Getting utilities right can often be a costly business in any development, particularly when it comes to putting in place new utilities infrastructure. Equally, with the Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem publishing a policy paper outlining how the electricity network will be transformed to cope with decarbonisation and rising demand on 4 August 2022, it is becoming an increasingly competitive and important consideration within the development process.
Understanding the key stakeholders, how they operate and how competition is managed in the utilities sector will offer an advantage to developers looking to install new utilities connections quickly and with minimal added risk and cost.
The following is an overview of the process of implementing new utilities connections.
Competition in connections
Prior to the early 90s, the utilities sector was government-owned and known by regional ‘boards’.
To introduce competition to the market, the ‘boards’ were replaced with regional electricity companies known as Distribution Network Operators (DNOs) to distribute electricity in specific geographical locations. There are 14 regional electric companies within the UK.
Distribution Network Operators
The role of the Distribution Network Operators (DNOs) is to design, construct and maintain networks within their geographical region. DNOs are responsible for capacity and network studies within their regions also. When considering a new site, an application must be made to the DNO for a point of connection. This is simply the point in the network where you can connect so that your new development can be facilitated. Points of connections can be either at low voltage (LV), high voltage (HV) or extra high voltage (EHV). These applications are normally made online and can be free of charge or cost. DNOs have strict SLAs to adhere to for providing point of connection requests. If they fail, they can be fined by Ofgem and you, as the end user, may be entitled to compensation.
As load has now become sparse, more and more applications are being received by the DNO for point of connection requests. At times, there may be more than one individual that has applied for a load for the same geographical region. Your point of connection offer that comes back will be known as ‘interactive’. This means that you are put in a queue in the order in which the applications were received, and you will be unable to accept your offer until a certain date.
If an individual higher up in the queue accepts their offer, the offer you would have received will be null and void and you will be given a new offer for a different point of connection, which could have caveats regarding network reinforcement and lead-in times for connections. It is imperative to accept your point of connection offer whilst it is in date to ensure you have the capacity reserved. Capacity is usually only held for 12 months from receipt of order; this is to stop capacity being reserved and the network becoming unbalanced. The DNO may send ‘slow development/ progress’ letters as a warning or may – after 12 months – terminate your connection agreement and refund any monies, minus an admin charge, if they do not have designs submitted for approval or see progress being made on site.
Independent Connections Provider (ICP)
Competition in the connections market now allows you the choice when selecting who provides some elements of your connection process. These can either be provided by the regional Network Operators or Independent Connection Providers (ICPs).
An ICP is an accredited company that can build electricity networks to agreed standards and quality required for them to be owned by either a DNO such as Electricity Northwest/ Western Power Distribution or an Independent Distribution Network Operator (IDNO).
ICPs must hold a valid National Electricity Registration Scheme Accreditation (NERS) and be accredited by Lloyds to carry out connection works. ICPs can only tender for contestable works. This can be the design and installation of an electricity network. All non-contestable works must be carried out by the regional DNO and cannot be contracted to an ICP.
An ICP will carry out an initial design and create a fee proposal based on the information provided by a client to install a new electric/ gas/ water network. An independent connection provider tends to provide phased payment options covering project milestones. This is typically as follows:
|10% deposit payment on receipt of order
|30% on completion of firm design
|50% on installation of substation
|10% on energisation of *** plot number
This aids project cashflow and ensures you are not outlaying huge sums of cash at the outset.
Independent Distribution Network Operators (IDNOs) and Independent Gas Transporters (IGT)
In 2004, Independent Distribution Network Operators (IDNOs) and Independent Gas Transporters (IGTs) were introduced to the marketplace. An IDNO and IGT own and operate a network for its lifetime. IDNOs and IGTs are allowed to operate anywhere within the UK, unlike the regional ‘boards’. There are currently 13 IDNOs and 9 IGTs registered within the UK. These independent networks must adhere to the same standards as the DNOs and are all subject to the same p62 regulations, which focus on response times in emergencies, maintenance, and the adoption of pipes, cables and switchgear.
An IDNO/ IGT offers a degree of flexibility on network design, which allows the ICP to provide more competitive solutions to the client. It’s a commonly held view that DNOs may ‘over-engineer’ networks which is at the client’s cost or insist on specific equipment when there are other material suppliers out there who produce perfectly acceptable kit.
IDNOs are solely focused on adoption of connections and do everything they can to ensure that the ICP can work efficiently and negate any time-delays.
Working on an IDNO network means that once it’s been energised then all permissions for the ICP to do further works are under the control of the Electricity Operations team, enabling access to do connections and network builds in a straightforward and timely manner.
An IDNO assesses their income stream from any new network and, where appropriate, will provide investment to the ICP or to the end customer, this could be a small amount or several hundred thousand pounds depending on the technical scope, number of connections and voltage associated with a new network. This income stream is known as ‘asset value’ and this asset value can either be:
- paid directly to the ICP who can use this to offset against the construction cost of the project; or
- paid directly to the end user/ client as the client can then enter into separate discussions with ICPs on how they wish the tendering process to be conducted.
This tendering process can either be a full design, build and adopt, or just simply a design and build. Asset value is paid once the network is engineered and the IDNO takes legal ownership of the network. Asset value is usually paid as a lump sum on initial energisation and then phased throughout the construction phase of the network.
Ofgem, as the industry regulator, requires IDNOs to have a ring-fencing arrangement through ‘keep well agreements’ which lock up sufficient cash in escrow for the business to operate for six months should it run into financial difficulty, and this would allow sufficient time for a new owner to purchase the assets and take over the running of the network. To date, no IDNOs have gone into receivership.
Choosing a provider
With available capacity and materials being key to getting any developments underway, it is vital to ensure that these are secured up front and that the development is de-risked. The connections industry is going through major changes in line with the new homes standard and gas being phased out on all new developments by 2025. As such, clients must consider what their deciding factor is in relation to ‘getting connected’, be it price, design flexibility, lead-in or start on site times. There is no one size fits all.
Developers can collaborate with their consultants to ensure that they are getting best value and the most suitable engineering solution for their site, that ensures that the brief is captured, and that the requirements of the developer are fully understood. Third-party legal are also a potential risk and can cause unforeseen delays. As such, developers must be fully briefed of any third-party issues, likely timescales and costs, so that these can be factored into the overall development budget.