Developing a cap and floor regime for
the GB-Belgium Interconnector:
NEMO
Pascal Boucquey (CREG) & Charlotte Ramsay (Ofgem)
10th FUI Stakeholder Group Meeting
11th March, 2011
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
10th FUI Stakeholder Group Meeting, 11/03/2011
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GB: Context for the challenge
Nordpool
Single Electricity
Market
Existing
2.5
GW
>10
4 GW
GW
Construction
Proposed
10th FUI Stakeholder Group Meeting, 11/03/2011
Central West
Europe
3
3
GB: Current regulatory regime
(for interconnectors only)
•
•
•
•
•
•
“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: Drivers for change
• 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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Belgium: Context for the challenge
Existing
Proposed
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Belgium: Current regulatory regime
(for national TSO, including interconnection)
• 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: Drivers for change
• 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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GB-Belgium interconnector:
Project NEMO
• 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
•
•
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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High level principles for the new regime
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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What is a cap and floor ...
• 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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Design of the cap and floor
• 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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Plans for joint consultation
• 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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Process & Next steps
• 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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Thank you for your attention!