Ofgem approves interconnectors for cap and floor regime

Regulator says links with France, Germany and Norway will deliver “significant” benefits to consumers

Ofgem has given preliminary approval for three new interconnectors to France, Germany and Norway to operate under the cap and floor regime.

The regulator says all three could deliver “significant” benefits to UK consumers, primarily by providing access to lower electricity prices.

The cap and floor regime places minimum and maximum limits on the revenues interconnectors can generate.

If an interconnector is unable to earn sufficient revenues from its operations, they will be topped-up to the floor level by the system operator National Grid. Conversely, any revenues which exceed the cap will be paid forward to National Grid.

After completing initial project assessments for the Grid Link, Neu Connect and North Connect interconnectors, Ofgem has agreed in principle to allow them to operate under the framework, subject to some conditions. The regulator wants to make a final decision in September following a consultation on its minded-to decision.

“Our analysis indicates that all three projects are likely to generate significant net benefits for GB consumers,” said Ofgem in its consultation document. The projects “can also provide security of supply and sustainability benefits by providing access to alternative generation and increasing GB capacity of supply”.

Although the analysis suggests all three will deliver multi-billion-pound savings for consumers in the base scenario, it also indicates that the Neu Connect and North Connect interconnectors will be detrimental to overall welfare due to the cannibalisation of the revenues of other interconnectors and domestic generators.

Industry figures have previously complained about the lack of a level playing field between interconnectors and generation.

The approved projects applied for cap and floor regulation between 31 March and 31 October 2016. They join five other interconnector projects which have been approved in principle by the regulator.

Another proposed interconnector between France and the UK is also being developed outside of the cap and floor framework. According to Ofgem, the completion of all the aforementioned projects would bring the UK’s total interconnector capacity to 17.9GW.

The proposed new projects

Grid Link – a 1.4GW interconnector running between Kingsnorth in Kent on the UK side and Durkirk in France. The link is being developed Elan Energy and Icon Infrastructure.

Ofgem says the economic case for Grid Link is mainly driven by “the high proportion of nuclear in the French energy mix as well as a growing proportion of renewables, which drives lower wholesale prices in France. This can provide security of supply benefits by diversifying energy resources in GB.”

Neu Connect – a 1.4GW interconnector passing from the Isle of Grain in Britain to an undecided location in Germany. The project is being developed by Frontier Power, Meridiam and Greenage Power and would be the first interconnector between the two countries.

“Germany’s energy system has high renewables penetration, continental demand profiles and lower average wholesale prices, which are positive for interconnection”, Ofgem notes.

The regulator says the interconnector is likely to gain significant value from intraday trading due to the different daylight hours in Germany and the UK as well as “the sweep of east-west weather patterns”. It says this factor was not valued in its assessment.

North Connect – a 1.4GW interconnector joining Peterhead in Scotland with Simadalen in Norway.  The project is being developed by the North Connect consortium consisting of Lyse Produksjon, E-CO Energi, Vattenfall and Agder Energi.

As the Norwegian electricity system consists almost entirely of low-cost hydropower, Ofgem says the link should bring down bills for consumers. It will also give access to pumped hydro storage which can absorb excess generation from Britain’s growing wind sector.