Decision on proposed changes to our electricity interconnector cap and floor regime to enable project finance solutions
Decision
Publication date
Industry sector
Transmission Network
We have decided to change aspects of our electricity interconnector cap and floor regime for the Greenlink and NeuConnect interconnector projects to enable project finance solutions. This follows our October 2019 consultation which provided our minded-to position on changes requested by the developers of the two projects. Our decision applies to these two projects only except where we have noted otherwise as set out in our decision.
Our October 2019 impact assessment demonstrated that approving three of the key requested changes for the two projects is likely to be in the interests of GB consumers. Following our review of consultation responses and additional evidence, we have updated our impact assessment. As a consequence of this update, we have decided to maintain our consultation position to approve the following key variations to our default cap and floor regime:
- Reducing the default five-year revenue assessment period to one year.
- Changing the principle and design underpinning our minimum availability threshold of 80%.
- Broadening our definition of force majeure under the default regime to include some specific additional events.
We have also decided to approve an additional key variation request to set the floor based on actual cost of debt and gearing achieved from a competitive market process. This is a change of position relative to our consultation. We will provide flexibility for developers by using either of the following options to set the floor:
- Keep the default notional approach but replace the default cost of debt benchmark with a slightly different cost of debt index, with everything else remaining the same as in the default regime; or
- Follow a competitive market approach and set the floor based on actual cost of debt and gearing (which is the developers’ request) with Ofgem to oversee the process. Under this approach, the floor will cover the debt-geared portion of the investment only (including provision for a reasonable debt service cover ratio). However, if the floor based on this approach is higher than the floor based on Approach 1 above, and higher floor payments from consumers are required, developers would reimburse consumers the difference from future revenues above the floor before they can recover equity investment and any dividends. This will ensure that the overall additional cost to consumers will be broadly the same as the notional approach or better from GB consumer point of view.
Evidence indicates that the above variations are necessary to broaden the range of financing solutions available to the developers. We have considered the consultation responses received when reaching our decision. All non-confidential responses are available on the decision page.
We remain of the view that the Greenlink and NeuConnect projects are likely to be in the interests of GB consumers. We have therefore decided to approve the above variations to our interconnector cap and floor regime that would apply to the two projects subject to additional conditions as set out in our decision.