Getting utilities right can often be a costly business in any development, particularly when it comes to putting in place new utilities infrastructure.
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.
Distribution Network Operators
The role of the Distribution Network Operators (DNOs) is to design, construct and maintain networks within their geographical region. DNOs are also responsible for capacity and network studies within their regions. 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 chargeable by the DNO. DNOs have strict service-level agreements (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 may then become ‘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 may be given a new offer for a different point of connection.
This may also result in considerable reinforcement costs including excessive delivery timescales. It is imperative to accept your point of connection offer whilst it is in date ensuring you have this capacity reserved. The DNO may send ‘slow development / progress’ letters as a warning or, after a certain period, terminate your connection agreement refunding any monies, minus an admin charge if they do not see progress being made on site.
Competition in connections
Prior to the early 90s, the utilities sector was government owned and known as regional “boards”.
To introduce competition to the market, the “boards” were replaced with regional electricity companies known as DNOs to distribute electricity in specific geographical locations.
In 2004, Independent Distribution Network Operators (IDNOs) and Independent Gas Transporters (IGTs) were introduced to the marketplace.
New Appointments and Variations (NAVs) followed in 2017 when Ofwat implemented a competitive framework and changed the charging arrangement for water, meaning incumbents were no longer allowed to offer asset value.
Competition in the connections market now allows you the freedom of choice when selecting who provides the contestable elements of the works required for your development. The tendering process can either be a full design, build and adopt, or just simply a design and build.
Third party connection providers were introduced to the marketplace to provide the contestable connection(s) for your development. These connection providers are known as Independent Connection Providers (ICPs), Utility Infrastructure Providers (UIPs) and Self Lay Providers (SLPs).
These connection providers are authorised to build utility networks to agreed standards and quality that is required for them to be owned by either the Regional Statutory Company or an Independent Operator.They must be regulated under Lloyds and hold valid NERS, GIRS, WIRS, MURS accreditations in order to act on behalf of the statutory undertaker.
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, Independent Gas Transporters, and New Appointment & Variations
ICPs, UIPs and SLPs operate and maintain networks under licences granted by Ofgem and Ofwat.
These independents have the same duties and responsibilities as the statutory companies and must adhere to the same standards and regulations, such as BSC Modification Proposal P62, focusing on response times in emergencies, maintenance and the adoption of pipes, cables and switchgear.
IDNOs generally offer a degree of flexibility on network design which allows ICPs, UIPs and SLPs to deliver innovative and more competitive network design solutions for the client. It is a commonly held view that the statutory companies may “over-engineer” networks which is usually at the client’s cost. They can also be specific on the procurement of certain equipment, which may be more expensive and have longer lead times, affecting the developers build programme.
IDNOs also have the ability to approve designs quicker as they are solely focused on the adoption of new connections and do everything they can to ensure the ICP can work efficiently, avoiding any costly time-delays.
Unlike the statutory companies that cover geographical areas in the country, these independent operators are not restricted to a geographical region and are authorised to operate anywhere within the UK.
IDNOs, IGTs and NAVs assess the income stream from a new network and where appropriate will provide a financial contribution towards the cost of the construction of the networks. This could be a small amount or several hundred thousand pounds, depending on the technical scope, number of connections and metering type associated with a new network.
This income stream is known as ‘Asset Value’ and can either be:
- paid directly to the installing contractor who can use this to offset against the construction cost of the project; or
- paid directly to the end user/client enabling them to have separate discussions with contractors on how they wish to manage the novated agreement.
Asset value is generally paid once the network is energised with the IDNO/IGT/NAV, taking legal ownership of the network. Depending on whether the supply is a single bulk supply or multiple individual plot connections, the AV can be paid as a lump sum on initial energisation or phased throughout the construction phase of the development.
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. This would allow sufficient time for a new owner to purchase the assets and take over the running of the network. To date, none of these organisations have gone into receivership.
Choosing a provider
The Distribution Network Operators face major challenges ensuring capacity is available, especially on the larger major projects and EV charging. This will add additional stress to their existing infrastructure, highlighting why it needs to be ensured that loads are applied for in an accurate and timely manner. The costs of materials are also increasing, with switchgear and cables prices being at an all-time high. The connections industry is going through major changes, in line with the new homes standard, with gas being phased out on all new developments by 2025. Third party legals are often overlooked, causing problems later on, so carrying out a route proving study beforehand pays dividend in most cases. Gateley Hamer manage this process front end, making sure our clients get the best engineering solution and cost from the ICP or DNO formal offers.