Cap and floor regime lined up for interconnectors linked to foreign wind farms

A narrow cap and floor regime will be introduced for pilot non-standard interconnector (NSIs) projects, which link Great Britain to offshore wind farms in a foreign jurisdiction.

Ofgem set out its decision on the regulatory framework in response to a consultation on the Offshore Hybrid Asset (OHA) pilot scheme.

A separate framework will be set for multi-purpose interconnectors (MPIs), after Ofgem separated the regulatory regimes for the two forms of offshore hybrid asset.

An MPI is defined as an electricity cable that connects Britain to neighbouring markets and also connects offshore generation to shore.

The revised definition for an NSI – outlined in Ofgem’s consultation response – is “an electricity interconnector which is connected to an offshore converter station in the connecting jurisdiction and which does not subsist for the purposes of offshore transmission activities in Great Britain”.

Two projects have been selected for Initial Project Assessment: Nautilus, connecting to Belgium; and Lion Link, connecting to the Netherlands.

A consultation on the regulatory regime for NSIs proposed five options ranging from a full regulated asset base (RAB) to a full cap and floor model.

In its decision document, Ofgem states that “there was an almost equal split in opinion in favour of progressing a full RAB or the narrow cap and floor regime option” from consultation respondents.

It adds that while it has opted for a narrow cap and floor model “its detailed design will depend upon project specific revenue and risk matters”.

It adds: “We consider that a narrow cap and floor regime is the most suitable for the Pilot NSIs. The incentives on and signals to developers that are provided via the cap and floor regime remain valid, although they are reduced in the narrow form of the cap and floor regime.

“More risk protection is likely justified for the Pilot NSIs, due to the higher uncertainties and risks that these projects face relative to point-to-point interconnectors, and therefore the narrower cap and floor regime has been selected.

“The degree of narrowing of the cap-floor range can be decided based on the risks of the projects, available revenues, consumers’ interests, and bearing in mind what the comparator of a RAB regime might be (equivalent to a position where the cap and the floor revenue levels are equal).”

The consultation also sought views on cross-border sharing of costs and revenues for the pilots.

Following the consultation Ofgem said it “will take account of legal and regulatory constraints in connecting jurisdictions and the interests of GB consumers in considering the cost and revenue sharing boundaries of a Pilot NSI”.

It adds: “We will contribute to ongoing international discussion and development of regulatory arrangements on this topic with a view to achieving fair sharing of costs and revenues on Pilot NSIs and other OHAs to support the growth of the sector and protect the interests of GB consumers.”