Ofgem approves plans for interconnector with Belgium

Ofgem has approved the financing and regulatory regime for Project Nemo, giving the green light to an interconnector between the UK and Belgium which will be the first to be built under Ofgem’s new cap and floor regime.

Ofgem has set the annual revenue floor for Nemo at £50.4 million over the 25 year duration of the scheme. The annual revenue cap has been set at £80 million. These levels will be adjusted following a final assessment of costs post-construction, Ofgem said.

On completion in 2019 the Nemo project will add 1GW to the UK’s electricity capacity, increasing energy security for UK customers. The interconnector is expected to cost £500 million and will run for 130km between Zeebrugge in Belgium and Richborough in Kent.

Ofgem chief executive, Dermot Nolan said: “Our cap and floor regime has already attracted interest from other potential projects, and looks set to be an effective gateway to new investment that will make energy supplies more secure and increase competition in the market, to the ultimate benefit of households and businesses.”

The cap and floor regime was developed by regulator Ofgem in partnership with CREG, its Belgium counterpart, to encourage investment in interconnector projects that deliver good value for customers.

The regime is designed to protect developers from the full financial risks of the project by implementing a floor. If developer’s revenues fall below this level, consumer’s top up the revenues back up to the level. If developer’s revenues exceed a cap, the excess is returned to consumers.

Consumer gains and costs are passed on through the network costs of customer energy bills and will be equally split between Belgium and Britain for Project Nemo. Ofgem said it expects the risk of consumers having to pay for top ups for Nemo to be low.

Project Nemo is being proposed jointly by National Grid Nemo Link, a subsidiary of National Grid, and Elia, the Belgium transmission system operator.

National Grid’s European business development director, Alan Foster said: “The decision to allow the interconnector to be built under the new cap and floor regime gives us more certainty about the revenue streams and keeps the project on track to reach a final investment decision in spring 2015. It’s encouraging news too for the other interconnector projects we are developing with other European partners“.

Energy secretary, Ed Davey, said: “This is a major landmark in our ambition to greatly increase interconnection with our neighbours, to improve our energy security and lower bills. The new cap and floor regime will unlock billions of pounds of investment in interconnectors, and I expect more projects to come forward next year.”