Longread: take a deep dive into offshore cable risks

Our expanding electricity network – and its expanding pool of owners – has raised new questions about how to allocate and manage risk relating to the cables on which the system depends. New Power took a deep dive into cable risks in an article first published in the June 2020 issue of New Power Report. We republish it with both the  Western Link and the BritNed links outof service 

As it happens, the issue has arisen just as the industry as a whole has moved away from the idea of large central power stations, to a mixed approach in which a significant proportion of power generation is distributed – ie produced very close to where it is used, or even on-site. That is because in practice, while half of the generation industry is moving closer to its demand customers, the other half is moving much further away.

Wind farms far offshore, and generation from neighbouring markets imported over interconnectors, both rely on generating plants hundreds of kilometres away. While large assets onshore are part of a mesh network, distant assets have less opportunity to switch to alternate export routes. And while onshore assets that may fail (such as a cable joint) are geographically small and simple to access, the points of failure for these far connections are likely to be buried, in deep water, or often inaccessible during unfavourable ‘weather windows’.

Currently, offshore wind farm operators are arguing that the existing investment regime for connections is no longer fit for purpose. Because the UK regime stops companies from investing “ahead of need” for regulated assets like cables – to protect consumers from paying for unneeded assets – each wind farm has its own connections to the onshore network. As Tom Glover of RWE Renewables argued in New Power, investing in larger capacity connections that can carry power from huge new wind farms – or a group of wind farms in an offshore network – would be more efficient. That would reduce the number of cables and therefore the likelihood of for example being damaged by shipping. But in the event a cable was damaged, an outage would affect more power capacity.

 

Who takes the risk?

Overall, with more assets far away, the physical risk of a supply interruption because of a cable issue is increasing. But meanwhile, the impact an interruption in the cable availability has on its owner has become more significant. That is because the ownership profile of offshore wind connections and interconnectors is very different to the network companies of former times.

Transmission network operators like National Grid, or France’s RTE, own and operate a network across a wide geographical area – often a whole country. They have wide flexibility in managing outages (planned or unplanned) and a variety of revenue and expenditure lines that can reduce the impact of poor performance in one area in the short term.

Companies owning and operating connections increasingly look very different from this. They are often single purpose vehicles, but in all cases they have one job: transmit power from one end of the cable to the other and deliver it to the onshore network.

Who are the owners of these new connection assets? In the case of offshore connections, Ofgem has now spent a decade building its OFTO (offshore transmission owner) model. This strips the activity right back to the single link and a single purpose as above, within a model that strictly limits risk to the owners and provides a steady revenue stream for two decades. Investor enthusiasm for the model has grown and consortia including banks and investment funds have competed hard to acquire the links. That cuts the cost for consumers – but at the expense of leaving them vulnerable to risk. Consumers pay if the link is available and will continue to do so for the licence term, even if the power is not needed or the wind farm is out of action. And it is consumers who bear the risk of issues affecting link availability that Ofgem decides are out of the operator’s control.

 it is consumers who bear the risk of issues affecting link availability that Ofgem decides are out of the operator’s control

Interconnector owners are somewhat different, not least because GB has more than one licence framework.

Interconnectors can be built on a fully ‘merchant’ basis, in which the owners on all the risk – and retain all the returns. Alternatively – and most common in the UK – owners can choose to pursue a ‘cap and floor’ regime set in place by Ofgem in which consumers guarantee a minimum level of return (and benefit from upside). The aim is both to reduce the cost of financing and to widen the pool of potential investors, but it means consumers bear some of the risk.

So the cost of cable outages is now of direct interest to consumers and investors, and visible accordingly.

 

What have we learned? 

At the moment we are in a discovery phase, where OFTO operators are finding out exactly what type of failures Ofgem will accept as ‘income adjusting events’ – which means the owner is credited with the availability it would have achieved without the event. Legal disputes are also establishing case law on when liability changes hands and how warranties are used by the current owner, the previous owner (in the case of OFTOs, most were built by and initially owned by their associated wind farm operator, and later auctioned by Ofgem) and the original equipment manufacturers.

This growing body of knowledge will reveal the risks that will be borne as the network continues to expand. It will help determine the risk and reward for companies building and owning the new, bigger links that will connect us to larger wind farms and offer exchange with neighbouring markets – and provide important incentives for manufacturers to sharpen up their processes and develop new products that avoid the most common defects in existing ones.

Finally the experience provides important data for future network investors. Ofgem’s vision is to increasingly to open sections of the network to competition in ownership. At the moment, for Ofgem, that refers only to new, high-value and easily separable sections of the network – new lines or major upgrades that may be onshore or connect two parts of the onshore network (such as a ‘bootstrap’ link between Essex and Kent). But the National Infrastructure Commission goes further, seeing no reason why most new assets should not be competitively awarded.

 

What is the experience so far?

It would be expected that there are faults in the early stages of operation, following by a period of few faults until ageing effects begin to raise  faults again (this is sometimes referred to as the ‘bathtub’ curve).That is evident in outage data from interconnectors.

In 2017/18 the availability of the IFA1 interconnector between England and France, now approaching 35 years in operation, was 93.86% (with six unplanned outages). The BritNed connection with the Netherlands, in operation since 2012, recorded 98.22% availability in the year. The Nemo link with Belgium, which started up at the end 0f 2018, recorded two unplanned outages in February 2019, two months after startup.

 

What about the OFTOs?

The large number of OFTOs mean that they are the source of most data (onshore transmission outages are also recorded in NGESO’s annual Transmission Performance Report). OFTOs receive bonus payments if availability is above a 98% availability target, and are subject to penalty charges if they do not meet this level. It is Ofgem who decides whether service interruptions are due to action elsewhere, in which case the operator income is adjusted, or the fault of the operator.

Most links have met their availability targets, although the early years see more outages. For detailed examples of Ofgem’s response see below.

 

Placing the blame

OFTOs for Gwynt y Mor and Thanet claimed for outages caused by cable faults dating back to the manufacturing process. But the claims were rejected by Ofgem. The regulator dismissed Gwynt y Mor OFTO’s argument that this was a retrospective change in regulation and one that would mean future OFTO owners would price in more risk, raising costs. Ofgem said that the OFTO should have pursued legal claims against the company that built the wind farm or the connection, rather than use the ‘income adjusting event’ route.

Allocating liability prompted legal action in the High Court in which the OFTO - a consortium comprising Balfour Beatty Investments and Equitix  - pursued a claim against the vendors, a joint venture led by Innogy, Stadtwerke München, Siemens and the UK Green Investment Bank. The latter consortium owns the associated wind farm and initially owned the link, before it was transferred after a sale process overseen by Ofgem. The OFTO took ownership on 17 February 2015.

Two (of four) subsea export cables failed, in March and September 2015, respectively. After repair and on examination, severe corrosion was found in each cable, dating back months or years and likely caused by a manufacturing defect. Reinstatement cost £15 million.

The OFTO sought reinstatement costs from the defendants in respect of an indemnity clause in the sale and purchase agreement (SPA). But the defendants claimed that the indemnity only covered the costs of reinstating the assets if they were damaged in between the signing and completion of the SPA. The judge agreed, among other points saying that the unobservable corrosion could result in the defendants being liable for failures occurring many years in the future, which would be commercially unsound.

In a discussion on the document, Rebecca Williams, Alexander Creswick and Rachael Davidson of lawyers Watson Farley & Williams said OFTOs take on assets knowing there is inherent risk with subsea assets, but assuming they were manufactured and installed properly.

Meanwhile, developers who are selling the assets provide warranties and indemnities  on the understanding that the risk passes to the OFTO with the assets. A change or unexpected interpretation of the contract could be “costly and detrimental to either party”.

Ofgem’s  decision, “Does not sit well with the intention behind the OFTO regime, which is designed to protect purchasers from risks/liabilities accrued prior to transfer.

The WFW authors say this decision, “Does not sit well with the intention behind the OFTO regime, which is designed to protect purchasers from risks/liabilities accrued prior to transfer.” Where liabilities will usually be split in time between the vendor and OFTO, this decision makes it fundamentally important to properly and accurately define the temporal scope of risk allocation provisions.

They say, OFTOs can ill afford liability for unforeseen reinstatement costs.  “The risk allocation in OFTO SPAs is designed with that in mind and to reflect that the OFTO’s fixed income stream is not usually suited to large remedial costs (especially where Ofgem will likely categorise those costs as foreseeable and therefore not an Income Adjusting Event).”

 

Compare the market: telecoms cables

Undersea power cables are at the start of potentially explosive growth. But undersea telecoms cables are a mature industry, with up to a million miles of cable in operation worldwide. Telecoms cables are described as “the indispensable infrastructure of the 21st century” but also seen as a weak point in the telecoms and data industry, and concern over that risk reaches the highest level of government.

Rishi Sunak MP – now chancellor of the exchequer – described sabotage of undersea cable infrastructure as “an existential threat to the UK”

In a 2017 report (Undersea Cables: indispensable, insecure) for think tank Policy Exchange Rishi Sunak MP – now chancellor of the exchequer – described sabotage of undersea cable infrastructure as “an existential threat to the UK”. Interruptions could “damage commerce and disrupt government-to-government communications, potentially leading to economic turmoil and civil disorder.”

  • Power cables don’t represent exactly the same risks, but they clearly overlap. Sunak said that for telecoms:
  • The location of almost every undersea cable in the world is publicly available, making them uniquely vulnerable to hostile actors. 
  • Their vulnerability is accentuated by international choke points where large amounts of cable capacity are funnelled into concentrated geographic areas both at sea and on land. 
  • Accidental damage and cable outages hinder the ability of governments to communicate effectively with each other and cause economic distress. 
  • At sea, the barriers to entry for successful attacks on cable infrastructure are low.  
  • On land, UK cables are highly concentrated in a small number of landing sites. These sites are not secure. 

The report also warns of gaps in legal coverage. It notes that undersea cables are largely owned and installed by private communications companies. As a result they are neglected by national governments.  International law (largely the United Nations Convention on the Law of the Sea, UNCLOS) is deficient in ensuring the security of undersea cables. “Current international law is more suited to the peripheral role cables played in the 1970s and 1980s, rather than to the indispensable status they hold today,” the report said.

Power cables are largely within territorial, rather than international, waters at present. But the use of HVDC opens the industry up to longer international cables, and proposals for offshore networks that link large offshore energy assets to more than one national onshore transmission system raise the question of international jurisdiction. Plans not currently progressing for an interconnector between the UK and Iceland are a case in point, as are proposals for ‘energy islands’ hosting wind turbines in the North Sea with connections to both European and UK networks.

How ought we to think about maintaining our offshore power cable infrastructure as it expands? Global Marine provides  service for telecoms cables. It provides maintenance services to around 120 authorities around the world, who form maintenance zones or “clubs”. It has vessels on standby across the globe to react within hours to a callout on a faulty or broken cable and for inspection or repair of submerged cables thousands of metres underwater, it uses a remotely operated vehicles. Clearly these types of models will have to be investigated by the power sector.

 

Four decisions in favour of OFTOs

The regulator has assessed unplanned events from earlier years. Among its decisions in favour of granting OFTOs an uplift for the outage:

Humber Gateway OFTO should receive uplifts in its availability record because periods when the export cable was out of action were beyond the OFTO’s control. It had an outage from 6 February to 22 March 2018. The export cable failed due to damage in the onshore section in part of the cable that is inside a duct made of polypropylene pipe.  The investigation found that the fault was due to a relatively small diameter indentation made to the exterior of the cable and that the damage must have occurred pre installation. Ofgem notes that the manufacturer took  ten days before agreeing to visit the site to investigate the earthing issue and its switchgear did not identify an earthing issue that had arisen. “We also note that the Licensee took all reasonable steps to press the switchgear manufacturer to take action and provide assistance on this issue as quickly as possible,” Ofgem said.

ABB had the $15 million contract for the design and supply of 28km of 132kV three-core AC submarine cables for the wind farm. The OFTO found a separate sheathing fault while it was investigating the 2018 failure that could in time lead to a further cable failure. It had to find a work plan that could manage a lack of space between the bonding leads for the two cables. It found the fault was caused by a faulty cable joint, in an area that was prone to flooding. A clip designed to prevent water ingress had not been fitted correctly during construction, and the water penetration was so severe that they had to strip down the joint and remake it. The faulty joint was located in a joint pit buried under a metre of soil and the repair meant the cable was out of action for three days in July 2019.

The regulator also agreed to credit the Thanet OFTO for cable problems that reduced export from the wind farm between 23 February and 7 July 2015. Investigations found two reasons for problems with the Siemens/Prysmian cables: a failureto earth the copper tubing surrounding the fibre optic cables at the offshore substation and a defect in manufacturing that meant a plastic sheath around fibre optic cables (which form part of the cable) is not uniformly semiconducting due to a defect in the manufacturing process.

A failure at Walney 2 in 2013, in one phase of the onshore export cable, was the result of mechanical damage that had occurred before the licensee was appointed. The damage affected the cable ducting and sheathing, which resulted in erosion of the cable insulation, leading to a fault during operation. Ofgem came to the same conclusion about a 2015 cable failure at Robin Rigg.

 

 

 

 

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