Competition comes to onshore transmission: inside Ofgem's draft CATO licence and guidance

25 agosto 2026

On 19 August 2026, Ofgem launched a non-statutory consultation on draft licence conditions for Competitively Appointed Transmission Owners ("CATOs") and accompanying guidance (see link here). The proposed CATO-specific Section F of the electricity transmission licence sets out the regulatory framework that will govern CATOs across the full project lifecycle. The consultation closes on 16 October 2026.

The draft licence gives effect to Ofgem's previous decisions on the CATO commercial model (October 2024 and July 2025). While it draws heavily on the existing Offshore Transmission Owner ("OFTO") regime, it has been adapted for onshore assets and introduces several novel features outlined below.

Background to the CATO regime

The CATO regime introduces an "Early Competition" model for developing onshore transmission assets, a competitive tender process through which a single entity is appointed to design, finance, build and operate specific onshore electricity transmission assets. Currently onshore works are implemented by licensed transmission network owners. The CATO model is intended to drive innovation and cost efficiency while creating new investment opportunities in onshore networks.

The regime is intended to apply to network projects which are identified by the National Energy System Operator ("NESO") as being new, separable, capable within reasonable certainty of addressing a network need, and having a positive consumer benefit compared to a non-competitive approach (demonstrated by a cost benefit analysis). Ofgem will decide whether a project should be tendered, and NESO will then be responsible for running the tender process in accordance with the process set out in The Electricity (Early-Model Competitive Tenders for Onshore Transmission Licences) Regulations 2025.

Unlike the current regime for OFTOs, the CATO regime will require successful bidders to design and build the onshore transmission assets.

Key licence features

1.	Obligation to construct:	The CATO will be required to develop the system in accordance with the approved design. The CATO must post and maintain security throughout the preliminary development and construction phase.
2.	Revenue stream:	The CATO receives a 35-year Tender Revenue Stream ("TRS") from NESO only once NESO certifies the system is available to operate. The Bid TRS set out at bid submission is the starting point for this calculation. It will be updated through the PPWCA process and at Financial Close, and will be subject to the adjustments set out below. A bidder may be entitled to receive preliminary milestone payments during the preliminary development phase, where NESO considers them to be required to remove barriers to entry. This will be netted off the operational-phase TRS. Certain categories of costs will be recoverable on a pass-through basis in the operational phase (licence fees, network fees, decommissioning obligations, etc.).
3.	Post-Preliminary Works Cost Adjustment (PPWCA):	The PPWCA will allow the TRS to be re-calculated to reflect indexation, permissible design-led cost changes and additional works during the preliminary development works phase. The adjustment will be subject to a 40% cap (although certain high impact events will be excluded from the cap).
4.	Financial Close adjustments:	A debt funding competition revenue adjustment applied at Financial Close will reconcile the assumed financing terms in the licensee's bid against terms obtained via a debt funding competition. There will also be a market rate revenue adjustment to reflect actual market rates discovered at Financial Close.
5.	Incentives:	Availability incentive – the licence sets out an availability incentive mechanism, similar to the existing structure used for OFTOs. The target availability is normally 98%, unless the specific tender sets a different figure. Other financial incentives: Ofgem states that it may introduce other incentives based on the updated RIIO framework.
6.	Agreed refinancing:	Ofgem acknowledges that a 35-year debt tenor may not be available, and so the Agreed Refinancing mechanism allows periodic refinancing with full pass-through of gains or losses. CATOs must submit proposals to Ofgem before commencing any refinancing debt funding competition.
7.	End of revenue stream:	At year 30, Ofgem will assess (i) whether the assets are needed beyond the 35-year term; and (ii) whether the assets are in an acceptable condition. Outcomes include decommissioning (with a residual value payment made to the CATO), extension of revenue term to 40 years, and retendering the assets. As part of assessing asset health, the CATO must commission an independent asset health review. If asset condition is unsatisfactory, Ofgem may direct remedial works and/or determine an asset health withholding from the residual value payment.
8.	CATO of Last Resort:	Ofgem may appoint a CATO of Last Resort where a licence is revoked or a competitive tender fails, ensuring continuity of transmission delivery.

Timeline

Ofgem currently anticipates the following timetable for the first CATO projects:

Date	Event
16 October 2026	Non-statutory consultation closes
Late 2026	NESO to request the first project(s) for competitive tender, following the transitional Centralised Strategic Network Plan 2 (tCSNP2) Refresh
Early 2027	Ofgem to publish a further update following consultation responses, followed by a statutory consultation reflecting feedback
2027	First CATO onshore competition tender expected to launch
TBC	First CATO licence award

Implications for market participants

The draft CATO licence and guidance represent a material step forward in the onshore transmission competition regime, moving it into the implementation phase after a decade of policy development.

While the alignment of aspects of the CATO regime with the existing OFTO model should improve familiarity to participants already participating in offshore transmission projects, the new CATO regime represents a fundamentally different delivery profile which requires its own risk and reward assessment by developers and their funders.

Please do not hesitate to contact us if you would like to discuss the proposed CATO model.

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Key contacts

Dr Silke Goldberg

Partner, London and Israel Group

Sam Cundall

Partner, London

Sarah Pollock

Partner, Head of Energy Sector, London

Paul Butcher

Director of Public Policy, London

Disclaimer

The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.