Electricity
Interconnectors in GB
26.02.13
Emmanouela Angelidaki
Content
• Role of interconnection in Europe and GB
• Approach to interconnector investment to date and drivers for
change
• New regulatory regime for interconnector investment in GB
• Next Steps
• Q&A
2
Interconnection-the basics
•
Interconnection (IC) =Cross border transmission, connecting different member
states
•
European legislation: leading role on how revenues are raised (i.e. Profits can be
made)
•
It requires all interconnector capacity to be allocated via market based methods, i.e.
Auctions
•
Interconnectors generate revenue based on the price arbitrage opportunity between
countries. Whilst there is a country price difference, there will be demand for the
capacity & a revenue stream will be generated
•
In GB, to date, investment could take place only through the merchant route, i.e.
investors would take the full upside and downside risk and would seek for an
exemption from EU legislation , to protect their business case;
•
We are now developing a regulatory regime which can facilitate economic
investment …
3
European Energy
Infrastructure Package:
Interconnection capacity to support 2020
RES targets
2020
(Source: Imperial College & KEMA, study for EIP communication, 2010)
4
ECF 2050 Pathways:
Interconnection capacity to
support 80% RES by 2050
2050
Source: ECF – Roadmap to 2050 (www.roadmap2050.eu)
5
Interconnection from Great Britain: the
context
2012
figure:
4.8%
Average total import capacity relative to installed generation capacity by
percentage, 2004
(Source, DG Competition Report on Energy Sector Inquiry, 2007)
6
Proposed electricity interconnector
investment
7
Drivers for change
• Increasing government support for IC investment and Ofgem’s
commitment to facilitate economic and efficient IC investment, while
maintaining the developer-led approach
• Potential for commercially viable interconnection
– But pure merchant financing of projects less viable …
– We want to see timely development of new infrastructure to
contribute to the delivery of internal energy market
• Financing gap- greater need for 3rd party investment?
• Need for a common / coordinated approach to regulation of shared
assets
• Challenges with merchant-exempt regime:
– Regulated “risk” of exemptions, which are seen as the exception
not the rule
– European model, national TSOs deliver interconnector investment
Need to develop a regulatory regime to remove regulatory barriers and
facilitate economic and efficient investment
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Steps to date
•
January 2010: Consultation on options for regulating interconnector
investment
•
September 2010: Next steps letter on our intention to progress with the
cap and floor regime, using project NEMO as the pilot project
•
June 2011: Consultation on principles and design of the cap and floor
regime, exploring whether this regime could be a high level solution for
other IC projects
•
December 2011: Preliminary conclusions on the principles and design &
Ofgem’s intention to develop a process for considering other IC
investment proposals and to ensure the three GB regimes for transmission
investment are compatible (offshore, onshore, interconnection)
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CAP AND FLOOR
APPROACH
•
•
•
•
•
•
Recoup returns within bounds of pre
set cap and floor
Revenues over cap – paid back to
consumers
Revenues fall below floor – triggers
payment from consumers
Allows revenue regulation, protects
consumers from market power
Maintains element of market
valuation of interconnection
Within the regulated regime favoured
by Third Package
10
CAP AND FLOOR
APPROACH
11
Timeplan for
NEMO
Phase 1
(Investment
decision):
Provisional
decision on C&F
levels based opex
&capex forecasts
2013-2014
Phase 2
Phase 3
(Construction):
( Postconstruction):
NRAs receive all
bids and
justification for
preferred bid
Ex-post review of
actual capex & reforecast of opex;
final C&F levels
25 year regime,
revenues
assessed against
C&F every 5 years
2017-2018
2018
2014-2017
Phase
4(operation):
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Proposed approach for setting the cap and floor
returns
• Will be set out in our consultation, expected to be published in March
• Aim: identify risks associated with IC investment and then develop an
approach for setting the CoC for IC investment under the cap and floor
approach;
• The proposed approach is developed for a notionally efficient investment
structure and it aims to answer questions like:
– Separate CoC at the cap and the floor vs. single CoC central estimate
for the project;
– Mechanistic vs. Discretionary approach
– CoC parameters fixed at financial close vs. post construction
– Cross Jurisdiction considerations: blended CoC vs. Separate calculation
in each currency
13
Next Steps
• Consultation on our proposed regime, including the CoC
methodology: March 2013- May 2013
• Analysis of responses and review of design and methodology:
June-September 2013
• Decision on NEMO provisional cap and floor returns: Q4 2013
14
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Regime Design
Aspect
Design
Mechanism
Cap & floor returns earned within boundaries; revenues above cap
returned to consumers, revenues below floor require payment
from consumers (via Transmission Use of System Charges)
Regime length
20-25 years
Cap and floor levels
Levels set ex-ante and remain fixed for regime length
Set on basis of costs, using RAV based model
Setting costs
Capex – ex post capex review*
Opex – set ex-ante, ie before operation
Cap and floor profile
Flat in real terms
Assessment period (assessing whether
IC revenues are above/below cap/floor)
5 years, discrete periodic basis
Availability incentive
Symmetric financial incentive linked to the cap, based on actual vs.
target availability, target set on a project by project basis
*(for NEMO; consultation will explore alternative treatment for future projects)
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