Ofgem embraces bonds in OFTO regime

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Adam Barber
February 24, 2014
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Ofgem embraces bonds in OFTO regime

The race to own and operate offshore transmission links starts again this week.

On Wednesday, energy regulator Ofgem is due to start the third round of tendering under its offshore transmission regime. The regulator is keen to talk to investors keen to become Offshore Transmission Owner’s (OFTO) to own and operate two new transmission links.

The links will connect the 220MW E.On Climate & Renewables offshore wind farm Humber Gateway and Dong Energy’s 205MW offshore project Westermost Rough into the grid. Both projects are located in the North Sea off the East Yorkshire coast.

Ofgem is making it easier for bidders by merging the Pre-Qualification and Qualification to Tender stages. It will talk more about the technicalities of this at its 26th February launch.

The regulator is also trying to attract more investors by embracing innovative funding mechanisms.

Traditionally, OFTOs have been backed by bank debt, but bonds are set to come more to the fore. Ofgem wants to increase competition as it hopes to reduce the cost to energy customers of connecting offshore wind farms into the energy grid.

It showed its keenness for bonds last November in the Greater Gabbard OFTO deal.

On 26th November, Ofgem granted the £317m OFTO licence to operate the transmission assets for Greater Gabbard Offshore Wind Farm to a consortium of Balfour Beatty, Equitix, and AMP Capital Investors. The 500MW Greater Gabbard Offshore project is in the North Sea off the Suffolk Coast, and it is owned by SSE and RWE npower.

The European Investment Bank reported that bonds with a value of £305m were issued to finance the link for the 140-turbine project. These bonds reach maturity in 2032.

The bank provided a £45.8m guarantee under its Project Bond Credit Enhancement product, which reduces the risk for bond investors and allows the OFTO to attract cheaper funding from institutional investors like insurance companies and pension funds. This is the first project in the UK where this EIB mechanism has been used, and only the second in Europe.

The upshot of all of this is that the aim of attracting a wider range of investors to these offshore transmission projects sounds like a good one. But something doesn’t sit right.

Ofgem wants to attract a wider range of investors to these projects, including institutions looking for stable income. It remains to be seen whether these mechanisms remain attractive as projects move further offshore and the level of risk increases.

Take a look at the activity that took place throughout round one and two, for a case in point.

Here, all sites were within 40km of the shore, and both Humber Gateway and Westermost Rough are too: 8km and 9km respectively.

However, round three projects will be pushed further out, into deeper water, which increases the development risk. There is also a concern that current AC technology won’t be appropriate for such schemes, and the move to new cabling technology is far from plain sailing.

Institutional investors, like pension funds and insurance companies, want steady long-term, low-risk income. Developers and regulators want investment stability and would rightly resist the temptation for a quick fix.

Innovative financial modelling can go some way to marrying the two but regulators should be careful not to risk losing the trust of prospective investors in the process.

The race to own and operate offshore transmission links starts again this week.

On Wednesday, energy regulator Ofgem is due to start the third round of tendering under its offshore transmission regime. The regulator is keen to talk to investors keen to become Offshore Transmission Owner’s (OFTO) to own and operate two new transmission links.

The links will connect the 220MW E.On Climate & Renewables offshore wind farm Humber Gateway and Dong Energy’s 205MW offshore project Westermost Rough into the grid. Both projects are located in the North Sea off the East Yorkshire coast.

Ofgem is making it easier for bidders by merging the Pre-Qualification and Qualification to Tender stages. It will talk more about the technicalities of this at its 26th February launch.

The regulator is also trying to attract more investors by embracing innovative funding mechanisms.

Traditionally, OFTOs have been backed by bank debt, but bonds are set to come more to the fore. Ofgem wants to increase competition as it hopes to reduce the cost to energy customers of connecting offshore wind farms into the energy grid.

It showed its keenness for bonds last November in the Greater Gabbard OFTO deal.

On 26th November, Ofgem granted the £317m OFTO licence to operate the transmission assets for Greater Gabbard Offshore Wind Farm to a consortium of Balfour Beatty, Equitix, and AMP Capital Investors. The 500MW Greater Gabbard Offshore project is in the North Sea off the Suffolk Coast, and it is owned by SSE and RWE npower.

The European Investment Bank reported that bonds with a value of £305m were issued to finance the link for the 140-turbine project. These bonds reach maturity in 2032.

The bank provided a £45.8m guarantee under its Project Bond Credit Enhancement product, which reduces the risk for bond investors and allows the OFTO to attract cheaper funding from institutional investors like insurance companies and pension funds. This is the first project in the UK where this EIB mechanism has been used, and only the second in Europe.

The upshot of all of this is that the aim of attracting a wider range of investors to these offshore transmission projects sounds like a good one. But something doesn’t sit right.

Ofgem wants to attract a wider range of investors to these projects, including institutions looking for stable income. It remains to be seen whether these mechanisms remain attractive as projects move further offshore and the level of risk increases.

Take a look at the activity that took place throughout round one and two, for a case in point.

Here, all sites were within 40km of the shore, and both Humber Gateway and Westermost Rough are too: 8km and 9km respectively.

However, round three projects will be pushed further out, into deeper water, which increases the development risk. There is also a concern that current AC technology won’t be appropriate for such schemes, and the move to new cabling technology is far from plain sailing.

Institutional investors, like pension funds and insurance companies, want steady long-term, low-risk income. Developers and regulators want investment stability and would rightly resist the temptation for a quick fix.

Innovative financial modelling can go some way to marrying the two but regulators should be careful not to risk losing the trust of prospective investors in the process.

The race to own and operate offshore transmission links starts again this week.

On Wednesday, energy regulator Ofgem is due to start the third round of tendering under its offshore transmission regime. The regulator is keen to talk to investors keen to become Offshore Transmission Owner’s (OFTO) to own and operate two new transmission links.

The links will connect the 220MW E.On Climate & Renewables offshore wind farm Humber Gateway and Dong Energy’s 205MW offshore project Westermost Rough into the grid. Both projects are located in the North Sea off the East Yorkshire coast.

Ofgem is making it easier for bidders by merging the Pre-Qualification and Qualification to Tender stages. It will talk more about the technicalities of this at its 26th February launch.

The regulator is also trying to attract more investors by embracing innovative funding mechanisms.

Traditionally, OFTOs have been backed by bank debt, but bonds are set to come more to the fore. Ofgem wants to increase competition as it hopes to reduce the cost to energy customers of connecting offshore wind farms into the energy grid.

It showed its keenness for bonds last November in the Greater Gabbard OFTO deal.

On 26th November, Ofgem granted the £317m OFTO licence to operate the transmission assets for Greater Gabbard Offshore Wind Farm to a consortium of Balfour Beatty, Equitix, and AMP Capital Investors. The 500MW Greater Gabbard Offshore project is in the North Sea off the Suffolk Coast, and it is owned by SSE and RWE npower.

The European Investment Bank reported that bonds with a value of £305m were issued to finance the link for the 140-turbine project. These bonds reach maturity in 2032.

The bank provided a £45.8m guarantee under its Project Bond Credit Enhancement product, which reduces the risk for bond investors and allows the OFTO to attract cheaper funding from institutional investors like insurance companies and pension funds. This is the first project in the UK where this EIB mechanism has been used, and only the second in Europe.

The upshot of all of this is that the aim of attracting a wider range of investors to these offshore transmission projects sounds like a good one. But something doesn’t sit right.

Ofgem wants to attract a wider range of investors to these projects, including institutions looking for stable income. It remains to be seen whether these mechanisms remain attractive as projects move further offshore and the level of risk increases.

Take a look at the activity that took place throughout round one and two, for a case in point.

Here, all sites were within 40km of the shore, and both Humber Gateway and Westermost Rough are too: 8km and 9km respectively.

However, round three projects will be pushed further out, into deeper water, which increases the development risk. There is also a concern that current AC technology won’t be appropriate for such schemes, and the move to new cabling technology is far from plain sailing.

Institutional investors, like pension funds and insurance companies, want steady long-term, low-risk income. Developers and regulators want investment stability and would rightly resist the temptation for a quick fix.

Innovative financial modelling can go some way to marrying the two but regulators should be careful not to risk losing the trust of prospective investors in the process.

The race to own and operate offshore transmission links starts again this week.

On Wednesday, energy regulator Ofgem is due to start the third round of tendering under its offshore transmission regime. The regulator is keen to talk to investors keen to become Offshore Transmission Owner’s (OFTO) to own and operate two new transmission links.

The links will connect the 220MW E.On Climate & Renewables offshore wind farm Humber Gateway and Dong Energy’s 205MW offshore project Westermost Rough into the grid. Both projects are located in the North Sea off the East Yorkshire coast.

Ofgem is making it easier for bidders by merging the Pre-Qualification and Qualification to Tender stages. It will talk more about the technicalities of this at its 26th February launch.

The regulator is also trying to attract more investors by embracing innovative funding mechanisms.

Traditionally, OFTOs have been backed by bank debt, but bonds are set to come more to the fore. Ofgem wants to increase competition as it hopes to reduce the cost to energy customers of connecting offshore wind farms into the energy grid.

It showed its keenness for bonds last November in the Greater Gabbard OFTO deal.

On 26th November, Ofgem granted the £317m OFTO licence to operate the transmission assets for Greater Gabbard Offshore Wind Farm to a consortium of Balfour Beatty, Equitix, and AMP Capital Investors. The 500MW Greater Gabbard Offshore project is in the North Sea off the Suffolk Coast, and it is owned by SSE and RWE npower.

The European Investment Bank reported that bonds with a value of £305m were issued to finance the link for the 140-turbine project. These bonds reach maturity in 2032.

The bank provided a £45.8m guarantee under its Project Bond Credit Enhancement product, which reduces the risk for bond investors and allows the OFTO to attract cheaper funding from institutional investors like insurance companies and pension funds. This is the first project in the UK where this EIB mechanism has been used, and only the second in Europe.

The upshot of all of this is that the aim of attracting a wider range of investors to these offshore transmission projects sounds like a good one. But something doesn’t sit right.

Ofgem wants to attract a wider range of investors to these projects, including institutions looking for stable income. It remains to be seen whether these mechanisms remain attractive as projects move further offshore and the level of risk increases.

Take a look at the activity that took place throughout round one and two, for a case in point.

Here, all sites were within 40km of the shore, and both Humber Gateway and Westermost Rough are too: 8km and 9km respectively.

However, round three projects will be pushed further out, into deeper water, which increases the development risk. There is also a concern that current AC technology won’t be appropriate for such schemes, and the move to new cabling technology is far from plain sailing.

Institutional investors, like pension funds and insurance companies, want steady long-term, low-risk income. Developers and regulators want investment stability and would rightly resist the temptation for a quick fix.

Innovative financial modelling can go some way to marrying the two but regulators should be careful not to risk losing the trust of prospective investors in the process.

The race to own and operate offshore transmission links starts again this week.

On Wednesday, energy regulator Ofgem is due to start the third round of tendering under its offshore transmission regime. The regulator is keen to talk to investors keen to become Offshore Transmission Owner’s (OFTO) to own and operate two new transmission links.

The links will connect the 220MW E.On Climate & Renewables offshore wind farm Humber Gateway and Dong Energy’s 205MW offshore project Westermost Rough into the grid. Both projects are located in the North Sea off the East Yorkshire coast.

Ofgem is making it easier for bidders by merging the Pre-Qualification and Qualification to Tender stages. It will talk more about the technicalities of this at its 26th February launch.

The regulator is also trying to attract more investors by embracing innovative funding mechanisms.

Traditionally, OFTOs have been backed by bank debt, but bonds are set to come more to the fore. Ofgem wants to increase competition as it hopes to reduce the cost to energy customers of connecting offshore wind farms into the energy grid.

It showed its keenness for bonds last November in the Greater Gabbard OFTO deal.

On 26th November, Ofgem granted the £317m OFTO licence to operate the transmission assets for Greater Gabbard Offshore Wind Farm to a consortium of Balfour Beatty, Equitix, and AMP Capital Investors. The 500MW Greater Gabbard Offshore project is in the North Sea off the Suffolk Coast, and it is owned by SSE and RWE npower.

The European Investment Bank reported that bonds with a value of £305m were issued to finance the link for the 140-turbine project. These bonds reach maturity in 2032.

The bank provided a £45.8m guarantee under its Project Bond Credit Enhancement product, which reduces the risk for bond investors and allows the OFTO to attract cheaper funding from institutional investors like insurance companies and pension funds. This is the first project in the UK where this EIB mechanism has been used, and only the second in Europe.

The upshot of all of this is that the aim of attracting a wider range of investors to these offshore transmission projects sounds like a good one. But something doesn’t sit right.

Ofgem wants to attract a wider range of investors to these projects, including institutions looking for stable income. It remains to be seen whether these mechanisms remain attractive as projects move further offshore and the level of risk increases.

Take a look at the activity that took place throughout round one and two, for a case in point.

Here, all sites were within 40km of the shore, and both Humber Gateway and Westermost Rough are too: 8km and 9km respectively.

However, round three projects will be pushed further out, into deeper water, which increases the development risk. There is also a concern that current AC technology won’t be appropriate for such schemes, and the move to new cabling technology is far from plain sailing.

Institutional investors, like pension funds and insurance companies, want steady long-term, low-risk income. Developers and regulators want investment stability and would rightly resist the temptation for a quick fix.

Innovative financial modelling can go some way to marrying the two but regulators should be careful not to risk losing the trust of prospective investors in the process.

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Not a member yet?

Become a member of the 6,500-strong A Word About Wind community today, and gain access to our premium content, exclusive lead generation and investment opportunities.