Developing a cap and floor regime for the GB-Belgium Interconnector:

NEMO

Pascal Boucquey (CREG) & Charlotte Ramsay (Ofgem)

10th FUI Stakeholder Group Meeting11th March, 2011

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Contents

• State of play in GB and Belgium:– The challenge– Current regulatory background– Drivers for change

• Project NEMO– GB-Belgium interconnector– Details and status of development– Coordinated approach from GB & Belgium

• Developing an alternative model for regulation– High level principles– Cap and floor, outline– Implications for GB and Belgium

• Next Steps for Ofgem and CREG

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GB: Context for the challenge

Nordpool

Central West Europe

Single Electricity Market

Existing

Construction

Proposed

2.5 GW4 GW>10 GW

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• “Light touch” regulation• Separate Interconnector licence• Merchant interconnection• Business case = congestion rents• All upside and downside borne by investors• Apply for exemption from EU legislation

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GB: Current regulatory regime (for interconnectors only)

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• Regulatory “risk” of exemptions (BritNed case)– Need for risk sharing between consumers and investors

• Exemptions the exception not the rule– European model, national TSOs deliver interconnector

investment

• Merchant-exempt route not possible for several project partners– Need for a common / coordinated approach to regulation of

shared assets?

• Potential for commercially viable interconnection– But pure merchant financing of projects less viable …

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GB: Drivers for change

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Existing

Proposed

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Belgium: Context for the challenge

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• Interconnections are integrated in the (national) transmission system

• No separate interconnector licence• Fully regulated regime• Interconnection included in the Regulated Asset Base

– Remuneration of the investment based neither on the level of revenues received from auctioning its capacity nor on the level of costs related to it

– The yearly fair margin available for the TSO’s shareholders is guaranteed and based upon the RAB

• Congestion recycled in order to decrease tariffs

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Belgium: Current regulatory regime(for national TSO, including interconnection)

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• Different risk profile of DC, subsea cables– Scale of investment– Complexity and risk of project

• National TSO (Elia) requesting enhanced rate of return to reflect risks

• In addition, project identified as bringing benefits for the security of supply, economic welfare and competition

• Alternative regulatory approach envisaged to fill the regulatory gap BE-GB

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Belgium: Drivers for change

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• Regulatory challenges:– Significant differences between current GB and Belgian

regimes– With current national regimes, risk of asymmetric

interests for investors involved in the shared interconnector project

• Issues converge with “Project NEMO”– GB – Belgium interconnector– Press release from National Grid & Elia, Feb 2008

• More on NEMO …• And on solving the regulatory challenges …

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GB-Belgium interconnector:Project NEMO

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GB-Belgium interconnector:Project NEMO

• 1 GW HVDC connection• Isle of Grain to Zeebrugge

• Marine– Sub sea survey– MMO contact– Consents and permits (GB and Be

Marine organisations)– Contact w. fisherman

• Onshore work– Consents & permits (Planning,

environmental surveys, etc)– Early preparation of landing site

(GB)

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1. Developers should be exposed to the market's valuation of interconnector capacity,

2. Consumers should be protected from the cost implications of excessive returns or market power that might accrue to interconnector owners,

3. Developers should be exposed to levels of investment risk that are commensurate with the level of regulatory intervention to mitigate excessive revenues and market power,

4. Regulatory treatment of developers should be coordinated between Regulatory Authorities at either end of the shared asset,

and• (For GB and future IC developments) Treatment of potential

interconnector developers should be impartial and unbiased between TSOs and non-TSO developers

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High level principles for the new regime

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• Recoup profits within bounds of pre-set revenue cap and floor

• Returns over cap – paid back to consumers

• Returns fall below floor – triggers payment from consumers

• Allows revenue regulation, protects consumers from market power

• Maintains element of market valuation of interconnection

• Moves closer to regulated regime favoured by Third Package

• Can provide tailored incentives on top of regulated regime

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What is a cap and floor ...

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• What activates the cap and floor?– Profit or similar (e.g. revenue, IRR)

• How often is it assessed?– > 1year, <lifetime of project– Cumulative perspective?– When is the cap paid back (or floor paid out)?

• When is the cap/floor set?– Ex-ante, on forecast costs …

• How long does the cap/floor persist?– Lifetime of investment? Lifetime of interconnector?– Should it be reassessed at any point?

• Additional requirements/obligations: – standards for operational efficiency and IC availability – requirements for capacity allocation (e.g. price coupling)

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Design of the cap and floor

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• The drivers for change in regulation of new interconnector investment

• The high level principles behind the regime and rationale for option(s) considered

• Design of the cap and floor - setting out the different parameters for the regime (e.g. what is the cap/floor levied on? How often is it assessed etc.)

• Indicative levels for the cap and floor (not specific to NEMO)• Additional requirements/obligations on the

developer/operator• List of requirements for application to NRAs for a cap and floor

(relevant for GB)

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Plans for joint consultation

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• Consultation – Launch: end of April / May 2011– Conclusions: Q3 2011

• Work on integrating the cap and floor into the GB and Belgian regimes (ongoing):– GB (Licence amendments, integration into price control

etc.)– Belgium (Necessary changes in current legal framework,

transposition of Third Package still ongoing …)• Continue discussions with other NRAs (GB)• Links with other projects: North Seas Countries Offshore

Grid Initiative, energy infrastructure package etc.

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Process & Next steps

Thank you for your attention!