Ofgem’s recent proposals explore the introduction of a new Independent Transmission Owner concept. The proposals could alleviate some of the UK’s high voltage grid bottlenecks that are affecting some of the UK’s fastest-growing sectors, particularly data centres and renewable energy projects.
Grid Reform Background
Ofgem is powering ahead with policy proposals which aim to reform the demand side of the grid connection system pursuing a three-pillar approach that includes:
- Curate – to re-organise the queue so that only viable projects remain;
- Plan – working with government to prioritise strategic projects and develop a strategic plan for data centres (data centres account for 73GW of the total demand queue according to Ofgem); and
- Connect – reforming connection policy to increase connections.
Ofgem’s objective is to create a fairer connections model so that connecting viable and strategically important projects to the grid is prioritised over so called “zombie” projects, those which are judged to be unviable or unrealistic and clog up space in the queue.
As part of its recent update on the Connect pillar, Ofgem has divided its work into two streams:
- Connect Accelerate – reforms to allow for self-build and ownership, and also self-build and transfer of high voltage assets; and
- Connect Operate – reform to contracting arrangements to allow for higher capacity demand connections without compromising the integrity of the wider network, focussed on data centre connections.
Ofgem would like to achieve multiple objectives under the Connect Accelerate workstream. These include giving developers greater control over delivery, speeding up connections, making connections cheaper and relieving pressure on Transmission Owners so they are free to address constraints on the existing network.
The ITO Model
To achieve these objectives, Ofgem has signalled that it is considering developing an Independent Transmission Owner (ITO) licence. The ITO licence would build on the established Independent Distribution Network Owner (IDNO) licence and enable private developers to develop high voltage transmission networks.
To understand why Ofgem’s proposals are so significant it is worth explaining how transmission and distribution infrastructure works in the UK:
Transmission Network
Transmission infrastructure can be thought of as the grid's electricity motorway. High voltage cables carry electricity across large distances to local distribution networks.
At present, there are three transmission network owners in Britain with overall responsibility to manage the transmission network in specific geographies.
- National Grid owns the transmission network in England and Wales;
- SP Energy Networks owns the network in the south of Scotland; and
- Scottish & Southern Electricity Networks owns it in the north of Scotland.
System operator functions across Great Britain are performed by the National Energy System Operator (NESO).
Transmission owners recover the cost of installing and maintaining transmission infrastructure through Transmission Network Use of System (TNUoS) charges, which are levied on generators, suppliers, directly connected transmission demand and certain embedded generators. NESO sets TNUoS tariff rates annually.
Distribution Network
To continue the metaphor, if transmission infrastructure acts as the grid’s motorway then the distribution network is comparable to the network of local roads which connect commercial, social and domestic users to the grid.
In Great Britain there are six distribution network operators (DNOs), which are responsible for distribution networks in fourteen licensed distribution areas. DNOs recover the cost of maintaining and operating the distribution networks from energy suppliers through Distribution Use of System (DUoS) charges. Individual DNOs set the DUoS charge, subject to Ofgem regulation.
In the early 2000s, the UK energy system was struggling to meet demand needs and DNOs in particular could not keep up with demand from developers. To ease the bottleneck, Ofgem developed a new IDNO model, so that a licensed independent provider could enter the distribution sector and own and operate electricity networks. The new model increased market competition, and gave developers the choice of connecting through either a DNO or IDNO. Not only did the new model increase competition, but it also crucially made the energy system better able to meet growing demand.
Today, IDNOs are an established part of Great Britain's electricity connections market. They provide developers with an alternative to incumbent distribution network operators and increased delivery capability across residential, commercial, and major infrastructure projects.
Data centre connection challenges
The UK grid connections process is lengthy, costly and at risk of being outdated as it faces the changing energy needs of modern Britain.
The growth of the AI sector is a key strategic priority for the UK government, spanning both private and public sector activity and AI models need data centres to train and power them. Data centres are incredibly energy intensive and, as it stands, some of these projects may not be connected until well into the next decade.
An ITO solution?
Data centres are such large consumers of electricity (99% of the current data centres in the connection queue are 40MW+ projects) that they often require direct transmission grid connections rather than connections from DNOs.
Ofgem’s proposal to develop an ITO market could address the massive increase in transmission demand caused by the rapid growth of the UK data centre sector. An ITO model could improve delivery capability by encouraging private investment in the sector so that there are more stakeholders capable of delivering transmission infrastructure.
Just as the IDNO model eased the burden on DNOs to meet demand for developments, Ofgem is now exploring whether the reforms might improve delivery capability for data centres, which are expected to be high demand energy consumers of strategic importance for years to come.
Renewable energy projects face similar constraints, often requiring large, direct transmission connections that compete for the same limited grid capacity as data centres. Ofgem is inviting feedback from industry on the scope of an iTO model and how best to deliver it from a regulatory perspective.
Jamie McAinsh, Chief Commercial Officer at Aurora Utilities, an Ofgem-regulated IDNO that owns and operates major electricity infrastructure projects across Great Britain, believes the proposals build on a proven model:
He commented, "The success of the IDNO model for distribution-level connections demonstrates what can be achieved when private capital and industry expertise are brought together to help deliver network infrastructure.
“An ITO model is the logical next step. As demand for transmission connections continues to grow, increasing the number of organisations capable of delivering that infrastructure could improve delivery certainty for developers, accelerate strategically important projects, and support the UK's ambitions for AI, renewable energy and long-term economic growth.”
"If implemented, the ITO model could represent one of the most significant changes to Britain's electricity infrastructure market since the introduction of the IDNO. For developers, investors, and infrastructure owners, it has the potential to reshape how large-scale electricity connections are delivered in the years ahead."
Next Steps?
With Ofgem inviting industry feedback on the scope and delivery of an ITO model, now is the time for developers, investors and existing network operators to consider how a new ITO licence might reshape their route to market.
Fladgate’s energy team is following these proposals closely and is well placed to advise clients on how to respond to Ofgem's consultation and position themselves ahead of this emerging market.
