Ofgem gives green light to investment in new interconnectors
Ofgem is inviting bids to bring forward billions of pounds of investment in new electricity interconnectors to help boost energy security, hit the country’s climate goals, and save money for energy consumers.
The energy regulator will hold a third investment round next year to build new subsea cables, called interconnectors, which can import cheaper clean energy when it’s needed and export surplus power to neighbouring countries.
Currently Britain has seven operational electricity interconnectors, connecting it to Ireland, France, Belgium, the Netherlands, and Norway, providing almost 7% of the UK’s electricity last year.
The UK Government wants to more than double existing interconnector capacity by 2030 to support its target of quadrupling offshore wind capacity by the same date.
To help meet that target next year’s investment round will favour projects able to complete by 2030.
Project developers and consumers will benefit from Ofgem’s “cap and floor” regime. This sets a maximum ‘cap’ on revenues and a minimum ‘floor’ to ensure an adequate return for investors while keeping costs down for consumers.
Ofgem will also run a pilot cap and floor scheme for the first-time inviting bids for “Multiple-purpose Interconnectors” (MPIs) which can link up clusters of offshore windfarms directly to an interconnector.
This means when the wind is blowing in the North Sea, these offshore wind farms can export surplus electricity to both Great Britain and Europe.
Akshay Kaul, Director of Networks at Ofgem, said: “Greater interconnection of energy across borders is vital to ensure resilience, affordability and sustainability in the future as we transform our energy system.
“Our next investment round for interconnectors will bring forward the investment we need, creating green jobs and unleashing the full potential of the UK’s world leading offshore wind industry, while also protecting customers by capping costs.”
- Ofgem’s decision on the Interconnector Policy review concludes a consultation process begun in August 2020. The decision recognises the benefits of interconnectors to the UK and that an updated version of the existing cap and floor regime is the right tool to deliver it. The changes Ofgem has made are to ensure cap and floor still works well for both investors and energy consumers. The revised regime will be finetuned ahead of it being rolled out for the next investment round in from mid-2022.
- The two previous ‘cap and floor’ rounds in 2014 and 2016 attracted investment for nine projects and currently 8.5GW of interconnector projects are in various stages of development.
- Great Britain’s electricity market currently has 7.4GW of electricity interconnector capacity:
- 3GW to France (IFA and IFA2)
- 1GW to the Netherlands (BritNed)
- 1GW to Belgium (Nemo Link)
- 500MW to Northern Ireland (Moyle)
- 500MW to the Republic of Ireland (East West)
- 1.4GW to Norway (North Sea Link)
- Under the current regulatory framework, there are two general routes for interconnector investment:
- A regulated route under our 'cap and floor' regime. This allows developers to identify, propose and build interconnectors, subject to Ofgem approval. A cap and floor mechanism regulates how much money a developer can earn once in operation, providing developers with a minimum return (floor) and a limit on the potential upside (cap) for a 25-year period.
- As an alternative to the cap and floor model, developers can seek exemptions from regulatory requirements. Under this route developers would face the full upside and downside of the investment and would usually apply for an exemption from certain regulatory requirements to better enable the business case of their investment.
- Interconnectors make money in the wholesale market from congestion revenues. Congestion revenues are dependent on the existence of price differences between markets at either end of the interconnector.
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