Ofgem consults on loosening cap and floor regime for interconnectors

Ofgem is consulting on a series of variations to the cap floor and regime requested by the developers of the Greenlink and NeuConnect interconnectors to Ireland and Germany.

Without the changes, the companies claim the projects will struggle to secure sufficient financing and could be delayed or cancelled.

Both have already been given the all-clear by Ofgem to operate under the cap and floor regime on generic terms. The scheme entitles interconnector operators to receive top-up payments from consumers when their revenues fall below the floor but also requires them to return money to customers when their revenues exceed the cap.

The regulator has previously estimated the projects to be worth £2.36 billion in terms of net benefits to consumers but wants to ensure that the proposed changes do not transfer too much value to developers. It is therefore seeking views from stakeholders on five key variations, which are:

• A reduction in the revenue assessment period from five years to one to allow operators to receive top-up payments more frequently.
• An exemption from the requirement for an interconnector to be available 80 per cent of time to receive top-up payments. The developers have suggested that top-payments for years in which availability is less than 80 per cent should later be returned to consumers in instalments.
• A broadening of the regime’s definition of force majeure to cover more events.
• A change in the way the cap and floor levels are calculated so they are based on actual rather than notional gearing. The developers claim the current arrangements underestimate the cost of debt.
• An exemption from the requirement for projects to be completed by a set date in order to benefit from a full 25-year agreement. The developers say exceptions should be made in instances where delays are beyond their control or in the interest of consumers.

The consultation document notes that the four other electricity interconnectors to be approved under the regime are all being funded by developer National Grid Ventures from its own balance sheet.

“The likelihood of balance sheet developers similar to National Grid Ventures stepping forward to fund these two projects under the default regime is unclear,” the documents adds.

“In any event, we expect that the balance sheet financing route would likely result in project delays. We also consider that ensuring the regime is fit for a broad range of financing solutions, including project finance, would benefit consumers in the long run.”

Ofgem said its initial impact assessment suggests the fourth and fifth variations should be rejected and the rest accepted. It is aiming to make a decision in early 2020.

The deadline for responses is 28 November.