNed Interconnector – Robin Rigg OWF

• Other roles on many other offshore

transmission projects now operational:

– Basslink Interconnector – Isle of Man Interconnector

• Managing a team of international experts

providing project management and specialist technical expertise

• Recent development work includes grid

connection aspects of OWF site bids

Round 3 OWF Round 1/2 OWF Interconnector

Design & Development Service

• We offer a full transmission development

service in relation to the assets to be

• wned by the OFTO:

– Front end engineering and design – Environmental Impact Assessment – Stakeholder consultation – Land right acquisition – Crossing agreement negotiations – Sea-bed survey (and other site investigations as necessary) – Connection application and connection agreement negotiation – Liaison with GBSO and onshore transmission companies – Advice on OFTO performance targets – Advice on regulatory transmission issues – OFTO-of-last-resort

• Access to specific experience of onshore

and offshore transmission assets:

– Power system design engineers – Environmental & planning consultants – Land agents – Marine engineers – Sea-bed survey contractors – Cable installation contractors (onshore and

• ffshore)

– Specialist directional drill contractors and

• nshore cable ploughing contractors

– Equipment manufacturers (cables, substations, converters) – Maintenance contractors

Asset Management & Investment Service

• Full service for equity investors, working with specialist advisers to provide:

– Bid management – Development and Design – Technical and legal due diligence – Arranging debt finance – Procurement and construction management – Operational management – Insurance – Industry and stakeholder liaison – Health & safety compliance – Regulatory compliance

OFTO Requirements & Risks – Financial & Bid

• Balance sheet, net assets of:

– 120% of RAV

• Project finance, net assets or

evidence of raising:

– 100% Equity spend – 100% Debt spend

• Turnover test?
• Credit risk minimal
• 20-yr fixed revenue stream subject
• nly to:

– RPI Indexation (full) – Availability (capped)

• Exchange rate risk minimal

Wind Farm associated with OFTO

The OFTO revenue is fixed in accordance with the amount bid, but the cash actually comes from all consumers and generators (via National Grid). There is no direct contract with the wind farm and so minimal credit risk National Grid Electricity Transmission plc (in its role as “GB system operator”)

OFTO All GB generators & consumers

OFTO Requirements & Risks – Regulatory & Legal

• Timing

– Regime first consulted on in 2004, first licence award not before Q2 2010 – 12 month tender process …. due to start in Q3 2009

• Codes & licences

– Transmission Licence – SO-TO Code: governance arrangements and code change procedures – TO Construction Agreement – Technical: GBSQSS, Grid Code, STC

• Unbundling

– Directive due to enter force in summer 2009 – Post transposition into national legislation will require ownership unbundling of generation and transmission – Complicated, exemptions allowed, not particularly clear – But intention is to prevent control of one and influence in other:

• Appointment of directors of supervisory and administrative boards
• Exercise of control or any right including voting rights

OFTO Requirements & Risks – Technical - All projects

• Health & safety (Health & safety at Work Act 1974 and underlying regulations):

– The Construction (design & Management) Regs 2007 – Management of Health & safety at Work Regs 1999 – The Diving Regulations 1997 – Electricity at Work Regulations 1989 – Working at Height Regs 2005 – … and numerous others …

• O&M, insurance

– OJEU process for procurement (Utilities Contracts Regulation 2006) – Timing and cost of obtaining bids during tendering process – Some repairs may require OEM – Repairs: spares, access, vessels – needs a well-thought out strategy – Insurance, few brokers experienced in this area, significant recent claims history

• Decommissioning

– Cables can be left in situ, offshore structures to be removed – Decommissioning plan as part of tendering process

OFTO Requirements & Risks – Technical – Enduring only

• Design & development

– Regime still being devised in this area – Level of development risk to be taken not clear – who takes consent risk? – How much design and development has the offshore wind developer done? – Who takes design standards compliance risk: GBSQSS, Grid Code, Industry standards etc.?

• Procurement

– OJEU process (Utilities Contracts Regulation 2006) – Suppliers non-exclusive: implications? – Timing and cost of obtaining bids during tendering process – Limited suppliers in some areas (cables, VSC etc.)

• Construction

– Significant ground risk and weather risk to be managed – Requires experienced offshore transmission procurement and construction mgt – Requires experienced installation contractors, poor recent history on offshore cables – Turnkey v multi-contract: pricing, interface risk, delay risk etc.

Issues for New Entrants

• Bid costs

– Ofgem’s costs well structured – Important to keep bidders’ own costs under control: rely-upon information, only project specific at latter stages

• Consortia and pre-qualification

– New entrants likely to be forming consortia to meet requirements – Few management teams skilled in offshore transmission in the market – Regime must be structured to allow relevant experience and capabilities to be applied to PQ & QTT criteria

• Level playing field

– Unbundling restrictions appear to offer a window of opportunity for generator-affiliates to bid to be their own OFTO – Generator-affiliates are incentivised to do this as:

• Inadequate compensation to generator for unavailability of OFTO assets
• Cost advantage in carrying out O&M using capabilities required for offshore wind farm
• Hedging effect of below-market bid coming through in lower offshore element of TNUoS charges

– Key issue, if not addressed new entrants will not bid – Can be addressed: through generator making O&M services available to all on standard Ts and Cs and regulatory oversight of prices bid v costs of capital; or preventing generator from bidding – Transitional regime allows for non-balance sheet players, must be followed through into enduring regime

Conclusions

• Potentially attractive short-term opportunity

– Structured well for financial investors that can access offshore transmission management expertise – Transitional regime provides opportunity for entry into the market without construction risk – But need to be sure that not wasting time bidding against generator-affiliates

• Longer term opportunity should be attractive

– Large scale investment opportunity (circa £10-15bn up to 2020) – Regime broadly the same offering revenue certainty, but … – Bidders need to be brought in at the right stage – If asked to take on too much development risk and cost uncertainty will reduce number of bidders interested

• Financial risks low
• Regulatory and legal risk low but some aspects will need active management
• Significant technical issues to be managed, limited available expertise

Contact details: Email: chris.veal@transmissioncapital.com Tel: 07768 036613 Web: www.transmissioncapital.com