Decision on the cap and floor regime for the GB-Belgium interconnector project Nemo
Decision
Publication date
Industry sector
- Transmission Network
- Generation and Wholesale Market
Electricity interconnectors can significantly benefit existing and future consumers. Our objective is to make sure that economic and efficient interconnection is delivered in a timely manner. Nemo is expected to be the first interconnector built under the cap and floor regulatory regime which we have developed with the Belgian energy regulator, CREG.
The regime
The cap and floor regulatory regime sets a framework for GB interconnector investment. This developer-led approach balances incentivising investment through a market-based approach, with appropriate risks and rewards for the project developers are appropriate.
The regime is designed to limit the downside of the investment by providing regulated revenue at the floor. Here, the developers will receive a top-up from GB and Belgian consumers if revenue falls below a predefined level. Consumers are protected through the cap, which ensures that high returns are passed back to network users in GB and Belgium. Following consultation on the details of this regime, we have now applied the regime to the GB-Belgium interconnector Nemo.
The cap and floor are constructed using a ‘building block’ approach. These building blocks include our assessment of efficient construction costs, a return on capital and an assessment of operating expenditure. For Nemo, we have calculated the cap and floor levels based on the final regime design and our assessment of costs to date. This generates an annual floor level of £50.4m and an annual cap level of £80m (2013/14 prices). These will be subject to final adjustments following our final assessment of costs after construction.
Impacts
We looked at the impacts of applying the cap and floor regime to Nemo as part of our Impact Assessment. We expect that over the lifetime of the project, Nemo will provide social welfare benefits resulting from trade between the GB and Belgian markets. We also anticipate wider positive impacts (such as a small increase in competition and enhanced security of supply) that will benefit consumers, in addition to those captured by trade benefits. The cap and floor regime is designed such that a project only goes ahead if revenues are expected to exceed the floor. The revenue projections presented by the developers suggest that consumer top-ups to the floor are unlikely.
Next steps
Our decision to apply the cap and floor to Nemo, along with the final regime design, has been agreed with CREG. CREG consulted on its decision in November 2014 and has now submitted its decision to the Belgian Parliament. We expect the Nemo developers to take their final investment decision in early 2015 with the interconnector in operation by the end of the decade.
This marks the end of the regime development for Nemo. We will now make the necessary changes to GB interconnector and transmission licences to reflect our decision. We will work with the developers and consult formally on these changes.