Introduced in 2009, the UK’s Offshore Transmission Owner (OFTO) regime was the government’s chosen way of enacting European Union (EU) unbundling rules demanding that ownership of offshore generation assets be separated from ownership of transmission assets.
Previously, energy generation firms had built the wind farms and laid the transmission cables under one procurement process. From 2009 on, the task of government was to introduce a regime that would successfully lure new capital to the tune of billions of pounds in exchange for ownership of the cables.
Recently, the eighth OFTO project reached financial close – the transmission link to the huge, 630-megawatt London Array wind farm. There are plenty more such deals to be done but it seems a good time to ask whether OFTOs have delivered what they set out to do – and, if so, whether the same type of regime could be applied in order to attract capital to other infrastructure sectors?
What the government sought to do was to combine traditional energy regulation with a licence that would look sufficiently like a Public-Private Partnership/Private Finance Initiative contract to lure investors used to investing in the PPP/PFI space.
“The government saw limits on the generators’ balance sheets and wanted to devise a structure that would bring in new sources of capital,” Andy Briggs, a partner at law firm Hogan Lovells told Infrastructure Investor.
In this respect, it has undoubtedly succeeded. Each successive OFTO bidding process has lured a healthy number of bidders, with participants on the equity side including the likes of INPP, Equitix, Barclays Infrastructure Funds and Macquarie Capital. The attraction is obvious given the guaranteed income under the licence for 20 years rising in line with the Retail Price Index – with these revenues based merely on the availability of the cables rather than utilisation of them.
Indeed, criticism of the OFTO regime has tended to come from those who believe investors have been handed too good a deal. For example, earlier this year a report by Parliament’s Public Accounts Committee suggested that “the transmission licences appear to have been designed almost entirely to attract investors at the expense of securing a good deal for consumers.”
Consumers are not the only ones thinking they may be on the wrong side of the deal. Even when cable is “not available” for whatever reason, investor revenue deductions are capped while the generators are paid nothing. This is why the generators – upon sale of the cables – typically try to negotiate a maintenance agreement with the new owners so they can at least retain control even while handing over ownership.
But to return to the earlier point: the government needed a new source of capital and, through the OFTO regime, they succeeded in finding it. One source who has advised OFTO deals tells us that he would expect a similar regime – featuring government contractual underpinning – to be applied to roads, pipelines and other forms of transmission. It fits, the source says, with the government buzz-phrase of “leveraging the balance sheet” by way of contingent support and guarantees rather than writing cheques. So it doesn’t just work: it’s also fashionable.