Summary and Background
176.The Government is putting in place a framework intended to encourage the development of generation of electricity from offshore renewable energy sources, for example offshore generating stations driven by wind. Offshore generating stations tend to consist of a device (for example, wind turbines placed on towers driven into the seabed) which powers a generator to convert the (wind) energy into electricity. These offshore generating stations will need to connect to the main onshore electricity network (transmission and distribution) in order for the electricity generated to be supplied to end-users, including domestic consumers.
177.Electricity transmission generally constitutes the movement of electricity around a national grid system using high voltage networks, whilst electricity distribution generally constitutes the delivery of electricity on local low voltage networks to end users.
178.The Energy Act 2004 provides powers for the Secretary of State to make changes to the codes, agreements and licences – which regulate onshore electricity transmission and distribution – for the purposes of regulating offshore electricity transmission and distribution.
	Since the Energy Act 2004 was passed, the Government has been working with the Gas and Electricity Markets Authority (“the Authority”) to establish an offshore transmission licensing regime to regulate:
	the conveyance of electricity along high voltage lines offshore (defined in the 2004 Act as those with a nominal voltage of 132kV or more), and
	associated plant and equipment which connect offshore generating stations to the onshore electricity network.
	the high voltage lines and associated plant and equipment together make up the “transmission assets”.
179.The overall objective of the regulatory regime for these transmission assets is to enable large amounts of electricity from renewable sources generated offshore to connect to the onshore electricity network in a safe, economic and efficient manner, whilst maintaining the integrity of the electricity system as a whole.
180.To date, the transmission assets for offshore generating stations have been built and operated by generator-developers.
181.The new offshore transmission regime will:
	require the transmission assets to be owned and operated by a separate licensed entity (not the generator).
	extend National Grid’s role as the onshore transmission system operator offshore.
	introduce a competitive tender process for determining to whom the Authority will grant a transmission licence to build, maintain and finance the transmission assets for a project. The Authority will make regulations under section 6C of the Electricity Act 1989 to enable it to run competitive tender processes and determine the successful bidders. The regulations will need to be approved by the Secretary of State. The Government anticipates that the Authority will consult on the way in which these provisions will be implemented, before the regulations under section 6C are made.
182.The new offshore transmission regime will come into force on commencement of section 89 (which makes changes to the Electricity Act 1989 so that certain activities offshore require a licence) and section 180 (which adds a new definition of “high voltage line” in the Electricity Act 1989) of the Energy Act 2004. From that date, those participating in offshore transmission will require a licence.
183.In addition to the powers contained in the Energy Act 2004 for offshore transmission, two further areas have been identified where powers are necessary to ensure the effective operation of the new licensing regime.
184.The Authority’s new function of carrying out tender exercises will cause it to incur additional costs beyond those incurred in exercising its existing functions. The Act contains new provisions relating to cost recovery. These will ensure that the Authority is able to use alternative mechanisms to cover its costs in running the tender process. These will include mechanisms to ensure commitment to the tender process from different parties.
185.The combination of the offshore generating station and the transmission assets are described in these explanatory notes as the “offshore project”. Some of the earliest projects for which a tender exercise for an offshore transmission licence will be required are offshore projects where the generator-developer will either:
	have funded and already built the transmission assets; or
	have funded and be part way through building the transmission assets; or
	be ready to construct the assets (in that it has all necessary funding in place to do so),
at the time the offshore transmission regime comes into force.
186.These offshore projects will require the transfer of property, rights and liabilities (which might include the transmission assets) from the existing owner (e.g. the generator-developer) to the successful bidder (as a result of the tender exercise for an offshore transmission licence) in order for that successful bidder to be able to perform its licence and statutory functions. For offshore projects where the transmission assets will have already been built when the new regime comes into force, and where a transfer to the successful bidder has not taken place by that time, a generator-developer will be “stranded” since it will not be authorised to convey its electricity lawfully to the onshore network. Although in the majority of cases it is anticipated that the transfer will be agreed via commercial negotiations between the parties, the Government considers that a mechanism is needed to cover the possibility of such negotiations failing. This will enable the Government to ensure that property is transferred in a fair, timely and effective way, and avoid generator-developers being “stranded”. The Act enables the Authority to make a property scheme in those cases.
187.There is an amendment to the definition of “relevant offshore line”, which is set out in section 180(2) of the Energy Act 2004 (which has not yet been commenced), and will be inserted into section 64 of the Electricity Act 1989. The amendment to this definition through the Act clarifies that any line built for the purpose of transmitting electricity from an offshore generating station and which is wholly or partly in internal waters, the territorial sea or an area designated under section 1(7) of the Continental Shelf Act 1964 (which currently includes the Renewable Energy Zone) is a “relevant offshore line”, even if only a small proportion of the line is situated offshore. The definition in section 180(2) of the Energy Act 2004 is being repealed.