Podcast: Project Commitment Fee – Guest Series with Alex Ikonic, Grid Engineer at Ørsted

00:00:36 – Kyle Murchie

Hello and welcome to another Connectology® podcast from Roadnight Taylor. Today we’re going to be talking about the Project Commitment Fee, and we’ll get into that in a bit of time. But first, I’m Kyle Murchie and I’m joined by my colleague, Catherine Cleary, and you might notice we’ve got a special guest. Alex, do you want to introduce yourself?

00:00:55– Alex Ikonic

Hi everyone, my name is Alex Ikonic, I’m a grid engineer at Ørsted, so I work primarily in our onshore side of the business, and I’ve been involved in the CUSC work group for the Project Commitment Fee.

00:01:06 – Kyle Murchie

Perfect.

00:01:07 – Catherine Cleary

Thanks very much for coming, Alex.

00:01:09 – Alex Ikonic

Thanks for having me.

00:01:10 – Kyle Murchie

Now, it’s a really important time and lots going on if we haven’t noticed.

00:01:16 – Catherine Cleary

It’s a standard opening line now.

00:01:17 – Kyle Murchie

Yes, a standard opening line lots going on but, as we’re recording, this is the day of the vote in the working group on the Project Commitment Fee. But I think, before we get into that and into where we think it’s going and our kind of views, it would be good to revisit what is the project commitment fee and where did it start from, because I think a lot of listeners might have joined this at the time of the financial instrument and that kind of terminology. So, yeah, it would be good to just have a bit of a chat about what the financial instrument was and how that’s changed into the Project Commitment Fee. So, Catherine, if you want to?

00:01:55 – Catherine Cleary

Yeah, so the financial instrument was a kind of an initial sort of idea that NESO had flagged at the end of last year, back in 2024, which was quite a punchy idea of kind of asking projects to provide a bond of up to £20,000 per megawatt so you know, really pretty punchy fee on acceptance of a Gate 2 offer. So, the idea was you know, actually we wanted to make sure that projects accepting Gate 2 offers were really serious and there was a lot of industry feedback about that, you know really robust feedback, I think to say you know that those kind of figures would be extremely challenging, you know, risk of making otherwise viable projects unviable and so NESO went away and they’ve come up with a revised proposal, renamed, so we’re calling it the Project Commitment Fee. They raised a CUSC Mod, so CMP448, which is the work group that Alex and I have sat on, and that changed the proposal in two ways. So, it reduced the value, so it said, rather than £20,000 per megawatt, which is a pretty astronomical sum, we went down to £2,500 per megawatt, but it would ramp up over time. So, every six months it would go up to a maximum of 10,000, so 2,500, 5,000, 7,500, 10,000.

The second really fundamental change was they said we’re not going to introduce it yet. So, we are basically wanting to raise a Code Mod to introduce this kind of idea and concept into the CUSC; but it would only be triggered in the event that the queue, the kind of post Gate 2 queue kind of, becomes unhealthy. So, we still end up with sort of stalled or terminated projects that are missing their milestones, they came up with the idea of this kind of trigger threshold. It’s quite complicated in some ways, so the trigger threshold gets breached if…

00:03:38 – Alex Ikonic

More than six gigawatts of projects are terminated. So, as a result of either missing their M1 or just being terminated before they submit their M1.

00:03:49 – Catherine Cleary

Yeah, so before planning submission.

00:03:52 – Kyle Murchie

Yeah, and where did that 6,000 number come from?

00:03:54 – Catherine Cleary

It came from NESO.

00:03:55 – Alex Ikonic

Yes, it’s based on a 5% value of the additional capacity that’s needed to be built for Clean Power 2030.

00:04:05 –  Catherine Cleary

Yeah, so I guess kind of 5% of the future queue, but I don’t think that the 5% wasn’t necessarily based on a, you know, I don’t think there has been a huge amount of kind of numerical analysis to get to that figure. Yeah, but that was the figure, and interestingly it’s this 6,000 megawatts, and it doesn’t matter whether that’s 6,000 megawatts of terminated projects being maybe three large offshore wind farms or whether it’s you know, 60 much, much smaller projects – it doesn’t matter the quantum of projects. So, I think that was something that was identified; actually, there’s quite a lot of uncertainty about how and why this trigger threshold might be met.

00:04:44 – Kyle Murchie

Is that technology agnostic?

00:04:45 – Catherine Cleary

It is. So, it wouldn’t matter if all of the terminations happened in a particular technology sector. The remaining projects in the queue would all be subject to the PCF, the remaining generation projects in the queue. That’s another kind of key point to add – this doesn’t apply to demand projects. So, demand projects are exempted from the PCF under NESO’s proposal. That was something they did consult on, wasn’t it? So, the kind of work group consultation that some people might have seen, probably about a month and a half ago, did ask whether people felt that demand should be included or not. A few kind of debates there, I think.

00:05:25 – Alex Ikonic

Yeah. I think generally it was felt that because demand projects are subject to final sums, that’s quite a hefty sum to have to secure so that this additional financial commitment isn’t particularly as relevant to them.

00:05:36 – Kyle Murchie

I suppose it would require another change to another section of the CUSC as well, whereas I’m assuming this is making section 15 changes?

00:05:45 – Catherine Cleary

Yeah, so I think there was a question about whether it could be drafted. There is obviously a separate Code Modification still in process at the moment to try and bring demand users under CUSC section 15. Just to be clear at the moment, even if that happened, those demand users wouldn’t be subject to the PCF. So, I think that’s kind of probably worth pulling out.

00:06:10 – Kyle Murchie

So, with this new fee, would you lose it if you terminate your project?

00:05:45 – Alex Ikonic

Yes, is the short answer. So, once it’s been triggered, so everyone will have to sort of secure against it, similar to securities and liabilities and how they work today, and if you terminate your project or if you reduce your capacity, you will have to pay a portion of that fee.

00:06:18 – Kyle Murchie

Okay, but that’s not in addition to your securities?

00:06:36 – Alex Ikonic

It is.

00:06:38 – Kyle Murchie

Right.

00:06:38 – Catherine Cleary

So yeah, so this is the proposal from NESO in its current form is that the PCF works on top of your additional securities and liabilities. You secure 100% of it and if you terminate your project, you lose all of that. If you were to tech reduce your project to 50%, you’d lose 50% of it, sort of pro-rata. There have been a few alternatives raised in the work group, so there are currently two alternatives which look at changing some of those things.

So one of the alternatives looks at reducing the value of the PCF significantly with an aim to try and make sure that actually projects, especially projects that are going to spend maybe longer in this period before they submit their planning, so that might be kind of projects like DCO consenting projects that might be in the Gate 2 queue, like solar, but will take a while to do all of their environmental studies and submit into planning, things like offshore wind as well, which traditionally spends a lot longer in that kind of pre-planning submission timeframe.

So, one of those WACMs looked at reducing the value of the fee very significantly. The second WACM, which is WACM 2, also suggests changes to what would happen if you self-terminated. So, the idea being to give a bit of an incentive to say well, actually, projects that are doing the right thing, identifying they’re no longer viable and exiting the queue promptly should be kind of incentivised to do that, rather than just you know there being no difference to sitting in the queue and waiting until you’re kicked out for missing your milestone. So that suggested, is it a 50% discount, I think Alex?

00:08:10 – Alex Ikonic

Yeah, 50% or 75% – might have to check that.

00:08:15 – Catherine Cleary

Might have to check that one, but a significant discount for self-termination.

00:08:20 – Kyle Murchie

Quickly, I just want to take it back to the actual trigger itself. So, we talked about the 6,000 megawatts. But how does that, if that’s triggered, what’s the mechanism once that number is reached, what happens? Is it an automatic situation where that’s it is now applied, do you get a, you know a variation to your offer? What, how does that come through?

00:09:22 – Alex Ikonic

So not necessarily it’s that it’s an immediate trigger. And so, every six months NESO will monitor the queue, and they’ll publish kind of how close are we to this trigger threshold. And once it’s reached, they will also publish that to kind of notify the industry and they will then sort of take it to Ofgem, so Ofgem actually have the final say. So NESO will make a recommendation about whether they think it should be triggered or not, and then Ofgem will kind of have the final say so, potentially override that and if they don’t deem it necessary. In terms of timelines …

00:09:29 – Catherine Cleary

Yes, I think it’s six months. So, it’s basically effectively, you would get a, there would be a within that six months, NESO would take their recommendation to Ofgem, Ofgem would then make their decision and then all parties get a notice period of three months I believe, before the PCF is required, so you could leave the queue at that stage without having to pay your PCF. You would obviously still have to, potentially you know you would lose your cancellation charges if you had had cancellation charges.

So it’s quite, you know, there’s been a lot of thought that’s gone into this but it is quite a complex process and I suppose one of the concerns which has come out a lot in the work group consultations for a lot of industry members I think fed this back as well is that we’re sort of, you know, there’s a lot of detail that has to be drilled out right now to go into the CUSC for a kind of future implementation. So, this trigger, I think it’s probably reasonable to say we’re probably not expecting that trigger threshold to be met initially, you know, for the first couple of years potentially, because what we’re going to have a Gate 2  queue comprised of, you know, probably things like battery projects which have already submitted planning, they’ve already met this M1 milestone, so the PCF won’t apply to them because the PCF only applies up to that M1 milestone.

Then you’re going to have, you know, maybe some solar projects, some offshore wind projects, for example, which have longer time frames. There are more likely to be projects like that in the queue that haven’t submitted planning yet but they’re going to have their milestones effectively getting reset by their Gate 2 offer, so their milestones aren’t going to kick in straight away. So, for us to get to six gigawatts of terminated projects might take us a while and I suppose in some ways that’s good news for parties worried about this because the PCF isn’t going to apply for a while, and in other ways it sort of just adds to the uncertainty. We’re kind of trying to lock everything down now for a bit of a future problem.

00:11:14 – Kyle Murchie

I suppose, is the challenge with all the changes you know we’re talking earlier, if you were doing an experiment you’d change one thing at a time, of course, we all recognise that would take our whole careers to solve all the kind of challenges. But all these introductions do obviously have unintended consequences on one another. So just thinking towards, let’s say, two or three years down the line, so really, we’re getting into SSCP territory, really, isn’t it? It’s not really on the CP30 projects. Is that fair to say, or could it still be?

00:11:51 – Alex Ikonic

Well, it could definitely hit some projects in the 2035 pot of CP30, but potentially more so for the SSCP projects when they come in.

00:12:02 – Kyle Murchie

Yeah, so it just depends on what gets triggered and probably, as you say, more looking at that phase two.

00:12:08 – Catherine Cleary

Yeah, I think, Alex, we discussed the kind of concept of a CUSC Modification, the process in itself. You know, effectively you have to identify a defect and then you’re trying to resolve that defect, and perhaps one of the tricky things about this Mod is that it’s a future potential defect. And I think that is making it hard to get industry to agree on what the right solution is, because there are some people who think this will never occur. There are some people who think, well, this is already a huge problem, you know. So, I think there’s quite a kind of split amongst opinion, even amongst generators, as to whether this is the right solution now, or whether actually we don’t have enough information to know what the right solution is. You know, and maybe we should you know, should we be looking to implement this once the defect, or if the defect actually becomes apparent?

00:12:58 – Kyle Murchie

Before we get into views and what the vote is likely to look like, which I think, for most of the viewers are probably expecting what we’re going to say already. What would be the recommendation, you know, as a developer, what are you and the business thinking, are you building this into longer term models as a potential risk, and is it a case of well, it’s not triggered yet, it’s not implemented yet. We’ll deal with it near the time. What’s that kind of risk appetite from your perspective?

00:13:32 – Alex Ikonic

I think it definitely will add to the risk for projects and especially for those kind of early stage, you know, greenfield sites that we look at as well, and so I think, although we aren’t necessarily incorporating it right now, I think, if it were to get approved, that is something we definitely have to consider and, yes, we’ll potentially change some assumptions with the way that we look at projects as well, and so, yeah, I think it’s definitely on the table.

00:13:54 – Kyle Murchie

Yeah.

00:13:55 – Catherine Cleary

And I guess is that something that you’d have to consider if the CUSC Mods approved, you know, regardless of whether because you just don’t know.

00:14:01 – Alex Ikonic

It could be triggered.

00:13:30 – Catherine Cleary

Yeah, yeah, and it could or could not be approved. Sorry, the triggering decision could or not be approved by Ofgem.

00:14:03 – Alex Ikonic

Yeah exactly.

00:14:09 – Catherine Cleary

So quite a lot of, in some ways, you’re basically saying even if the problem doesn’t materialise, actually developers are going to have to kind of cost that risk.

00:14:17 – Alex Ikonic

Will have to keep it in mind.

00:14:19 – Catherine Cleary

Yeah, exactly.

00:14:20 – Kyle Murchie

And would it change your strategy to M1, and actually, trying to you know your approach to achieving it, obviously it’s a challenging question because obviously the whole Connection Reform process is obviously having a big impact on how developers would move forwards with projects that are live now. But also, if you’re looking at developing anything from scratch, people wouldn’t do what we maybe did five or ten years ago, two years ago, but yeah, has that thought been at the forefront of your kind of mind at the moment?

00:14:55 – Alex Ikonic

I think it’s something that we have flagged as a concern as part of the PCF, in that it could actually be an incentive for people to submit early planning applications that are maybe not the best quality and because they’ll be, you know sort of weighing up of risks, of whether you know submitting a planning application is actually cheaper than having to secure the PCF, and you know there might be developers that kind of do take that approach and then sort of act to overwhelm planning departments, which just sort of moves the problem elsewhere.

00:15:28 – Kyle Murchie

Yeah, it’s actually on that. So, if you get to M1 which for everybody listening, M1 is the submission of planning, is there then a recheck to say, oh yeah, you submitted planning, but you never actually got planning, okay, the rest of CP30 and strategic alignment and gate to readiness would pick that up as part of that process. But is there a part of this Mod, does that?

00:15:53 – Catherine Cleary

I think that’s the issue is that you, or one of one of an issue, you could submit that you know slightly sort of slightly fast-tracked planning application and it could be quite rubbish, and you could not get consent and actually you’ve still discharged your requirement to submit planning. So, the PCF has fallen away and been refunded by that point. There’s no kind of comeback there, so I think it is definitely a risk in terms of incentivising the wrong behaviours, potentially from generators. And it could be quite sector specific because, as we say, the Gate 2 queue is going to be a real mix for, you know, things like battery storage technologies, there won’t be projects in the Gate 2 queue who haven’t yet submitted planning, so they kind of, you know, don’t need to worry about this, whereas, as I said, there’ll be other technologies where there’ll be a significant number of projects that haven’t submitted planning.

I think one of the other unintended consequences I wanted to put out was maybe in the offshore sector, and I appreciate, Alex, I think you obviously you look a lot at the onshore grid world for Ørsted, but you have that kind of offshore view too. So for offshore projects, is there a risk that you know who might be looking at those later phase two connection dates kind of 2035, is there a risk that they suddenly think, well, I don’t want a Gate 2 offer anymore, because I’m going to have to secure all of this and I could just sit in Gate 1, maybe with capacity reserved for me anyway?

00:17:09 – Alex Ikonic

Yep, there’s definitely potentially a risk. For offshore it’s actually very hard to fast track your planning applications. You’re actually quite tightly bound by the number of years’ worth of surveys that you need to make. And just having that exposure for you know, potentially up to five years, which is the milestone for submitting your planning, I think that’s quite a hefty cost, risk of cost to bear. So, I think there is a risk that developers will just wait to engage with the grid process and in the worst case that could actually delay build-out times and actually put Clean Power 2030 at risk from that as well.

00:17:46 – Kyle Murchie

And are there any other unintended consequences, Alex, that you’ve got kind of at the forefront of your mind that you think others should be aware of, if they were this were to go forward as planned?

00:18:02 – Alex Ikonic

I think, yeah, just sort of stepping back and just considering the fact that this defect hasn’t actually yet materialised, I think we just need to be very careful about setting that bar too low for the PCF to be triggered too easily, because I think the risk, I think, perhaps hasn’t been considered in as much detail in the work groups just from the urgent nature of it, which has meant these compressed timescales, and I think there are definitely significant risks to investor confidence and the additional costs that developers could bake into their projects as well, which ultimately could lead to higher CFD prices, or risk costs and be passed on to consumers as well, and so I think we just need to be very careful about looking at both sides of this proposal.

00:18:49 – Kyle Murchie

Yeah, it’s really interesting because quite often numbers start flowing through from one angle saying, well, these are the number that could be potentially saved by, you know, not having the queue blocked up and facilitating that, you know, transition to a green economy, but, as you said, on the counter to that, it might then actually end up increasing or sorry, sort of decreasing investor confidence, increasing costs as a risk and then resulting in bills ultimately increasing. So, yeah, I think a really important one, and particularly given that we are today at the vote and obviously for those listening, the vote will have happened, but it’d be good to understand, yeah, what’s your view and what are you planning to vote this afternoon?

00:19:39 – Alex Ikonic

I think we will be voting for the baseline. I think we just feel that Connections Reform itself has to be able to take effect and we don’t yet know whether this defect really will materialise. And I think from our perspective, there’s nothing stopping NESO from monitoring for this defect when connections are promised, brought in, and if it does materialise, we could bring this Mod back in a similar fashion, also under an urgent timeline, and introduce it then, if there actually is a sort of proven defect that needs to be addressed.

00:20:09 – Kyle Murchie

And, just to be clear, what is the baseline?

00:20:11 – Alex Ikonic

The baseline is no PCF.

 00:20:13 – Catherine Cleary

So, the CUSC as it is no change, no modification.

00:20:15 – Kyle Murchie

And what are we thinking?

00:20:16 – Catherine Cleary

So, Roadnight Taylor, obviously on behalf of lots of customers, I think, probably share a lot of those concerns. We are also thinking baseline, that potentially for the same reasons, that it doesn’t feel like it’s quite the right time now to bring in this change and that there should hopefully be some significant checks and balances as a part of Gate 2 itself. So, you know, hopefully we need to give Connections Reform a chance to work first and then, if necessary, bring this back.

00:20:41 – Kyle Murchie

And we’ve talked about this, but do we think that all of the generation community are going to have the same sort of view, and why do we think there might be a bit of a kind of mixed view?

00:20:53 – Catherine Cleary

I think there is a mixed view and that’s been clear from some of the kind of alternates, some of the discussions within the work group, and it’s very understandable, right, because it’s actually quite dependent on where people’s portfolios are. You know, to some people this makes lots of sense, you know they’re very happy they’ve met their M1 milestones, they do want to see other projects moved out of the queue, incentivised to move out of the queue as soon as possible and to keep that pace of development moving, which makes a lot of sense. I think there are other people who think, compared to the original financial instrument, this is a better proposal. It is, you know, it’s not kicking in immediately. You know, and I think I guess so, a lot of those people probably support this Mod for that reason that actually they acknowledge that NESO really want to do something to correct the kind of you know, perhaps the wrong decision in the past that then people could accept big transmission offers with no liabilities sometimes. So yeah, I think there is a real mix of views.

00:21:50 – Kyle Murchie

Interesting. Well, we will wrap it up there and thank you much for your time. So, thank you Catherine, thank you Alex, and thank you everyone for listening. We’ll see you in the next one.

00:21:59 – Catherine Cleary

Thanks, Kyle.