CATO regime: overview from an offshore perspective

Ofgem’s July 2025 decision proposes the draft commercial framework for onshore transmission tenders. The intent is to drive innovation and investment whilst making room for private capital in traditionally regulated spaces. CATO differs from the incumbent TO model by creating a new class of regulated transmission licensee, governed by nine specific obligations and contractual risk-sharing mechanisms. Key features include the following:

• Competitive tenders for major reinforcements: Instead of automatic awards to incumbent TOs, large onshore schemes will be subject to a tender process. Ofgem describes this as a balancing act between consumer protection and bidder interest, offering private investors access to regulated returns — if they accept greater commercial risk.

• Upfront security requirements: Winning bidders must post security equivalent to 10 per cent of forecast construction costs (capped at £50 million for projects up to £1 billion). This collateral, via escrow, bond, or parent guarantee, remains in place through construction, tapering down as funds are spent. For larger projects, this still represents substantial capital that must be reserved.
• Pre-construction funding (PCF): Through milestone-based payments, bidders can recover up to 50 per cent of pre-construction costs during the design and consenting phase. This aligns early CATO cashflows with the TO model and helps mitigate risks in the development period. However, the cap and milestones require careful planning, as payments are only released when specific targets are met.
• Post-Preliminary Works Cost Assessment (PPWCA): Once preliminary works are complete, Ofgem will assess actual costs and adjust the bid price, accordingly, basically cost overrun sharing. Therefore, scope changes are capped, but inflation is indexed. A cap above 40 per cent will apply to cost increases, with carve-outs for force majeure and change-of-law events. This hybrid model forces bidders to balance realism and risk discipline in their pricing.
• Revenue and performance model: A Tender Revenue Stream (TRS) model, similar to OFTO, will apply, indexed to CPI-H. Projects are expected to meet a 98 per cent availability target, with bonuses or penalties applied at ±2.5 per cent TRS per 1 per cent deviation. TRS only begins post-commissioning, so delays directly affect revenue. Notably, early asset sell-downs are not subject to equity gain-share, giving investors full access to upside if delivery is successful.
• Incentives for timely delivery: There are no separate penalties for delay beyond TRS deferral. Carrying debt without income is considered incentive enough. Investors should factor in the cost of delays very carefully, as every month of slippage adds financing expense without tariff compensation.
• Revenue term and refinancing flexibility: CATO projects have a 35-year revenue period (with 40-year asset life and 5/40 residual value). This longer tenor allows for tariff smoothing and more time to realise IRR targets. However, it also exceeds standard debt tenors. Ofgem allows an “agreed refinancing” mid-life, which could be built into financial plans. Whilst any benefit from this refinancing flows to consumers, it helps keep the project financeable across its full lifecycle.
• Obligations for additional works: CATOs will retain ownership post-commissioning and must support future upgrades. Self-financing is expected for works up to 20 per cent of the original CapEx. For works between 20 per cent and 50 per cent, either self-financing or partial pass-through applies. Beyond 50 per cent, bespoke arrangements are allowed. This is more expansive than the OFTO regime and reflects the expectation of significant onshore network growth.
• Next steps and engagement: Ofgem’s decision is now subject to licence drafting and open consultation. Investors and bidders should monitor NESO’s market-engagement activities and remain alert to updates on service levels, milestone definitions, and financing terms.

The CATO framework introduces a set of commercial levers that aim to balance long-term investment certainty with strong governance and disciplined delivery. It offers the following:

• Inflation-linked returns without mandated gain-share
• Support during early development through PCF milestones
• A defined cost-sharing model with partial protection from unforeseeable risks
• Flexibility to refinance during the revenue period

For investors and bidders, the CATO regime offers a new avenue for regulated, inflation-linked infrastructure investment, but not without complexity. The regime rewards careful planning, realistic bidding, and strong delivery capacity.

Actions to consider:

• Model upfront capital requirements, including the 10 per cent security deposit
• Leverage early milestone payments to manage pre-construction cash flow
• Prepare for a mid-life refinancing event as part of the debt strategy
• Factor in additional works obligations and stress-test upgrade scenarios
• Stay engaged with NESO and Ofgem consultations during the licence finalisation phase

With regulatory clarity now emerging and the policy environment favouring decarbonisation and investment, the CATO regime could become a valuable new path for green capital, if governance, financing, and risk-sharing are handled with care. More importantly it may open the doors for offshore renewables projects, as barriers for onshore connection are ameliorated and grid availability improves.