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CATOs - 'Patience is the greatest of all virtues'

11 July 2017

The market will now need to wait even longer to find out whether and how the private sector will play a role in extending competition in GB transmission.

The June announcement by Ofgem is a blow to infrastructure investors who were hoping that the CATO programme would start providing a pipeline of investable projects in 'onshore' transmission projects in the same way that the OFTO regime had already done for offshore transmission.

Who's to blame?

The implementation of the CATO regime needed primary legislation, which exists in draft form. However, Brexit will monopolise parliamentary time for the next couple of years and there will be no opportunity to bring forward the enabling legislation.

What does this mean for the future of CATOs?

While the official line seems to be that the programme is just postponed, the finer detail of the Ofgem release suggests that the Brexit-related intervention may be terminal. It has said that in respect of its upcoming consultation on the Hinkley to Seabank project it will set-out Ofgem's "thinking around alternatives to CATO...".

What might those alternatives be?

Even before the most recent announcement, Ofgem had mentioned looking at tendering the finance aspects of major transmission procurement. This echoes Ofwat's thinking in the regulated water industry. As part of its Water 2020: Regulatory framework for wholesale markets and the 2019 price review in May 2016, Ofwat talks of encouraging "...water companies to use direct procurement for suitable high value projects in their business plans. This would include competitively tendering the financing of the projects".

It is understood that analogous mechanisms for the rail industry may also have been considered by the Hansford Review (which submitted its final report to Network rail on 6 June 2017).

RIIO-2.

Funding competitions aside, investors may have to wait until nearer the start of the next price control period (2022) before they can play a meaningful part in extending competition in GB transmission.

Will transmission needs have significantly changed by 2022?

Probably. The announcement by Western Power Distribution on 30 June 2017 that it will move towards becoming a fully smart grid suggests that the GB market has already begun a fundamental revolution in the way electricity is delivered and managed. So the transmission projects that the private sector may ultimately participate in may be very different to the 'new, separable and high value' ones which were contemplated as part of the CATO regime.

"Patience is the greatest of all virtues",
Cato the Elder 234BC - 149BC


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