The UK is not alone in struggling to get its power transmission network to adapt to the needs of more decarbonised generation. Germany and Sweden face notable and similar challenges with plentiful renewable generation in the north and strong demand for power in the south.

Variations of this issue are present everywhere. In the words of DigitalBridge chief executive Marc Ganzi: “We don’t think the planet has a generation problem. I believe the planet has a transmission problem”.

The challenge, then, is to find a way to adapt and, when launching the UK’s new independent National Energy System Operator (NESO) on 1 October, one of its first assignments will be to deliver a centralised network plan for the coming 12 and 25 years. This should identify the network upgrades necessary to meet the net-zero targets of the next few decades.

UK energy regulator Ofgem must protect consumers as the networks are developed, and including private capital could be part of that, with new investment opportunities likely, particularly within onshore transmission. Here, the focus is on large-scale projects that are somewhat separate from the meshed grid, such as reinforcements of the lines connecting the country from east to west and north to south.

“They are large and new schemes where the risk can be assessed and priced in competition in a manageable way,” Akshay Kaul, Ofgem’s director general of infrastructure, tells Infrastructure Investor.

“Either we are going to get those [new and needed] projects delivered through the incumbent monopolies, or we’re going to auction those projects,” Kaul says. “It will also hopefully add a bit of capacity at the client level for the supply chain, which at the moment is very stretched. New entrants could add capacity, they add new ideas, they bring new ways of working, maybe they bring a bit of new technology, such as smart conducting, and dynamic line ratings.”

What might onshore auctions entail?

To get more private capital into the development of onshore transmission assets, Kaul envisions building on what has worked in the offshore space: “The offshore side historically has had a lot of independent private capital coming into the offshore transmission space based on the developer-build model where the developer of the wind farm builds their link, and then we auction it out to competing OMM [operations, maintenance, and management] bidders.”

This Offshore Transmission Owner, or OFTO, scheme has been a resounding success with investors eager to bid. There has been appreciation for the asset class in the secondaries market too with John Laing buying a stake in an OFTO sold by HICL last year and expressing ambitions to move further into the transmission sector.

“The OFTO regime doesn’t have any construction risk in it, so it attracts a lot of institutional investors who are very happy with operating assets, where the focus is on the cost of capital competitiveness and OMM competitiveness,” says Kaul of the inflation-linked transmission lines. “[OFTO investors] are very comfortable with low-risk, low-return assets and want to hold them for a long period of time.”

That said, Kaul speculates that future OFTOs may involve building the assets as well as operating and maintaining them.

Currently, the 11th OFTO tender round is under way, with four shortlisted bidders including a Mitsubishi Corporation and HICL consortium, and a joint venture that includes Amber Infrastructure. Both are seasoned OFTO investors. Consortia led by Equitix and Gravis, respectively, are also in the running.

Given that potential onshore competitions will include construction risk, it will attract a different pool of bidders. Kaul expects transmission companies, foreign as well as domestic, to take an interest, but it is a question of waiting and seeing. “It is possible that some of those with experience from the offshore space are ready for a bit of higher risk and higher return exposure. I think we’ll start with a few pilot projects and build from there.”

Ofgem is mandated to ensure the best possible deal for the public. With a Labour government in power and continued questions around the UK’s regulated water utilities, questions might be asked if coming auctions look too profitable for investors, incurring seemingly high network charges for consumers. But Kaul is not worried.

“If [the costs] are set in competition, I don’t think anybody complains about it. You see that happening with the CfDs [Contracts for Difference]. We do that also on the OFTOs,” he says. “If you don’t build these links and build them in the most efficient way, consumers will end up paying more because of the cost of constraints. So, in some ways, the money is in the system. It’s just about spending it in the most intelligent and efficient way.”

The future of offshore transmission

The offshore grid also needs to be considered. Especially now that clusters of offshore wind are being built and generation may be sent to more than one onshore substation, as is already the case with the dual Danish/German connections to the Danish Kriegers Flak wind farm.

“In the future, we’re going to have to move towards a more meshed grid in the sea, and therefore, there will be a greater role for co-ordinated assets,” says Kaul.

“If we want to move to a more co-ordinated approach, then we may need to consider competing the assets as zonal systems and then they can perhaps be managed by one entity. They can be selected and appointed in competition, but then managed by one entity so that you have the proper electrical co-ordination of the system.”

Such zones may even end up having local electricity bidding zones, according to Kaul. “To some extent, that might happen with the energy islands and the multi-purpose interconnectors that are being built. That does set up a potential zonal pricing system in the sea, which I personally think is fine if it helps to route the flows in an optimal way.”

Looking ahead, there could be a merging in the offshore space between transmission and interconnectors, says Kaul. “At the moment, they’re completely separate regimes. We run a cap and floor regime for interconnection, which brings a lot of private capital. But in the future, we might see benefit in a convergence of these two as we build a meshed grid in the sea where all European countries, including Britain, can share wind resources.”