GB Grid Connection Reform

This insight provides an overview on the National Energy System Operator’s (NESO) recent proposal to require additional security for transmission connections – what it is calling its “financial instrument proposal”.

Background

Following Ofgem’s open letter signalling further changes to connections reform in September 2024, in particular relating to TMO4+ (the proposed new regime for transmission-related connections), Ofgem signalled that, in addition to the “project ready” connection criteria to be applied to the connection queue, there will also need to be new criteria relating to “strategic need” for projects, including by reference to a project’s location and technology type, in order to ensure the reforms align with the “strategic plans”. 

Currently, two “strategic plans” dominate the reform of the GB grid connections queue as well as wider energy policy. The first is the Strategic Spatial Energy Plan (SSEP) which was expected to be published at the end of 2024 but will now be delayed until the end of 2026. The idea is that the SSEP will take a longer-term view of whole energy system planning beyond 2030.

The second “strategic plan” is Clean Power 2030, and this is now going to be the definitive roadmap for the UK government’s ambition of a clean GB power system by 2030. In August 2024, the newly elected Government formally commissioned NESO to produce a report to inform the government’s plan, but the Clean Power 2030 plan is still awaited.

As a brief update on the TMO4+ timeline, pursuant to Ofgem’s Update to decision on CMP434 and CMP435 published on 30 September 2024, the proposed implementation date for TMO4+ is now Q2 2025 (with an exact date still pending). For further detail on Code Modification Proposals 434 and 435, which will implement the TMO4+ grid reforms in the CUSC, please see our previous Insights: NGESO signals plans to widen scope of connection process reform and Ofgem signals a move to capture 'strategic need' as well as 'project readiness'.

Financial Instruments

In addition to the “project ready” and “strategic need” criteria described above, NESO has proposed the introduction of a further financial requirement. This idea is not a new one, it was first mentioned in the November 2023 Connections Action Plan.  After much discussion, it was taken out of the TMO4+ code modification proposal (CMP 434), but the proposal is now back (and the subject of a separate code modification proposal).  

Proposed Financial Instrument – The Capacity Commitment Fee

On 11 October 2024, NESO outlined its proposed financial instrument, the Capacity Commitment Fee (“CCF”), during a “Transmission Charging Methodologies Forum and CUSC Issues Steering Group” session.

The CCF will be applicable to all projects which accept their “Gate 2” offer under the TMO4+ arrangements and it is proposed that it will be triggered much like the current Cancellation Charge, in that developers will be liable for the CCF on either terminating their connection or reducing the Transmission Entry Capacity (prior to energisation).

Please note, the current Cancellation Charge regime will remain - and both it and the CCF will operate in tandem. 

After instructing Baringa to produce a quantitative assessment to ascertain what the value of the CCF should be, NESO have proposed a figure for the CCF of £20,000/MW.  The CCF would therefore represent a significant cost.    For a developer that holds 1GW of transmission capacity, this could result in an overall CCF of £20 million (a sum which may be significantly higher than the development cost of the projects themselves).

Where the CCF applies, developers will be required to post security with NESO in respect of this liability (again, much like the Cancellation Charge Secured Amount).

In order to avoid “excess security requirements”, NESO is proposing that developers will only be required to post the higher of the CCF or the Cancellation Charge Secured Amount (i.e. the suggestion from NESO is that a developer will only be liable for the higher of the two charges).  However, in reality, at the early stages of a Project the CCF will in almost all cases be the higher figure.

A developer will only be liable for the CCF from acceptance of the “Gate 2” Offer until achievement of Progression Milestone 7 (Project Commitment).   This is the milestone in which a developer must show the project has the necessary commitment or backing for it to proceed.  Such commitment includes the developer:

• entering into the main contract in respect of the plant/equipment; or

• making the relevant capital contribution payment to NESO (if any); or

• providing evidence that a Final Investment Decision (FID) has been taken in respect of the project.

That said, by the time this milestone is reached the general security may exceed the amount of the CCF security anyway.

Why?

NESO says that in addition to the “project ready” and “strategic need” criteria, it believes that developers should provide appropriate financial commitment when they receive committed capacity and a place in the queue.  NESO sees connection capacity as a “scarce resource”, which in turn justifies this charge.

NESO also argues that the existing financial commitments (i.e. the Cancellation Charge and capital contribution amounts) do not accurately reflect the scarcity of capacity and do not provide an adequate incentive to those entering the connection queue to develop their allocated capacity.

It is the view of NESO that the lack of existing financial commitments has allowed the rise of “speculative re-seller projects” to enter and remain in the queue and this has led to increased connection delays, particularly where projects are not sold and/or remain dormant in the queue until they are terminated.

NESO argues that implementing the CCF will assist with progressing towards GB’s net-zero target and increase the capacity available in the queue.

Key Implications

1. “Scarce Resource” Argument

The idea of some form of financial instrument is not a new one but the proposed figure of £20,000/MW is being met with concerns from the industry. 

NESO’s “scarce resource” rationale may also require further consideration.  Whilst grid capacity is scarce, there are other tools in place which could be used to deal with this, including the recent introduction of the Queue Management Process at Section 16 of the CUSC (which was implemented for the specific purpose of keeping the development of projects on track.   Meanwhile, such a significant amount of security has the potential to make otherwise perfectly sound projects unviable.  This also raises the question of whether it might be a barrier to entry to the market or a threat to competition. 

While we understand that NESO wishes to protect against wasted grid reinforcement costs in a situation where a project drops out of the connections queue, there will most likely be other projects in the queue, in the same area, which could step-forward and make use of works already carried out by NESO.  A very simple change could be made to the proposal which would recognise this.

At present under the CUSC, there is a separate cancellation regime post-energisation under which a project must pay termination amounts if it disconnects.  However, these provisions go on to say that a developer may get a refund of some of these termination amounts if the transmission assets are re-used by another User or if they can be used elsewhere on the grid.  Similar provisions could be introduced into the CCF, so if a project falls away but another project in the queue can use the transmission upgrade, then the developer would be entitled to a refund.  This could make the implementation of the CCF fairer to all parties.

2. Penalty

The financial instrument is being introduced as a security, so the question is, what is it a security for?  There is already a Cancellation Charge regime which requires security to be put in place and these Cancellation Charges are linked to the wider reinforcement works or transmission assets NESO has to build out in order to connect a developer’s project.  If NESO proceeds with these works on the expectation of the developer connecting, NESO should be entitled to recoup wasted costs if the developer either reduces its TEC (meaning the amount of works reduces) or terminates its connection and walks away.  The Cancellation Charge in such instances reflects the wasted costs incurred by NESO.

In contrast, the CCF is a flat rate, payable regardless of any works or costs incurred at the time.  This may undermine the commercial rationale for the CCF and may also give rise to a legal argument that the security does not match NESO’s potential losses but is potentially a penalty and therefore, invalid.

These proposals have already generated much discussion, and it is expected that NESO will run a mini-consultation where industry participants will be able to voice their views on the CCF.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.