In the eleventh of a series of real asset investment case studies, Matteo Quatraro, Director and Head of Portfolio and Ben Rider, Associate Director, at Gravis Capital Management, look at potential investments in Offshore Transmission Assets in the UK.

In 2000, the UK commissioned its very first offshore wind farm. Since then, the deployment of the technology has scaled substantially, and the UK is now placed second in the world for installed offshore wind (China is number one). The industry has enhanced the UK’s energy security, reduced the nation’s carbon emissions and continues to create jobs.

A fundamental feature of these projects is how they connect to the national grid. This is achieved by transmission infrastructure which connects an offshore substation platform, via subsea and underground cabling, to an onshore substation, which subsequently exports power into the electricity network.

An Offshore Transmission Owner (“OFTO”) is responsible for owning, operating, and maintaining this transmission infrastructure.

An illustration is presented below:

The OFTO regime was established in 2009 by Ofgem under UK competition law. Its purpose is to separate ownership of offshore wind farms from their transmission infrastructure, thereby promoting competition among investors seeking to own and operate transmission assets. This, in turn, is intended to improve efficiency and reduce costs for consumers.

Under the regime, offshore wind farm owners are required to transfer the transmission assets to an OFTO within approximately 18 months of first export, through a competitive, regulated tender process managed by Ofgem.

The competitive OFTO process begins with an Enhanced Pre-Qualification (“EPQ”) phase, where potential bidders must demonstrate their financial stability, relevant experience in acquiring and managing similar infrastructure, and their capacity to efficiently operate the asset for up to 25 years.

Entities that pass the EPQ stage are then invited by Ofgem to take part in the Invitation to Tender (“ITT”) phase. During this stage, the entity provides more detailed information on the acquisition and management of the transmission assets, including evidence of financial backing from lenders.

At the conclusion of the process, the most competitive bidder is appointed as the Preferred Bidder (“PB”) and proceeds to negotiate final terms before completing the acquisition of the transmission assets and receiving an OFTO license.

Gravis views these assets as attractive because they provide a long-term revenue stream (up to 25 years, depending on the asset) that is linked to inflation and paid by the System Operator. This offers a strong counterparty, and the revenue is independent of the wind farm’s performance, relying solely on the availability of the transmission assets.

The sector presents several challenges that should be considered when deciding whether to participate in OFTO tenders. These include a limited number of established market participants with high barriers to entry, the increasing complexity of transmission technology as assets grow larger and are located further offshore, and substantial due diligence and adviser costs associated with the bidding process, which place funds at risk.

Gravis has successfully lead and passed the EPQ milestone for Tender Round 10 (TR10) and TR11. We have recently qualified for TR13 in collaboration with our consortium partner, Sosteneo Infrastructure Partners. Together, we achieved the high benchmark required to participate and will bid for projects later this year.

The transmission assets available for acquisition as part of TR13, have a combined value of approximately £3.5bn, and include both High-Voltage Direct Current (HVDC) and High-Voltage Alternating Current (HVAC) projects. The three assets available for tender are listed below:

• East Anglia 3
• Dogger Bank C
• Inch Cape

The next stage of the process for each asset will include an Invitation to Tender phase. This involves the comprehensive due diligence of assets, preparation of the financing package, and bid arrangement and submission. Prospective parties submit the Tender Revenue Stream (“TRS”) they will require in order to ensure assets are appropriately managed and project financing is repaid. To be successful, a bidder must submit a credible management plan alongside the lowest revenue requirement.

Despite the challenges in the sector, we feel it is a good fit for Gravis’ long term investment approach. OFTOs provide revenues that are government backed and inflation linked, and the sector aligns well with our existing infrastructure expertise.

The prospects for the offshore wind sector in the UK are very positive. Forecasts over the coming years point to a further 10.4GW of capacity going through final completion and commissioning, with an additional 8.4GW to start construction. Consequently, Ofgem is preparing future tender rounds, with TR14 to be launched before the end of 2026 and the potential for more tenders up to a total value of £30bn by 2030.

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