Securing electricity for development projects

A well-known 1980s cartoon character proclaimed, during his transformation into the all-powerful He-Man: "I have the power".

At the time of writing, developers are facing significant delays in securing a point of connection, offer from a Distribution Network Operator (DNO), to reserve power on the grid for a new development site. In a challenging market, a development site that might be sold off with planning permission is more marketable if it benefits from reserved power.

In this context it is important to note that Ofgem empowered alternatives in the market to DNO’s, to help create and promote competition in the connections market. Developers are entitled to appoint independent DNO’s (IDNO) who are licenced by Ofgem and granted the same statutory powers and obligations as incumbent DNO’s. 

The IDNO has authority to operate and maintain specific electricity networks connected to the DNO network. The developer can also separately appoint a suitably Lloyds accredited Independent Connection Provider (ICP) who are permitted to carry out a defined scope of electricity connection works on a development. The ICP will hold appropriate National Electricity Registration Scheme accreditation (NERS) and will be able to work on the IDNO network, sometimes using their statutory undertaker licence when working in highways.

Historically negotiation with a DNO was a "take it or leave it" approach to the DNOs standard terms of engagement; conversely appointment terms of either the IDNO or ICP are treated as a normal commercial negotiation. 

We have set out some key points to note regarding the structure of such electricity connection agreements.

DNO v ICP/IDNO

DNO

DNOs own and operate electricity distribution networks in specific geographical areas. They are the only entities who can grant power to sites by way of a point of connection offer. There are fourteen licenced DNOs in Great Britain, owned by a total of six companies. A DNO is capable of carrying out "all works" required to build, connect to and operate a new electricity network. 

IDNO/ICP

The other option available to developers is to engage an ICP and IDNO.  An ICP is a nationally accredited company that is permitted to build electricity networks to the specification and quality required for them to be adopted by a DNO or IDNO.  An IDNO is an accredited company that, like a DNO, can own, maintain and operate the network once it is complete. 

Contestable and Non-Contestable Works 

Both DNOs and ICPs can carry out the assessment, design and installation works required before connecting to the electricity grid.  These works are called "contestable works".

Only DNOs can carry out the "non-contestable works" which comprise carrying out the final connection to the distribution network and any associated diversions and reinforcement of its existing assets.

As a matter of contract, the developer can still instruct an ICP to deliver "all works" (contestable and non-contestable) but the ICP must appoint the DNO to carry out the non-contestable works element of the works. 

Once connected to the grid, an electricity network can be adopted, owned and operated by either a DNO or an IDNO.

Which option?

There are various time and cost reasons as to why a developer might prefer the ICP/IDNO model to the traditional DNO only model.

ICPs and IDNOs claim that together they can provide a complete end-to-end managed service, sometimes getting connections achieved quicker and easier than a DNO only model. 

ICPs and IDNOs can be related companies, which may enable them to offer more attractive and flexible commercial terms to those available when appointing a DNO.

Asset Values

The other commercial factor in selecting the ICP/IDNO option is the availability of capital installation cost discount (known as the "asset value"), which is not available with the DNO option. To incentivise developers to appoint it to operate the network, the IDNO agrees to pay "asset value" payments to the developer thereby reducing the capital cost of designing and building the electricity network.  

Asset values are typically pre-determined fixed amounts for each residential dwelling connected to the distribution system or in respect of a commercial premises based on electricity usage at the site over an agreed period. 

Asset values fixed at the outset of the development can be adjusted as the project progresses where certain project "key characteristics" change during the carrying out of the development. If a key characteristic (e.g. a change in connection location or loads) has changed, the adjustments to the asset values are then calculated using a pre-agreed variation methodology.

The electricity connection agreement with the ICP/IDNO

Under the electricity connection agreement:

(1) the ICP agrees to carry out the related electricity works in accordance with the contractual standard of care; and 

(2) the IDNO agrees to adopt the works completed to the adoptable standard together with making commitments in respect of reserved capacity for the benefit of the site and paying the asset value payments when they fall due.  

Disaggregating the construction and adoption

Where the ICP is an affiliated company of the IDNO, the developer will enter into a tripartite agreement with the ICP (to carry out the required works) and its affiliated company IDNO (to operate the network) at the outset. 

If the developer disaggregates the construction and adoption parts of the process, this means that the IDNO is appointed at the outset of the project and appointment sets out the criteria for the later appointment of the ICP. This is typically the case where IDNO is not affiliated with the ICP, and the developer can select from a wider pool of ICPs. 

This disaggregated route may prove more effective for the developer in the early stages when securing power from the DNO is often best started. The IDNO can assist in these early stages and the appointment of the ICP for construction works can take place at a later stage.

The decision as to whether to disaggregate the construction and adoption will be led by assessing the best value option for the development and programme considerations. 

Final comments

The electricity agreement is a crucial agreement for any development project.  It will often involve a time-pressured process, so it is important that a developer recognises when such an agreement is needed and seeks advice as soon as possible.  

As it is a complex agreement which can be drafted in various ways, we would always recommend instructing legal counsel to advise on the electricity agreement to ensure the key provisions (such as the works obligations, the terms relating to the asset value and the ultimate reservation of capacity) are sufficient and workable.