Ofgem encourages investment in UK electricity links
Blog
Stephen Beel
Publication date
Industry sector
- Distribution Network
- Transmission Network
Ofgem encourages more investment in UK electricity links through innovative schemes
Yesterday, the Department of Business Energy and Industrial Strategy (DBEIS) and Ofgem hosted an electricity interconnector development and supply chain event to take stock, share best practice and highlight the significant opportunities that interconnectors bring.
Interconnectors, which are high voltage links between the UK and other countries, offer a significant opportunity for the UK. This event provided a chance to collaborate and drive forward investment in new links that can benefit consumers by lowering bills and aiding our security of supply. In addition, Ofgem will be hosting a further event later this week to launch another major investment programme, the fifth offshore transmission (OFTO) tender round.
Increasing interconnection
One of the key drivers for increasing investment in new interconnectors is Ofgem’s cap and floor regime. The regime regulates the returns interconnector owners can earn. It is a world-first and has already resulted in six proposals for 7.3 GW of new links. This will increase our interconnection with France and Ireland, and provide new connections to Norway and Denmark. Ofgem’s success in running the regime, together with work on competitive tendering of links to offshore wind farms, was recognised in May when we won “best government public private partnership promoter” at the Partnerships Awards 2016.
More interconnection has a lot of benefits for Britain. Many European countries, particularly those with land borders, are already highly interconnected. Increasing interconnection with the continent improves Britain’s security of supply as we can import from a wider, deeper and cheaper pool of electricity. As our wholesale electricity prices tend to be higher than on the continent we have imported far more electricity than we have exported over the past few winters.
The NEMO link from GB to Belgium was the first to get a cap and floor agreement, and construction is underway. We're now in the process of agreeing the cap and floor levels for each of the other five projects that we have initially approved from our first bidding window.
Savings for consumers
In our regime, we set the cap and floor for how much interconnectors can earn. The cap is the maximum and the floor the minimum. If they don’t make enough from charges, their revenue will be ‘topped up’ to the floor level, with the funds ultimately coming from small adjustments to the high voltage grid charges we all pay as part of our bills. Conversely, if interconnectors earn more than their cap level, they return the surplus through the same route, thereby decreasing bills.
Overall, based on the projects assessed to date, we expect the cap and floor regime to result in a small net reduction in the total costs consumers pay for the high voltage grids, in addition to the benefits of lower wholesale prices. These grid costs are currently around 7% of an annual electricity bill.
Our second window for receiving applications for the cap and floor regime closes on October 31st. We expect that we will continue to see strong interest in the market as part of this. But with further interconnector links now in the pipeline, it is imperative that the supply chain matches keeps pace with the development of the links. If not development of interconnectors may slow down. That was the focus on our joint event with BEIS yesterday.
Offshore transmission links
On October 10th we will be launching our largest ever tender round for links to offshore wind farms which is expected to deliver up to £2billion in investment.
The Offshore Transmission Owners (OFTO) tenders are an innovative way to attract investment and also benefit consumers. The regime allows bidders to own and run links over a 20 year period. The first three tender rounds (a fourth is currently underway) have so far attracted £3.1 billion in investment value and delivered over £700 million in savings for consumers. Ofgem is hosting the OFTO event on the 30 September so that prospective bidders can find out more about the five links being tendered in the fifth round.
The offshore transmission and ‘cap and floor’ regimes are excellent examples of how innovative regulation can unlock the investment we need in these links and keep costs down for consumers. Together with government policies to encourage low carbon generation, they will both play a part in improving security of supply and sustainability for Britain.