In April 2021, NESO published its Early Competition Plan (ECP) setting out its initial strategy for introducing Early Competition (the commercial arrangements that will apply to a Competitively Appointed Transmission Owner (CATO) to finance, build, operate and maintain assets on the onshore electricity transmission network). Ofgem on 21 October 2024 published a consultation on NESO's proposals for how the commercial framework will work and now seeks stakeholder views on their proposals' viability.

Post-award security obligation 

The ECP sets out an obligation for the CATO to provide security during the preliminary works period (where the CATO will be looking to obtain necessary planning consents). NESO proposes that security cover should be 10% of the forecast construction costs until Financial Close, with the security requirement being tapered down to 0% once the CATO has invested a specified amount in the project. NESO proposes that acceptable forms of security could be a letter of credit, a performance bond from an institution with an acceptable credit rating or cash in escrow with all of the above being claimable in the event of contract termination or electricity transmission licence revocation.

Preliminary works payments

NESO surmises that payments to the CATO will be required during the preliminary works period until the Tender Revenue Stream stage to remove barriers to entry. Preliminary works payments would not be mandatory and would only be available where the preliminary works period is expected to be for a "significant period of time". NESO therefore proposes that if they are necessary, they should be capped based on the forecast preliminary works cost but, as an initial position for the first tender, a 50% cap would be best (subject to further evidence form subsequent tenders). Bidders would also need to submit payment milestones, setting out the preliminary works payments cap and allocating it to particular events. The milestones would be agreed between the parties.

Post Preliminary Works Cost Assessment (PPWCA)

NESO has elaborated on its proposals for PPWCA, which acts as the re-pricing process for updating the TRS (which were originally set out in its update in EC-1 Update in February 2024). Ofgem also gives its views including the following changes which they are considering to NESO's PPWCA proposals including:

  • Setting a flexible price cap for the first tender to balance receiving strong bids but also providing sufficient incentive to build in contingency upfront;
  • Considering the specifics of allowance for high impact, low probability events to sit out the overall cap mentioned above;
  • Detailed guidance on the foreseeable/unforeseeable test proposed by NESO within a joint NESO/Ofgem decision-making framework; and
  • Focusing on the first project not being overly complex from a technical/consenting perspective to avoid the issue of potentially not gaining enough interest from the market.

Payment mechanism and performance incentives

Again, the EC-I Update set out proposals on the three key principles on the payment mechanisms to allow CATO to recover its cost, namely the TRS model, through indexation and availability incentives. NESO has provided more detail on the availability incentives such as how availability would be measured, service reduction adjustments, first and last period adjustments and seasonality adjustments.

Additional works obligations

Since the publication of the ECP, NESO has provided further detail on the design adjustment process for changes incorporated between award and commissioning and new investment pricing and financing. For the design adjustment process, CATOs would be required during the preliminary works phase if post-award changes are necessary and justify them if they impact the delivery of the original solution. They would then look to plan the additional works accordingly. Regarding investment pricing and financing, NESO proposes a series of thresholds to the cumulative level of investment that the CATO is required to undertake through additional works, with each threshold providing the CATO a range of funding options such as combinations of CATO finance or pass-through payments, as one example scenario.

Revenue period

The consultation also sets out more detail from the ECP around the period in which the CATO receives its costs and the next steps following the end of the revenue period, such as around the length of the revenue period, the end of the revenue period, revenue stacking and asset transfer.

If you have questions on the Early Competition commercial framework, our group of Energy experts can help. Please contact James Stanier and Russell Evans for more information.