The Offshore Transmission Owner (OFTO) regime provides a solid platform for future growth, but it must evolve in order to attract the huge investment required and ensure offshore wind farms can connect to the onshore electricity network efficiently. Owen Tong discusses some of the trends and upcoming challenges.
The GB energy regulator, Ofgem, set up the OFTO regime as the framework for ownership and operation of the transmission assets that connect offshore wind farms to the onshore network. The first OFTO licence was granted 15 years ago (2009) for the Robin Rigg OFTO, and the market has significantly matured since then.
Ofgem has held nine tender rounds to date, representing £12 billion of investment. Our analysis suggests further investment of at least £16 billion will be needed in the medium term to fund future offshore transmission assets.
Ofgem awards OFTO assets to investors via a competitive tender process, similar to Private Finance Initiative (PFI) assets and other public-private partnerships. Institutional investors have responded with enthusiasm to this new asset class. The OFTO regime has expanded the pool of capital available for offshore transmission projects and is widely viewed as having been successful – achieving a low (but sustainable) cost of capital. OFTO investors can expect to receive a stable long-term equity return in the single digits.
Twenty-eight OFTO licences have been awarded to date, to nine different parties, as of 2024. New investors continue to enter the market, demonstrating the regime’s enduring ability to attract international capital.
The UK's offshore renewables sector is growing in size and complexity. Government’s ambition is for 55GW of installed offshore wind capacity by 2030, a three-fold on today's levels. To deliver that growth, incentivise investment, and maintain a sustainable cost of capital, the approach to delivering and operating offshore transmission assets will have to evolve.
Current transmission assets are point-to-point connections, with siloed project planning, and are developed and financed during construction by the offshore wind developer. Other OFTO models will need to be explored that are more suited to a market that's growing in complexity and is expected to triple in size over the next decade. The sector is just beginning on this journey, for example Ofgem’s recent approval of two Offshore Hybrid Asset pilot projects (November 2024).
For more insight and guidance, get in touch with Owen Tong.
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