By Gerard Wynn
LONDON May 3 Policymakers around the world are
turning to the private sector to finance a massive expansion of
electric grids and Britain's experience in funding offshore wind
projects holds lessons on consumers over-paying as a result of
Countries globally are seeking to expand transmission
capacity, to connect more remote renewable power; link networks
across wider areas to boost stability; and in emerging economies
draw more customers to the grid.
The International Energy Agency estimates some $7.2 trillion
of grid investment is needed globally through 2035, in its
latest World Energy Outlook, which is comparable with that
required in power generation.
Grid investment requires government intervention, given its
massive scale and non-market public benefits for example to
boost security of supply or cut carbon emissions.
Policymakers are turning to private sector finance, funded
by levies on consumer electricity bills, against a backdrop of
tight fiscal policy, and to pension funds in particular given a
pullback in bank lending and a perceived fit with their
The U.S. Mid-Atlantic and Midwest electric grid operator PJM
Interconnection this week opened a new process to allow utility
and non-utility competitors to propose how to meet power system
needs in specific areas.
That competitive approach was prompted by the U.S. Federal
Energy Regulatory Commission's (FERC) Order 1000, which allows
operators to use bidding to solicit investment in big projects.
Britain has lessons on how to avoid over-payment by
consumers after criticisms of its regime for public contracts
for offshore wind transmission.
UK OFFSHORE WIND
Britain is hoping offshore wind will supply a large portion
of its low-carbon electricity commitments under European Union
renewable energy targets in 2020.
As of the end of 2011, the country had installed 1.8
gigawatts (GW), up 37 percent on the previous year, according to
statistics from the Department for Energy and Climate Change
DECC's "UK Renewable Energy Roadmap" in July 2011 forecasts
a "central range" for 11-18 GW by 2020. (See Chart 1)
Britain's National Audit Office estimates the associated
undersea cables would require investment of 8 billion pounds
($12.4 billion) through 2020.
To raise the required funds, Britain has implemented a
competitive licensing regime where investors bid for ownership
of the cable connection.
Bids are based on annual revenue requests which reflect
their estimated cost of financing the cable acquisition or
construction plus operation and maintenance.
Costs are ultimately passed to consumers through the grid
operator National Grid via electric utilities and wind
farms which pay for transmission. (See Chart 2)
That contrasts with most EU countries which have left
responsibility for connection to the grid operator, as in
Germany where disputes over liabilities arising from late cable
construction have held up development.
EU rules require separate ownership of generation and
transmission assets, meaning offshore wind farms cannot own the
Chart 1: (page 45)
Chart 2: (page 17)
Chart 3: (page 22)
Chart 4: (page 12)
Advisory firm KPMG last December published a detailed review
of the British regime for investors, "Offshore Transmission: An
Investor Perspective", commissioned by the regulator Ofgem.
KPMG pointed out the low risk and particular benefits, for
example compared with onshore transmission investments and
public-private partnership projects (PPP).
"The evidence to date suggests that OFTOs (Offshore
Transmission Owners) offer strong returns relative to comparable
asset classes with similar risk profiles," it said, in comments
which perhaps should have alerted the regulator that the scheme
was too generous to investors.
KPMG noted attractions including: a 20-year,
inflation-linked revenue stream; rewards for over-performance;
penalties for under-performance capped at 10 percent of
revenues; and zero exposure to the wind farm's performance (no
The scheme has transferred risk to consumers who will be
left nursing the full cost if a wind farm fails, is barely used,
or if inflation spikes.
The aim appeared to be to attract competitive bids by
The tenders have attracted a range of bids but the KPMG
study shows that just two firms (Blue Transmission and
Transmission Capital Partners) have won nine out of 11 tenders
as of last December, for assets worth 1.36 billion pounds. (See
The idea of full inflation index-linking was to entice
pension funds which seek revenue streams to match their rising
As of December, the UK regime had attracted some pension
fund investment directly or indirectly: AMP Capital is an
Australian pension provider while some of the other equity
sponsors have pension fund investors.
But full index linking was over-generous, according to the
National Audit Office (NAO), which advises on value for money in
public spending, given that the main ownership cost is financing
which is fixed from the outset. (Chart 4)
Returns achieved in early projects were up to 11 percent,
exceeding PPP projects, according to the NAO report published
last June, "Offshore electricity transmission: a new model for
Parliament's public finance advisors, the Public Accounts
Committee (PAC), was more critical.
"The terms of the transmission licences awarded so far
appear heavily skewed towards attracting investors rather than
securing a good deal for consumers," it concluded in a report in
It suggested possible changes which will provide a check
list for similar regimes to deliver value for investors while
not demanding consumers bear all the risk.
These included: higher penalties for under-performance;
shorter licensing periods than 20 years; alternatives to full
index linking such as flat or partially indexed revenues;
transparency about actual returns; and a claw-back process to
share gains where these were excessive.