Ofgem announces provisional cap and floor levels for IFA2 project

Ofgem has confirmed the provisional cap and floor costs in its final project assessment of the IFA2 project.

IFA2 will be a 1GW interconnector between Chilling, Hampshire and Merville-Franceville-Plage, France. It is being jointly developed by National Grid Interconnector Holdings (NGIH) and by RTE, the French transmission system operator.

The cap and floor regulatory regime was set up in 2014 to provide a “clear and transparent” regulatory approach for the development of new electricity interconnector projects between Britain and other countries.

The regime places minimum and maximum limits on the revenues interconnectors can generate. Any interconnector which fails to earn enough money will be topped-up to the floor by the system operator National Grid, while National Grid will be entitled to the money if the cap is exceeded.

The provisional cap and floor levels, based on allowed costs and relevant financial parameters, are £50.7 million and £27.6 million (in 2016/17 prices). The cap level can increase or decrease by up to 2 per cent based on performance against the set target of 96.5 per cent for IFA2’s availability incentive.

These figures are lower than those used in the initial project assessment stage, which were £55.4 million and £33 million.

Based on Ofgem’s assessment, the NGIH’s development and capital costs have been set by the regulator at £347 million, an approximate 6 per cent reduction from the submitted £368 million.

In its executive summary of the final project assessment, Ofgem said it believed the project can reasonably be expected to provide “greater benefits to consumers” than expected as (all else being equal) the current cap and floor levels would reduce the likelihood of floor payments and increase the likelihood of cap payments.