Grid reform, Gate 2 and what's next for connections

Nick Pincott (00:02)

Hi everyone and welcome to Energise2030, a podcast from TLT. We'll be unpacking the forces that are reshaping the future energy market.

My name is Nick Pincott. I'm a Partner in the projects group at TLT and I've spent the last two or three decades working on wind, solar, storage and other clean energy projects in the UK - and indeed all over the world.

Amber Bains (00:24)

My name is Amber Bains and I'm an Associate at TLT and I specialize in regulatory and commercial energy work, which has been a lot of focus on grid reform over the past year.

Nick Pincott (00:36)

So, to give you an overview of what we're hoping to cover today, this first podcast in the series is about grid and connection matters. And we're hoping to cover an overview of what's been happening in terms of the application of TMO4 and grid reform.

First of all, what the latest situation is in relation to the most recent round of applications, and that's going to be taking up a fair bit of what we talk about today - but also how this all filters down to projects connecting at a distribution level. And related to both of those, when the next application window is going to be.

So, let's start with the first of those. I’ll give you an update, as I’m you're sure you know, the application window was last summer and during December, projects were receiving their notifications of whether they will be Gate 1 or Gate 2 status and they were then waiting for their revised offers to reflect that.

Amber Bains (01:28)

So, we now know that these revised offers have started to trickle through. So, start of the week of 23 February, we were aware of one offer and following NESO's webinar on the 24 February, we understand that eight revised offers have now been sent out. We understand that these relate to transmission protected projects with 2026 and 2027 connection dates, who will be the first wave of projects to receive offers under the Gate 2 timeline.

However, in relation to these protected projects of 2026 and 2027 connection dates, Ofgem has recently put out a letter stating that 210 of these 340 protected 2026 and 2027 projects are actually expected to be delayed, when they were expecting to retain their existing connection dates under the Gate 2 methodologies.

So, this means that two thirds of these protected projects, who were expecting to see their dates retained, have now been pushed back and the details of these delays are starting to emerge. We do understand that all projects which have been delayed should have been notified, but what isn't completely clear is whether the extent of these delays have been communicated clearly, including the quantum. And we already know that some projects have been notified of quite significant delays of over a year.

Nick Pincott (02:43)

Clearly, that's a really significant development. First and foremost, for the projects that are affected by that, they will have been developing to a very specific timeline, meeting milestone obligations and generally getting on with their projects and they will now need to look very carefully when they get the detail of those delays through and see how that affects their project and revisit their project programmes.

It'll also have a knock-on effect on other aspects of the project documents alongside just grid connection projects which will have had timelines, say, for the CFD process and the AR7 applications or for the capacity market regime. Equally, they might have private contractual arrangements under power purchase agreements, for example, or other route-to-market agreements. All of those will need to be revisited. They may need to, for example, implement extension of time provisions and so on, under those various different arrangements.

It also affects, as we said, when the next application window will be, not just when it will be, but also which projects might therefore be looking at it. The outcome of this application window in part is going to determine when the next application window can be and who's participating, and similarly, there's a big potential impact on distribution connecting projects. And we'll return to that bit later.

Amber Bains (04:03)

So, as we touched upon earlier, there are a number of protected projects who were expecting to see their existing connection dates retained under the Gate 2 methodologies and are now delayed. This is particularly frustrating for developers to have this reassurance that was expressed in the Gate two methodologies undermined.

Although it has always been the case in connection agreements that NESO or the DNO has the right under certain circumstances to push connection dates back, the fact that the methodologies have been effectively undermined in this way has eroded developer confidence and we wouldn't be surprised if some projects are therefore looking to dispute delays where they had expected their dates to be protected.

Having said that, there's not an obvious remedy or an easy way to dispute such delays. There is not a clear contractual remedy. So liquidated damages under the CUSC for transmission projects are zero and a similar approach will be taken in distribution connection agreements.

And in terms of regulatory relief, Ofgem has been quite clear that it's got a fairly limited appetite to hear disputes from developers. So, although there are ways for developers to pursue disputes, it does seem like a bit of an uphill battle.

Nick Pincott (05:15)

So, some very specific issues there for developers that are directly affected. But as Amber said, it also has a knock-on effect. It erodes this protected status, and if you like the way in which these rules are going to work on an ongoing basis, and that's also going to be relevant to future connections. Other projects looking to connect later, but also with a protected status, a 2B or 3B status that were looking perhaps to go into future rounds, they're going to be looking at where that leaves them.

Equally, there will be projects connecting at distribution level who may have already accepted an interim connection but with technical limits. And again, they are going to be looking very carefully and wondering, where does that exactly leave them?

So, leaving that aspect, perhaps we can move on to some other aspects of what happens. We're still waiting, as we've said, for quite a lot of revised offers still waiting to be received.

First of all, developers are going to need to take a very careful look when they get their hands on those offers. The revised connection date, of course, as we've mentioned, but also more specifically, what their queue management milestones now are, how that fits with their revised project programmes, what the new cancellation charges are and related to that, their new security obligations. Those have been effectively on hold for some time now while TMO4 has been implemented. Though, we might see quite a steep uptick now, particularly for these first offers coming through, which are of course projects with connection dates in the short term or relatively short term.

Amber Bains (06:44)

Looking ahead to the actual acceptance process when people receive their offers. So, the process is slightly different, depending on whether you're a transmission or distribution customer. For transmission customers that have a period of 90 days to accept their offer, NESO has said that if you spot a mistake in your offer, you'll need to notify this within four weeks. However, the clock will not stop while NESO deals with your issue, and you will still need to accept your offer within the 90-day timeframe.

So, there are still a few question marks over how this will work in practice, especially if you need to have a bit of back and forth with NESO.

Nick Pincott (07:20)

A lot of questions being asked in the Q&A process. That's clearly an important subject of concern for quite a lot of developers trying to get some clarity on that point.

Amber Bains (07:28)

Yes, and hopefully the process will become a bit clearer as more offers start to be released and NESO has to think about this. But as it stands at the moment, there is still a bit of uncertainty how it will work in practice and also, in terms of your queue management milestones. There is a process whereby you can get your construction progression milestones, which relate to milestones M5 to M8, extended to account for the delays in the actual Gate 2 process itself and the delay in your offer being issued - but you can only apply for this proportionate extension once you've actually accepted your offer and then you have to do so within a certain timeframe.

So again, there are question marks around how this will work if you're a developer who has to first accept your offer before you can apply for an extension of time to these milestones.

Nick Pincott (08:11)

Following on from that, again, how will this flow down? How will it apply to distribution offers? Now, there are shorter time periods for accepting those offers, so you can see how that's beginning to be dovetailed into the transmission regime. But it isn't clear at the moment quite how this process for queries and mistakes will work. For example, that's especially the case if there is, a technical issue or error that needs to be referred from you to the DNO by the developer, but then on to NESO and then to the relevant TO, and then all the way back down the chain again.

And I suppose that fits in with another expression of frustration that we've heard from distribution connected projects. It is often not possible to sit down and have a tripartite meeting on technical matters like this with the applicable DNO, but also with perhaps NESO and certainly with the TO involved, just to try and thrash out technical points like this quickly. They feel “just get all the relevant stakeholders around the table, it could be resolved quickly”, but it's often done in this parting along the chain and then back in sort of a bilateral way. So again, there's another application of that frustration.

Amber Bains (09:20)

Looking ahead to future Gate 2 application windows. As it stands at the moment, the majority of technology parts for zones around the country are filled and battery in particular is already oversubscribed in that capacity, so it isn't clear at the moment what room there will be for projects in these capacity parts to reapply within future windows and we will need projects to drop out in some cases for there to be space in the queue.

But the picture will become a bit clearer once Gate 2 offers have actually been issued, which will then enable developers to decide whether or not they wish to accept them, or some projects might drop out when they fail to meet milestones, for example.

In terms of projects that have been given a Gate 1 notification, there's a bit of frustration with some developers because although if you have a Gate 1 offer, you are eligible to get your cancellation charges removed and get your securities returned. In order for this to actually be carried out, you have to have accepted your Gate 1 offer, which creates a bit of a limbo situation for some developers who face extending their securities in the interim period until they actually receive a Gate 1 offer, only for those securities to then be returned to them.

Nick Pincott (10:25)

So, a number of things that we've touched on there have been in relation to projects connecting at the transmission level. But as we said, there are some big question marks over how some of these things will then flow down to distribution connecting projects. And again, we've had a lot of frustration expressed from those projects. Some developers even saying, they feel like they're second class projects in a way. Certainly, still waiting to see how current projects will be dealt with, and some of the things that we've just been talking about.

Looking forward, they're still waiting for whether it's NESO or ENA, or a combination of ENA and the various DNOs to provide more clarity on how the enduring regime is going to work for future distribution connected projects.

Amber Bains (11:08)

And in terms of the enduring regime and when the next Gate 2 application window will be, there hasn't been any further clarity on when the next Gate 2 window will open. It does have to open this year under NESO's current license conditions, but NESO has emphasized that there are certain push and pull factors it's considering as to whether it wants to open the window earlier rather than later or vice versa.

Nick Pincott (11:29)

But as Amber said before, it's very difficult to predict for projects and looking to go into future windows quite what the queue will look like. They need to wait and see how this round of applications will pan out, which projects will be awarded Gate 2 and which Gate 1 - and which of those Gate 2 projects will not accept those offers, or decline those offers and voluntarily go into the Gate 1 pot. So really, it's very hard to tell what the queue will look like and what projects will be looking to go into future application windows.

Amber Bains (11:59)

Looking even further ahead, Ofgem is currently carrying out an end-to-end connection review, which is a long-term review of the regulatory framework for grid connections. This is currently in consultation stage and the consultation is open until the end of February.

And although retrospective relief may not fix some of the issues that products are experiencing now in terms of being able to claim effective remedies for delays, some of the things that are being looked at under the end-to-end connection review are how network operators can be held to account for delays - for connection delays.

In future years, it is possible that we may see the introduction of things like liquidated damages, which would make it easier for developers to claim compensation where their projects are pushed back.

Nick Pincott (12:47)

So, to round up on some of those points, and trying to focus on the positive, the market still is certainly very active, and projects are still actively developing. In some cases, particularly some of the protected projects with very close connection dates, or what they currently understand to be close connection dates, they have no choice but to progress those projects.

But they are having to deal with these various issues that we've been talking about. And it's not only the developers, of course, but there's a knock-on effect in terms of bank debt. Those projects that are seeking project financing, or projects, as we said, dealing with CFD or capacity market applications or their other route to market agreements. Again, in terms of financing, there's still, I think, a lot of fluidity in the sector market, a lot of M&A activity. But again, how do you deal with some of these uncertainties? How do you place a value on a Gate 1 project at this stage?

And these are subjects that we're going to return to in some of our future podcasts. But in the meantime, thank you very much for listening. Goodbye from me, Nick.

Amber Bains (13:47)

Thank you and bye from me, Amber.

Nick Pincott (13:49)

Thanks, bye bye.