1. European Offshore Wind 2009 A description and analysis of the new competitive regime for the provision of grid connections for UK offshore wind farms

2. Overview Financing Offshore Transmission – an emerging issue in Europe The UK Offshore Transmission Regime –a description –an offshore wind developer’s perspective –an OFTO bidder’s perspective Who will the new offshore transmission owners be? How does the regime impact on offshore grid design? –a grid system planner’s perspective

3. Financing Offshore Transmission – an emerging issue in Europe

4. Growth in Capex Requirements for Offshore Transmission The pace of offshore wind growth is picking up Even conservative estimates envisage 20- 40GW by 2020 To date rule of thumb of €500m capex on offshore transmission for every 1000MW of offshore wind capacity (15-20% total capex) Farther offshore wind farms will require even greater transmission capex So minimum of €10bn in Europe by 2020 UK government /Ofgem estimating UK offshore transmission market may be worth €15bn-€20bn on its own Greater interconnection will increase capex requirements, and benefits even more so Delivering Offshore Wind Power in Europe, Offshore Wind Industry Group, EWEA, 2007

5. New Challenges for Transmission Companies Onshore grids largely built by state owned monopolies Many grids now in private hands Private finance required to fund offshore transmission expansion Investment requirement offshore may be greater than existing asset base (cf UK) Investors may not be willing to fund or at least to commit to funding expansion Particularly in current “credit crunch” climate Hence different models required …. UK first of these …

6. The new UK offshore transmission regime

7. Description By summer 2010 it will be prohibited in the UK to transmit electricity offshore at 132kV or above without an offshore transmission licence Ofgem will be the licence awarding entity Currently no offshore transmission licences exist Licences will be awarded following a competitive tender on a project-by-project basis The criteria for licence award will be 60% finance based and 40% non-finance Existing and under construction offshore transmission assets will be transferred to new offshore transmission owners (OFTOs) – TRANSITIONAL REGIME New offshore transmission assets will be procured, constructed and owned by new OFTOs – ENDURING REGIME

8. Scope of OFTO Offshore Transmission Owner (OFTO)Onshore TO Generator Offshore Platform Connection to onshore network 132 kV Cable 33 kV Inter Array Cables Onshore Substation

9. Industry Relationships OFTO GBSO O&M Contract Ofgem Offshore Generator Crown Estate Lease Sale and Purchase Agreement Transmission Licence Bid revenue stream Transmission Use of System Charges Insurance Financing

10. Transitional Regime Projects ProjectDeveloperSize (MW)Exp. Completion 1.Barrow Dong Energy / Centrica 90Operating 2.Robin RiggE.ON180Jul 09 3.Gunfleet Sands I & IIDong Energy1722009 4.ThanetVattenfall300* 5.Greater GabbardSSE / RWE Innogy504Mar 11 6.OrmondeVattenfall150Nov 10 7.Walney I & IIDong Energy360* 8.Sheringham ShoalStatoil Hydro / Statkraft315Jun 10 ProjectDeveloperSize (MW) 9.London ArrayE.ON / Dong / Masdar1000 10.LincsCentrica250 11.Gwynt y MorRWE Innogy750 12.Docking ShoalCentrica500 13.Race BankCentrica500 Projects likely to qualify for First Transitional Tender (£1.15bn) Projects that may qualify for Final Transitional Tender (up to £1.5bn) 1 2 3 4 5 6 7 9 10 11 12 13 8

11. An offshore wind developer’s perspective … Good bits –Offshore wind developers don’t need to finance offshore transmission connection –Rate of return requirements will be less than for offshore wind farm – offshore wind developers will benefit (customer taking the risk of default of the offshore wind farm) –Energy production metered offshore Bad bits –No significant compensation if offshore transmission is unavailable –No significant compensation if offshore transmission is late Clarification needed in some areas –When to seek appointment of the OFTO? –How many OFTOs for a large multi-site project?

12. An OFTO bidder perspective Good bits –Credit risk minimal, 20-yr fixed revenue stream subject RPI indexation –Availability incentive/penalty (capped at 10% of annual revenue) –O&M and insurance costs, generally small and can be estimated and fixed –Most significant repair costs should be insured or under manufacturer’s warranties –Some cost items are pass-through Bad bits –A long time coming (regime first consulted on in 2004) –Complex, costly and lengthy tendering process Clarification needed in some areas –Lack of clarity as to when committed financing required –Indeterminate timing gap between licence award and takeover of asset –Requirement for compliance with utilities contract regulation (OJEU) –Level playing field with respect to generator-affiliated OFTO bidders

13. Who will the new offshore transmission owners be?

14. Who might the new OFTOs be? Transitional –Offshore wind generators (for their own projects) –Existing onshore TOs –New entrants backed by infrastructure/pension funds Enduring –Offshore wind generators (subject to unbundling) –Existing onshore TOs –New entrants - to the extent cut-their-teeth on the transitional rounds –New entrants - with offshore construction management experience

15. UK regime impact on offshore grid design

16. Offshore Wind Farm Connections or offshore grids?

17. A grid system planner’s perspective UK regulatory enduring regime still being developed Some positives –Information to be published by TSO –Co-ordination by controlling body (landlord) –Co-operation between developers Some way to go though … –Connection application process requires individual treatment of offshore wind farms –Offshore wind developers incentivised to be selfish in some circumstances –Interconnection has to be merchant Some of these issues will be addressed through forthcoming UK consultation processes What can EU do to help or hinder? –Cross-border planning standards –Clear and certain mechanism for recovering costs of interconnection (including return on investment)

18. Conclusions Financing offshore transmission is a growing challenge New models for funding being tried UK model has acceptable risk/return profile for low return capital Some issues still need to be resolved in the tender process but otherwise attractive for investors Some issues less than ideal for offshore wind developers and enduring regime still being devised A competitive process expected with new entrants in the transmission ownership space EU has a role to play in facilitating cross-border connections leading to an optimal offshore grid design

19. Contact details: Email:chris.veal@transmissioncapital.com Tel:07768 036613 Web:www.transmissioncapital.com