Review of the methodology for the calculation of the Interest During Construction for offshore transmission and future interconnectors granted the cap and floor regime

Publication date
23rd January 2018
Closing date
20th February 2018
Policy area

Developers of generator build offshore transmission assets invest capital during the planning and construction phase, with no return on this investment until the project is complete. In determining the final asset values that developers receive when the ownership of the assets is transferred to Offshore Transmission Owner we include the efficient cost of capital for construction through Interest During Construction (IDC). IDC is accrued on the actual cash flow when payments are made against the contracts for developing and constructing the transmission assets. We have determined that IDC should be allowed up to the point where the transmission assets are available for use for the transmission of electricity. Similar conditions apply to Interconnector construction being developed through the Cap and Floor regime. 

In December 2013, we committed to annual reviews of the IDC cap for OFTOs to reflect current market conditions. For what concerns the IDC for interconnector projects, in May 2017 we decided to adopt different calculation methodologies depending on the approval stage of each individual project. For projects which have already received an Initial Project Assessment decision by Ofgem (window 1 projects), we will continue to set the IDC on a project specific basis at the time of Final Investment Decision (FID). For projects which had yet to receive an IPA we committed to consider to move to annual updates of IDC to align the calculation inputs with those for the OFTO IDC.

As part of our annual review of the IDC for OFTOs and the planned review of the methodology for calculating the IDC for interconnectors that have yet to receive an IPA, we have commissioned Cambridge Economic Policy Associates (CEPA) to review our methodology for calculating the cost of capital for these projects

This letter presents our minded-to position with respect to the methodology to calculate IDC for OFTOs that have yet to reach a FID and Interconnectors that have received an IPA decision as part of the second window of the Cap & Floor regime and any future projects that might be approved under this regulatory framework.