Ofgem signals a move to capture "strategic need" as well as "project readiness"

Three high-level concepts are proposed which are:

• the Gate 2 Criteria Methodology - which would specify the criteria that relevant projects need to meet to receive and maintain a connection offer with a confirmed connection location and date, and a place in the connections queue;
• the Project Designation Methodology - the methodology which sets out the criteria for ‘designation’ of individual projects that have met Gate 2 to be prioritised; and
• the Connections Network Design Methodology - how connections network design will be undertaken in relation to Gate 1 and Gate 2 processes in the future

These concepts will be lightly codified within the CUSC, with the detail of each methodology to sit outside code governance and instead be prepared by the ESO and approved by Ofgem. At present, there is still very little detail on what each of these methodologies will comprise, but the ESO plans to consult on these in November 2024.

The Primary Process relates to the introduction of the “annual application window” and the gated approach to connections under TMO4+, being Gate 1 and Gate 2. It is envisaged that under the Project Designation Methodology, there will be exceptions to this Primary Process. Such exceptions will relate to projects which are designated to be critical to the security of supply or materially reduce network constraints.

Whilst not in either Report, the ESO has indicated that Gate 1 will be optional for some projects, so that “project ready” projects can 'skip' Gate 1 and go straight to Gate 2.

In our May 2024 Insight, we reported that there would be a gated approach with criteria which must be achieved to ensure that a project is “project ready” and can proceed to “Gate 2” and a firm connection. The July Reports confirm the criteria from May relating to securing land rights and a commitment to a date for submission of an application for planning consent.

In relation to land, developers will need to have secured rights to lease or own the land (and it is made clear that an exclusivity agreement is not sufficient to meet the Gate 2 criteria).

However, in addition, the process is moving towards a “strategic need” approach rather than a “project ready” approach, described below.

As previously reported in our May 2024 Insight, ESO has confirmed that TMO4+ will be retrospective in nature and the details of this are set out in the CMP435 July Report: when TMO4+ is implemented, all existing contracted projects in the queue will have their connection agreements converted to either a Gate 1 or a Gate 2 agreement, depending on whether they have met the Gate 2 criteria at the Implementation Date.

This will be of particular interest to projects in the current transitional arrangements (with “Step 1” and “Step 2” offers) which have been given a firm date in their Step 2 offer, but may not have achieved the TMO4+ Gate 2 criteria when these are implemented and will therefore lose their place in the queue.

In our May 2024 Insight, we noted that the impact of TMO4+ on small- to medium-sized projects was yet to be clarified. In the July Reports, this element has been given some clarification and there is a separate process for small and medium embedded (i.e. distribution connected) power station projects. For such projects, the ESO proposes to introduce the concept of a Distributed Forecasted Transmission Capacity (“DFTC”) submission. In essence, a DFTC submission will involve the DNO, or where applicable an IDNO, submitting a DFTC to the ESO during the Gate 1 “annual application window”.

The aim is that this will be a view of forecasted capacity volume of connections that may be made in the future, and it is anticipated that such submissions will allow the ESO and the relevant Transmission Operators to forecast the anticipated transmission capacity required for these embedded projects.

This will largely follow current practice with DNOs using the existing Project Progression/Transmission Impact Assessment process to submit Gate 2 applications on behalf of embedded customers.

The purpose of ESO’s letter to Ofgem was to request an urgent extension to the timetable for the implementation of CMP434 and CMP435.

ESO’s rationale for the need to extend the timeline is due to the “unprecedented scale and ambition” of the new connection reforms being put forward as a result of aligning the currently proposed reforms with 2030CP and the SSEP. ESO also note that as the key methodologies (referred to above) will not be in place until Q1 2025 it is necessary to delay the Implementation Date.

As a result of this delay and the time required to develop the key methodologies, ESO sought an extension to the Implementation Date to a date in Q2 2025 (however, no further information is provided as to when exactly in Q2 2025 this will be). Ofgem has indicated that it has no concerns with pushing the date back to Q2 2025.

For a detailed overview of the new connections timeline, please see the table outlined in the ESO letter here.

Ofgem’s open letter on the reformed regulatory framework on connections provides an update on the processes it has undertaken to progress key initiatives since the Connections Action Plan.

Ofgem is of the view that due to the accelerated targets brought in by the new Labour Government this requires the current regulatory changes to go further than the TMO4+ code modification proposals and faster.

It was initially planned (if not explicitly stated) that the connections reform would be carried out in two phases. However, because of the accelerated targets, Ofgem is of the opinion that this represents an opportunity for the current reforms to be aligned with the strategic planning demands of the GB energy system (which are to be set out in the 2030CP and the SSEP).

A potential reason for the faster approach is due to current analysis showing that while the current proposals would likely reduce the size of the queue significantly, there is a risk that such reduction will not deliver a technology mix which aligns with the goal of creating a secure clean energy system by 2030.

Therefore, it appears that there will be technical or technology requirements built into TMO4+. We understand that Ofgem and ESO are looking into setting capacity caps based on size and/or a locational requirement, across different technologies, with such restrictions being outlined in the SSEP.

This approach confirms a suspicion that the sector has long had that the process would not remain technology-agnostic, and Ofgem and ESO were planning on applying technology- and location-specific Gate 2 criteria under TMO4+ (albeit with relevant carve-outs to the criteria for strategic projects). It looks very much like Ofgem is now opening the door to including “strategic need” in its connection criteria, which prefers certain technologies in certain geographic areas over the simple “project ready” approach put forward for several months.

Ofgem also calls for the National Energy System Operator (NESO) to be at the forefront of this change given it is taking on new and enhanced responsibilities (which include the coordinated development of the whole energy system). Thus, through its licence, NESO will take greater control over the connections process for those applications connecting to, using or impacting the transmission system. To ensure that the interests of the industry are safeguarded, and NESO meets its statutory objectives, such control should be done in a form that facilitates the delivery of the strategic plans in an open, transparent way (within the parameters of the new governance framework that will be set out by Ofgem following a consultation).

To implement this “further and faster” approach and to ensure NESO can control the connections process, additional necessary licence modifications are now proposed. In the open letter, Ofgem makes it clear that it does intend to consult on the new licence modifications to enable the implementation of a TMO4+ connections process and the three (non-codified) methodologies (referred to above).