It’s time for CATOs

Steve Gummer and Shyann Sheehy explore Competitively Appointed Transmission Owners (CATOs) and consider their benefits and drawbacks.

This article explores the concept of Competitively Appointed Transmission Owners (‘CATOs’), their regulatory framework and role in enhancing onshore transmission infrastructure through competition. It will also look into the potential benefits, risks, associated developments and draw comparisons with the use of offshore transmission owners.

With already high levels of demand on the grid and undoubtedly more electricity demand to arise due to the electrification of heat and transport in an attempt to achieve net zero by 2050, CATOs will play a crucial role in alleviating grid pressures. This strengthening grid infrastructure should also occur from CATOs role in actively encouraging investment with private sector investment. RIIO-1 took the first steps to introduce competition and gave the responsibility for planning, constructing and maintaining the onshore electricity transmission network on the regional transmission owners (a ‘TO’) but each of the three main TOs currently hold a monopoly over the transmission infrastructure within their territory, a issue CATOs will attempt to combat.

What is a CATO?

In order to combat the issues listed above, Ofgem has proposed the introduction of a new regulatory regime. Originally the intention was for this regime to run its first tenders in 2018, but this was pushed to allow sufficient time for the introduction of the relevant primary legislation for an onshore competition regime.

Selected CATO, appointed by Ofgem following a competitive tender process, would manage a tranche of onshore transmission infrastructure under a ‘CATO Licence’. Their obligations would include financing, developing, constructing, operating and eventually decommissioning the relevant transmission infrastructure. This work would be similar to that of an onshore TO, but it shifts obligations instead to the delivery and management of the assets rather than reinforcing or operating a wider network area.

In RIIO-T1, it was envisaged three key categories of CATOs will be utilised:

1. Highly integrated CATOs – this will reinforce existing transmission systems, adding to the existing alternating current network.
2. Point-to-point CATOs – these will be bulk reinforcements of existing systems using an AC or high voltage direct current to the existing AC network.
3. Radical connection CATO – here an AC or high voltage direct current addition will be made to the existing AC network to extend the existing transmission system.

Comparison to offshore transmission owners

The Energy Act 2023 allows for competition in onshore networks using the process for appointing offshore transmission owners (‘OFTOs’), this regime is similar to CATOs in that they both:

• Are established by Ofgem to ensure development relating to transmission assets and include a competitive bidding process.
• Provide for private companies to bid for the right to operate and own transmission infrastructure.
• Require long-term responsibility from the owner in terms of operating and maintaining the relevant transmission asset.
• Aim to facilitate an integration of renewable energy into the grid to enable power to be efficiently transmitted.

Despite these similarities, CATOs and OFTOs have a number of fundamental differences as outlined below:

• Primary Context – CATOs are aimed at onshore transmission projects whereas OFTOs are for offshore wind farm transmission infrastructure.
• Asset Development – CATOs will be involved from the development stage of the relevant project whereas OFTOs acquire already-built assets from wind farm developers.
• Scope – CATOs are primarily for onshore projects (such as upgrades or new interconnections) whereas OFTOs are for offshore wind farm projects.
• Procurement Process – In a CATO bidding will be for the development and future onshore assets whereas OFTO procurements will be to purchase and operate existing assets.

Benefits

Ofgem’s Integrated Transmission Planning and Regulation project demonstrated that further competitive tendering could drive value for consumers enabling cost savings and innovation. Additionally, the Department for Energy Security & Net Zero’s Transmission Acceleration Action Plan explains that introducing competition to onshore electricity networks could save consumers up to £1bn by 2050 and enable a greater level of inward investment into networks in Great Britain.

Allowing new operators to bid for this work will reduce the current monopoly on transmission assets and allow for more innovation and technological advancements in the market. This will ideally reduce lifecycle costs and incentivise bidders to create new operational solutions to gain competitive advantages. CATOS will also help to support ambitions for more renewable energy integration whilst alleviating current pressures on the grid.

Risks

Understanding the potential instability and risks arising from the CATOs own default or financial default is crucial in ensuring smooth transmission in the network. Ofgem has worked to address these issues by proposing that measures such as clear change mechanisms, allocations of risk, financial conditions and stipulations of funder requirements are established at the outset of any tender process.

With any type of procurement issues may arise during the tender process such as underbidding, lack of sufficient appropriate bidders, and there may be the risk of a monopoly if one entity consistently wins bids. Issues may also arise during the transitional period with any incumbent operators which will need to be appropriately mitigated and managed.

Additionally, as with any long-term contractual arrangements, the complexity of the project may cause issues where the original intended scope changes without appropriate change mechanisms or mitigations in place. These risks are amplified by the fact that the potential to disrupt the grid if a replacement is required if the CATO defaults or exits the market is extreme.

Early Competition model

The Early Competition model was developed by NESO and is a competition to determine the best solution to the needs current facing the network. It will be run before any detailed design of the preferred solution has been undertaken with the aim of encourage cost efficiencies and driving innovation in design/delivery. By awarding the contract earlier in the lifecycle the successful bidder will have an active role in the design process and any solution delivery.

The process will be governed by the (currently draft) Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2024, if made and approved by the Secretary of State. These regulations set out the process for granting an onshore electricity transmission licence, including how this tender process will be administered by Ofgem and NESO. Ofgem will identify, initially, one project to be subject to the process have and identified a pipeline of relevant projects which will be assessed against the criteria in the Electricity (Criteria for Relevant Electricity Projects) (Transmission) Regulations 2024.  A summary of the end-to-end process provided by ESO is as follows:

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Ofgem has also released a consultation on the intended commercial framework relating to CATOs in October 2024, including the post-award security obligations, preliminary works payments, post preliminary works cost assessment, payment mechanism and performance incentives, additional works obligations and revenue period.

Proposed Modifications to the Codes

Several modifications have been proposed to the codes to enable the introduction of CATOs as summarised below.

Steve Gummer is a Partner and Shyann Sheehy is a Paralegal at Sharpe Pritchard LLP.

This video is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email This email address is being protected from spambots. You need JavaScript enabled to view it.