Revenue cap and floor proposed to boost interconnector investment

Developers of electricity interconnectors are to earn regulated returns under Ofgem proposals to encourage more cross-border links.

Cables linking the UK to other countries can help to lower electricity prices and boost security of supply but the market is not delivering enough investment, Ofgem said.

The regulator is proposing a “cap and floor” framework to give developers greater confidence their investment will pay off. Once the interconnector is operating, if revenues exceed the cap, the surplus will be paid back to consumers. If revenues fall below the floor, consumers will pay for a top-up to the level of the floor.

Martin Crouch, Ofgem senior partner on transmission, said: “The current market-led approach has not encouraged sufficient investment in interconnection with our neighbouring countries. We are proposing a regulated framework that will deliver crucial energy infrastructure at a fair price for consumers.”

The UK has four electricity interconnectors with a combined capacity of 4GW. A report commissioned by government from consultancy Redpoint last year estimated adding 5GW of capacity by 2040 would benefit UK consumers by up to £9 billion.

Ofgem expects to start considering applications under the new regime in autumn. It will set the cap and floor of each project individually, according to its assessment of the efficient costs.

National Grid is working on further connections to France, Denmark and Norway that would be eligible for the regime. Links to Ireland and Iceland are in the early stages of development.

Peter Boreham, National Grid director of European business development, said: “This is the step change we have been waiting for. It sends a strong message about the importance of interconnectors in the future of the UK energy market and will unlock new investment in the next generation of cross border infrastructure.”