Ofgem is planning to offer a ‘cap and floor’ financial regime to just one of seven interconnector projects that sought to use the framework.
The regulator considered whether to allow customers to underwrite returns on the schemes, in exchange for capping profits, that applied in an ‘application window’ during the period September 2022 to January 2023. Interconnectors can alternatively connect on a ‘fully merchant’ basis, in which they take the risk and benefits in their entirety.
The regulator said that as with earlier application windows, it assessed the projects on simple socioeconomic welfare (SEW), acknowledging interconnectors’ potential to capture new security of supply and decarbonisation benefits, which bring additional value to consumers beyond the impact on wholesale prices. However it also considered the maturity and deliverability of projects, including whether they could start operating before the end of 2032.
The regulator now plans to approve a cap and floor regime for the Tarchon link, a 1.4GW direct connection to Germany from East Anglia.
It rejected six other links, in some cases because they would result in high constraint costs where the surrounding network had too limited capacity. The regulator said it expected GB prices overall to be much lower than today’s levels in most scenarios, but because GB will become a net electricity exporter exports will slightly increase GB wholesale prices, which shifts the balance of consumer and producer benefit.
Interconnectors provide a route to the European market for surplus wind energy that would otherwise be curtailed. However, as the bulk of GB’s wind resource sits in the north, the proposed location of most of the applicant interconnectors in the south means that most of the proposed interconnectors will substantially increase transmission system costs because of network bottlenecks. Ofgem said, “The positive decarbonisation and security of supply findings are often matched with a high constraint cost effect that we need to weigh against other factors in determining whether to approve an applicant project”.
It had concerns over the viability and deliverability of Aminth (1.4GW to Denmark) and NU-Link (1.2GW to the Netherlands). Its concerns over Aquind (2GW to France) were over high constraint costs, which were also a concern with the Cronos link (1.4GW to Belgium). It regarded LirIC (0.7GW to Northern Ireland) and MaresConnect (0.75GW to Republic of Ireland) as having negative SEW.
The regulator is consulting on its decision and requires responses by 30 April.