Guidance

Energy Security Bill factsheet: Competition in onshore electricity networks

Updated 1 September 2023

Through introducing competition to Great Britain’s onshore electricity networks, consumers could see savings of up to £1 billion by 2050.

Why are we legislating?

In order for the UK to reach net zero by 2050 and achieve independence from imported fossil fuels we need to decarbonise the electricity system by 2035. Alongside this, we also expect a doubling of electricity demand as sectors like transport and heat switch to electricity as a fuel source. To accommodate this, we need to significantly increase the amount of electricity network infrastructure in Great Britain.

Introducing competition will provide new opportunities to invest in networks where it is efficient to do so. The creation of a new competitive market should improve efficiency in investment, foster innovative solutions to network needs, including increasing the opportunities for smart and flexible solutions, and reduce costs to consumers. This is also expected to encourage greater levels of inward investment into electricity networks, to help provide sufficient additional network capacity to meet growing demand in Great Britain.

How the Bill will achieve this

This measure will enable competitions to be run for the build, ownership and operation of onshore electricity networks in Great Britain, building on the existing competition regime which exists in respect of offshore transmission assets. It will take powers to enable the Secretary of State to appoint a body to run tenders and to set criteria to determine a network project’s eligibility to be competed. It will also extend Ofgem’s power to make regulations which will set out the process by which tenders will be run.

FAQ

Will this policy ensure that competitions will only be run where benefits for consumers will materialise?

Yes, onshore competition builds upon the existing offshore competition regime which has saved over £800 million for consumers since its introduction in 2009. We expect onshore competition to save consumers up to £1 billion by 2050.

By opening up network projects to third parties beyond incumbent network companies, we expect to see more innovation and competitive pressures to reduce costs for network build more generally. Tenders will only take place for network projects which meet eligibility criteria, set through secondary legislation by the Department for Business, Energy and Industrial Strategy, Secretary of State under a power taken in this measure. These criteria will take into account consumer benefit.

Will competition support our energy security and net zero ambition?

Yes, introducing competition will provide new opportunities for third parties beyond incumbent network companies to invest in networks where it is efficient to do so, fostering more innovative network solutions and helping to reduce costs to consumers. This is even more important now as we head towards net zero, and anticipate a doubling of demand associated with uptake in low carbon technologies on both the generation and demand side, and more energy independence as set out in the British Energy Security Strategy.

Once competition is in place, the time taken to compete projects can be taken into account at an early stage to avoid any delay to the overall process from identification of need to commissioning. However, for projects beyond a certain stage of planning at the point that competition comes into effect, delays from competing and/or uncertainty about the applicability of competition could be unavoidable. For this reason, Government proposed in the British Energy Security Strategy to exempt upfront certain strategic transmission network projects during a transitional period after competition is introduced. This will provide certainty to the market and encourage strategic investments to proceed apace to support our renewable electricity and energy security objectives. Ofgem have consulted on which projects to exempt, and will publish a decision by the end of 2022.

Does this add to competition in the network space or replace it?

Whilst some competition for unlicensed solutions to network challenges already exists through schemes such as Pathfinders and Distribution Network Operators’ (DNOs) flexibility tenders, introducing onshore network competition will create a framework that allows licensable solutions to compete against solutions which may not require a licence

Existing types of competition such as Pathfinders and DNOs’ flexibility tenders will continue to be able to operate separately and in addition to onshore network competition introduced as a result of this measure.

Background

Electricity networks transport electricity from where it is generated to where it is consumed. In Great Britain, the transmission network conveys high voltage electricity across the country, and the lower voltage distribution network brings electricity into households and places of work. Electricity networks are owned by network companies who build, own and operate network infrastructure within a specific area. These companies are regional monopolies. The costs of upgrading, maintaining and operating the system within these areas, and the opportunities for profiting from them, always fall directly to the relevant company. Those costs are scrutinised by Ofgem before being passed to users like electricity generators, electricity suppliers, and, ultimately, consumers. Nearly 25% of the average consumer electricity bill is made up these network costs^{[footnote 1]}.

In 2009, Government and Ofgem introduced a new process for identifying new licensees for transmission assets that connect offshore windfarms to the onshore grid. Under this process, potential operators compete directly with each other for the right to operate the relevant transmission assets by taking part in an auction-like bidding process, with Ofgem selecting the party that puts forward the most competitive bid. The competitive process for identifying offshore transmission operators (OFTOs) has been operating since 2009 and has saved consumers over £800 million^{[footnote 2]} .

To gain benefits similar to those seen in OFTOs as we transform the whole electricity network to reach net zero and maintain energy security Government is seeking to extend the competitive process to the onshore network. This will enable operators of onshore network solutions to be identified through competition. Competition will not be restricted to traditional wire-based solutions but will allow smart and flexible solutions too. This will build upon and sit alongside existing competitive processes in network regulation, like National Grid ESO’s Pathfinders.

Further information

The following documents are relevant to the measures and can be read at the stated locations:

• Consultation on competition in onshore electricity networks (2021).
• Ofgem’s Decision on the development of early competition in onshore electricity transmission networks sets out the model of early competition and criteria for network project eligibility to be competed (2022).
• Ofgem’s RIIO-2 Sector Specific Methodology Decision, sets out Ofgem’s view on late competition and criteria for network project eligibility for competition (2019).
• Energy and Climate Change Select Committee: Pre-Legislative Scrutiny of an earlier version of this measure (2016).

1. https://www.ofgem.gov.uk/energy-advice-households/costs-your-energy-bill ↩

2. https://www.ofgem.gov.uk/publications-and-updates/consultation-cepabdo-evaluation-offshore-transmission-tender-round-1-benefits; 2018/19 prices. Original figure of £770 million (2014/15 prices) consists of the lower range (conservative) estimate of total savings for TR1, TR2 & TR3 for counterfactual #3 and can be found here: https://www.ofgem.gov.uk/publications-and-updates/evaluation-ofto-tender-round-2-and-3-benefits ↩