UK: Offshore Wind Grid Connection Could Cost Consumers GBP 17 Billion

Public Accounts Committee (PAC) publishes report on offshore electricity transmission – a new model for infrastructure.

“Not only is it unlikely that this new licensing system for bringing electricity from offshore wind farms onto the national grid will deliver any savings for consumers, it could well lead to higher prices.

Indeed the terms of the transmission licences appear to have been designed almost entirely to attract investors at the expense of securing a good deal for consumers.  Licensees and their investors are provided with a guaranteed income, increasing annually in line with RPI, for 20 years regardless of the extent to which the assets are used.

Future payments to licensees are estimated at around £17 billion, and this will ultimately be funded by customers who could well end up paying higher electricity prices. At the same time, the most operators can be fined if their facilities are not available and working is just 10% of their income in any one year. Furthermore, investors do not have to share any gains made through debt refinancing or excessive equity profits.

The Department and the Authority told us their aim was to develop a competitive market for offshore electricity transmission but the reality is that the first six licences were won by just two companies.

In setting up this new market the Department and Authority ignored vital lessons from previous government experience of PFI, such as the need to share refinancing gains, and it is shocking that the Treasury allowed it to proceed.

The Treasury’s defence, that it did not want to introduce any limitations on investors, does not cut it. It used a similar argument in relation to early PFI deals, only to reverse its position later. The Treasury must ensure that lessons from PFI are passed on and applied across government.”

Margaret Hodge was speaking as the Committee published its 20th Report of this Session. The Committee had taken evidence from the Department of Energy and Climate Change, the Gas and Electricity Markets Authority, and industry representatives on the new licensing regime for offshore electricity transmission.

The Department for Energy and Climate Change (the Department) estimates that offshore wind farms have the potential to contribute 8-15% of electricity by 2020. This will require a large investment in offshore infrastructure, including around £8 billion of investment in transmission assets (offshore platforms, cables and onshore substations) to bring electricity from offshore wind farms onshore to the national electricity grid.

The Department and the Gas and Electricity Markets Authority (the Authority) have introduced an elaborate regime that licences operators of offshore electricity transmission assets following competitions. The terms of the transmission licences awarded so far appear heavily skewed towards attracting investors rather than securing a good deal for consumers.

The transmission operators receive their income from the National Grid which recovers its costs from electricity suppliers and generators. Although all concerned state that no public funds are directly involved, the future payments to licensees, which will amount to around £17 billion, will in fact be passed onto consumers through electricity bills.

The investors’ estimated returns of 10-11% on the initial licences look extremely generous given the limited risks the investors bear. Licensees are guaranteed a fully retail price index-linked income for 20 years regardless of the extent to which assets are used. Yet penalties are limited to 10% of expected income in any one year if the operators fail to provide the transmission facilities when required. Despite the lessons from the PFI market the Government has failed to ensure that gains secured, for example, from debt refinancing are shared.  The Department and the Authority must also ensure that the offshore electricity transmission market remains competitive and does not become an oligopoly both at the bidding stage and if and when initial investors sell shares to long term investors.

[mappress]

Press release, January 14, 2013; Image: Windreich