Regulating New Interconnector Investment

Emmanouela AngelidakiOfgem

16th June 2010

Overview

• Background on Ofgem consultation and options proposed

• Consultation responses– Response to Options 1-4– Developing an enduring regime

• Next steps

EWIS (European Wind Integration Study)

High wind penetration scenario (2015): Cross border links where expansion would

provide economic benefit

NameConnects

GB toCapacity

(MW)

Existing

IFA France 2000

Moyle N. Ireland450 (to NI)

80 (from NI)

Underway

BritNed Netherlands 1000

East West Interconnector

Ireland 500

Future

East West 1 East West 2

Ireland 2 x 350 MW

Channel Cable France 800

Nemo Belgium 1000

IFA 2 France 1000

Norwegian interconnector

Norway 1000

Belbrit Belgium 1000

Up to 9GW of capacity by 2020

Options for regulating new Interconnectors

Merchant…………to revenue controlled approach

Options for regulating new Interconnectors

1. Uncapped (“merchant approach”): returns determined by auction proceeds..Exemption is required

2. Regulated cap (Britned case) : cap on returns or revenues from auctions; excess revenues must be invested in increased capacity or returned to customers

3. Regulated cap and floor : returns within a range depend on auction revenues ; above or below they are returned to or supplemented from customers

4. Regulated Revenues (“regulated approach”): Equivalent to including IC in the transmission tariff mechanism. Assessment of required revenues and any auction revenues above/below is returned/supplemented from customers

The Consultation closed on 30 March 2010 and we received 20 responses :

IC owners TSOs Energy Companies

Organisations

IUK National Grid EON AEP

Moyle RTE Centrica APX

Britned Eirgrid EDF Consumer Focus

Elia RWE

Statnett Statkraft

SSE Mainstream Renewable Power

Statoil ASA

IPR

Option 1: Uncapped Merchant Approach Many see benefits of risks and rewards being

covered by the investor Some highlight option 1 as providing the most

efficient levels of interconnection Some see pure merchant approach as

increasingly infeasible due to need for exemptions

Others don‘t recognise this as a problem Some highlight merchant investment as the

way to provide timely investment Others argue the opposite due to exemption

requirements etc.

ConsultationResponse

Option 2:• Few have this as a preference• Several believe that this option (and option 3)

distort incentives to invest in IC, and if not correctly applied can result in inefficient use of IC capacity

• Some note that this deviation from the pure merchant approach causes delays in investment and often results in collapse of investment plans

ConsultationResponse

Option 3:• Several saw this as an option to maintain

merchant investment in IC whilst harmonising to some extent with EU

• ... but only if it could be compliant with EU legislation

• Several believe that this option (& option 2) distorts incentives to invest in IC, and if not correctly applied can result in inefficient use of IC capacity ..

• “Addition of a floor is an unacceptable risk for consumers, particularly as the risks associated with IC are not something that is well understood – makes setting of floor complicated“

ConsultationResponse

Option 4:• Makes GB fully in line with Europe • Efficiencies result from harmonisation of

legislation (in terms of time taken for investments, considering cross-MS nature of IC investment)

• Others considered the introduction of TSOs slows the investment process

• Some concern that the regulated approach generates an inefficient number of ICs (i.e. Uncongested lines), and results in high costs to consumers

• GB IC different from elsewhere: DC, subsea / offshore, long distances – therefore needs diff erent approach re. incentives

ConsultationResponse

Enduring regime for new interconnector investment

• Some support for mixture of different approaches• But not imposed retrospectively on established projects • Implement an aligned structure for both Britned & IFA • Others consider that mixture of different approaches has less

advantages; should be limited to existing ICs and a unified approach should be applied to all new ICs to provide correct investment signals

• Important for NRAs to coordinate in two sides of the border & agree on the access rules

• Some emphasize the difficulty to see how merchant ICs will compete with regulated ICs…..

ConsultationResponse

• We need to explore further Options 3&4: eg. how cap and collar should be applied , consistency with the CMGs and GB legal Framework

• We intend to collaborate with CREG on Project Nemo (GB-Belgium Interconnector)..

• Ongoing discussions with all stakeholders

• Report back to IG on progress

Next Steps