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Ofgem seeks to trigger wave of interconnector investments


New consultation proposes "cap and floor" financial support mechanism for new international links that could curb costs and emissions

By Jessica Shankleman 27 May 2014

Plans to build a new fleet of interconnector links that would allow the UK to trade electricity with other countries, cut costs and reduce emissions have taken a major step forward after Ofgem unveiled a new financial support mechanism for the industry.
The energy regulator announced a consultation late last week, accepting that the current "market-led approach" had failed to drive sufficient investment in interconnectors and proposing new incentives for investors.
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Using a so-called "cap and floor" framework, Ofgem has said it will place a limit on the profits a developer can earn from any individual project, with each cap decided on an individual basis. Any revenues above the decided threshold will be returned to the government.
The UK currently has four interconnectors offering a total capacity of 4GW, linking the country to the power grids in France, Ireland, the Netherlands and Northern Ireland. But Ofgem has identified the need for further capacity in order to help lower costs and boost the UK's security of supply.
Unlike import cables, interconnectors allow a two-way flow of power that offers countries the opportunity to trade based on the difference in energy prices between the two connected states. There are a number of projects being developed with this technology that could allow the UK to trade electricity with Belgium, Norway and potentially the Isle of Man.
They could also provide a notable boost to the wind power industry, by allowing the UK to sell offshore wind to countries such as Iceland and Norway, where it could be stored using pumped hydro.
Martin Crouch, Ofgem senior partner in the Transmission division, said the new plans were designed to deliver fresh investment in interconnectors in the way that the current market-led approach has so far failed to do.
"We are proposing a regulated framework that will deliver crucial energy infrastructure at a fair price for consumers," he said in a statement. "This sits alongside a range of reforms aimed at increasing energy resilience in Britain, including increasing charges for suppliers and generators when they fail to meet customers' energy needs."
The news was welcomed by National Grid, which recently issued a report highlighting the economic and environmental benefits of interconnectors. It estimated that each 1GW of new interconnector capacity could reduce Britain's wholesale power prices up to 1-2 per cent, reduce the cost of decarbonisation and make it easier for the UK to meet binding EU renewables targets.
It found that if interconnector capacity doubled to 8-9GW, there could be potential savings of around £1bn a year. This would also take Great Britain closer to the European benchmark of having interconnectors making up 10 per cent of generation capacity.
"This is the step change we have been waiting for," said Peter Boreham, National Grid's director of European business development. "It sends a strong message about the importance of interconnectors in the future of the UK energy market and will unlock new investment in the next generation of cross-border infrastructure."
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