Navigating asset valuations amid grid reform uncertainty

What are the TM04+ grid reforms, and what do they mean for projects:

Introduction

In April 2025 Ofgem announced the decision to approve and implement the TMO4+ reform package which outlines a new methodology for the electricity connection process. In the summary decision published by Ofgem, it concluded that:

1. “Waiting times in electricity connections queue are too long”
2. “Uncertain pace of connections is also risking the confidence of existing investors”

Under the reformed methodology the government can essentially prioritise or deprioritise projects based on the need and readiness level of the projects. The aim being to streamline the grid connection process, removing what had historically been a flawed system that allowed speculative projects to fill up the grid queue. Pressure regarding the approach of 2030 Net Zero targets has provided the impetus to enact reforms. However, the uncertainty created by these reforms has created its own problems for developers and investors alike.

Gate 2 to whole queue (G2TWQ) assessment

The first major aspect of these grid reforms is the G2TWQ Assessment. This is a one-off exercise, to reform the current grid queue, reshuffling projects to bring the most developed projects to the front of the queue and remove those projects which are unlikely to be ready for connection. Developers can obtain Gate 1 or Gate 2 connections, with Gate 1 providing an initial, non-firm grid connection date, while Gate 2 is a more stringent hurdle requiring projects to demonstrate progression through key development milestones, with potential for removal or acceleration of sites. Full definitions of Gate 1 and Gate 2 grid offer, from NESO, are set out below:

• “Gate 2 applies to projects that meet the new requirements for readiness and strategic alignment. These projects can secure a confirmed connection date, connection point and queue position.”
• “Gate 1 applies to projects that do not meet the Gate 2 criteria. These projects will receive a Gate 1 offer or have the option to agree to terminate their connection request. Gate 1 projects will not be assigned a confirmed connection date but may progress through future windows if readiness is demonstrated.”

Eligibility criteria for G2TWQ

During the G2TWQ, all projects will receive either a Gate 1 offer or a Gate 2 offer, depending on two key factors:

• Whether they meet specific criteria pertaining to land and / or planning. Key criteria for Gate 2 include securing land rights for a suitably large site; or having planning submitted and validated at a sufficiently large site (even if land isn’t yet fully secured).
• Strategic alignment of projects with the mandated Clean Power 30 (“CP30”) capacity for each region and technology will be critical in determining Gate 1 or Gate 2 offer. The below table provides an assessment of what renewable generation is required to achieve the UK government’s 2030 Net Zero targets. This capacity is further split across distribution and transmission zones and the grid connection constraints in each zone will impact the development risk for projects. Sites that align with NESO’s capacity requirements for 2030 will receive a Gate 2 offer pre-2030.

[There is a further capacity requirement to 2035, especially in offshore and onshore wind, with sites falling within this category receiving Gate 2 offers from 2031 – 2035.]

Exemptions for projects

Given the level of oversupply in the grid queue, failure to meet either of these requirements is likely to result in a Gate 1 offer, with subsequent connection potentially after 2035. There are a number of exceptions for projects which have achieved key development milestones, or that have sufficiently early grid connection dates. Some of the exceptions which apply to the G2TWQ assessment are listed below:

• Protection clause 1: projects contracted to connect by end of 2026 – [Current grid connection date will be honoured.]
  • Applies to projects having a contracted connection date of 31st December 2026 or earlier.
  • Projects having met both Queue Management Milestone M2 and Queue Management Milestone M7
• Protection clause 2a: projects which are significantly progressed – [Guaranteed a Gate 2 offer, but current date not guaranteed.]
  • This clause applies to any existing agreement where the user can evidence one of the following: obtained planning consent, holding CfD, holding a capacity market contract.
  • Projects which meet Clause 2a criteria and also have grid connection dates in 2027 will be eligible to have their current grid connection dates honoured.

The situation surrounding the G2TWQ is such that, without one of the above exemptions securing a Gate 2 grid offer, many projects are likely to receive Gate 1 grid connection offers, and significantly delayed grid connection dates. As we discuss below, this could result in significant loss of value for many developers.

Following on from the G2TWQ, NESO will hold Gate 2 application windows twice a year, where projects have the ability to demonstrate protection under one of the above exemptions, or otherwise demonstrate sufficient progression to receive a Gate 2 grid offer.

How will these reforms impact the grid queue, and developmental project valuations:

These reforms aim to address long-standing inefficiencies in the connections queue, particularly by removing so-called “zombie projects” and prioritising those aligned with national strategic goals and CP30 targets. Ultimately, whilst the reforms resolve a long-standing and fundamental flaw with the grid connection system, their implementation, particularly alongside the recent REMA reforms, has created further uncertainty within the UK energy market, leading to opportunities and some significant risks for developers of renewable energy sites. In our experience, the uncertainty around grid connections has significant impact on asset valuation. We are seeing premiums in the market for assets which have protected status and are guaranteed to receive Gate 2 offers. Meanwhile, given the uncertainty around grid connection, investors appear less willing to take on development risk relating to projects which have unprotected grid status.

Some of the implications of the new grid connection methodology are discussed below:

Premium on advanced projects: projects with firm, near-term grid connection dates under Gate 2 are likely to command higher valuations due to increased deliverability, certainty over timelines, and reduced exposure to development risk. The value of these projects is naturally enhanced by the limited number of projects which presently sit in this position. The new connection methodology outlines “Queue Management Milestones” which projects will have to achieve in order to retain their Gate 2 connection, ensuring that only mature projects are able to stay in the Gate 2 queue. Our valuation methodology for Gate 2 projects will factor in the milestones which have been achieved and the readiness of projects to complete the remaining milestones.

Gate 1 downgrade risk: sites reprioritised to Gate 1 category will likely face severe downward valuation pressure, as increased uncertainty, and the greater length of time to grid connection timing makes them less attractive to investors. This is a particular concern given the new government’s impetus to achieve 2030 Net Zero targets, limiting the support for the deployment of renewables that do not support this goal. Projects with Gate 1 connections can shift to Gate 2 connection if they are able to meet the eligibility criteria in the next application window. When valuing projects with Gate 1 connections, we would evaluate the readiness of projects to fulfil the eligibility criteria for Gate 2.

New development opportunities: the reform is expected to create new headroom by clearing speculative projects from the queue—creating the opportunity for well-developed sites to quickly move forward in the grid connection queue. This may result in strong value creation for specific developers who had otherwise been crowded out by the congestion in the grid connection queue.

Impact on CfD projects: There are some protections built in for CfD projects under the new connection regime (refer Clause 2a above), but many CfD projects may not be able to keep their original connection date. Low Carbon Contracts Company (LCCC) issued a statement confirming that CfD projects experiencing delays due to revised grid connection dates may be eligible for extensions to their contractual milestones. Uncertainty regarding grid connection dates has the potential to impact the valuation of CfD projects. 

Ultimately, the reforms raise questions about how to accurately account for development risk when considering pre-construction projects, or portfolios. Use of strong benchmark data, deployment of multiple valuation cross-checks where possible and thorough sensitivity analysis remain key. Selection of an appropriate methodology remains critical, especially with considerations about the reliability of financial information for projects at such early stages of development.

DCF vs multiples: due to the early to mid-stage development of most projects affected by grid connection reform, cashflows are often highly uncertain or unavailable. For that reason, a multiples approach to valuation (e.g., £/MW with probability weightings applied based on development milestones) is typically adopted instead of discounted cash flow (DCF) valuation. Given the above reforms we would expect some adjustment of the relative probability weightings used, furthering the importance of achieving Gate 2 requirements when considering valuations.

Conclusions and what’s next?

After some initial hiccups to the online portal, NESO has extended the window for developers to submit application to obtain Gate 1 or Gate 2 connection under the G2TWQ assessment. The application window, which was initially supposed to open from July 8 – 29, may now remain open till end of August. Any further delays are also likely to impact sites which are expecting to receive planning prior to the closing of the submission window, allowing more time for sites to demonstrate consented status and secure Gate 2 offers.

As this reform progresses, our valuation approach is evolving to incorporate these new dynamics. Our multi-disciplinary Energy and Infrastructure team are engaging with our clients to help them in responding to the changing regulatory environment. Please reach out to our valuation experts Ben Morris, Karishma Merchant or Charlie Williams for further discussion.

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1. About connection reform – NESO
2. Gate 2 Criteria Methodology
3. Clean Power 2030 Action Plan: A new era of clean electricity
4. Ofgem Decision on Connections Reform Package (TM04+)