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Developing a cap and floor regime for the GB-Belgium Interconnector: NEMO. Pascal Boucquey (CREG) & Charlotte Ramsay (Ofgem) 10 th FUI Stakeholder Group Meeting 11 th March, 2011. Contents. State of play in GB and Belgium: The challenge Current regulatory background

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Developing a cap and floor regime for the GB-Belgium Interconnector:

NEMO

Pascal Boucquey (CREG) & Charlotte Ramsay (Ofgem)

10th FUI Stakeholder Group Meeting

11th March, 2011


Contents
Contents Interconnector:

  • State of play in GB and Belgium:

    • The challenge

    • Current regulatory background

    • Drivers for change

  • Project NEMO

    • GB-Belgium interconnector

    • Details and status of development

    • Coordinated approach from GB & Belgium

  • Developing an alternative model for regulation

    • High level principles

    • Cap and floor, outline

    • Implications for GB and Belgium

  • Next Steps for Ofgem and CREG

10th FUI Stakeholder Group Meeting, 11/03/2011


Gb context for the challenge
GB: Context for the challenge Interconnector:

Nordpool

Single Electricity Market

Existing

Construction

Proposed

2.5 GW

4 GW

>10 GW

Central West Europe

10th FUI Stakeholder Group Meeting, 11/03/2011


Gb current regulatory regime for interconnectors only
GB: Current regulatory regime Interconnector:(for interconnectors only)

  • “Light touch” regulation

  • Separate Interconnector licence

  • Merchant interconnection

  • Business case = congestion rents

  • All upside and downside borne by investors

  • Apply for exemption from EU legislation

10th FUI Stakeholder Group Meeting, 11/03/2011


Gb drivers for change
GB: Drivers for change Interconnector:

  • Regulatory “risk” of exemptions (BritNed case)

    • Need for risk sharing between consumers and investors

  • Exemptions the exception not the rule

    • European model, national TSOs deliver interconnector investment

  • Merchant-exempt route not possible for several project partners

    • Need for a common / coordinated approach to regulation of shared assets?

  • Potential for commercially viable interconnection

    • But pure merchant financing of projects less viable …

10th FUI Stakeholder Group Meeting, 11/03/2011


Belgium context for the challenge
Belgium: Context for the challenge Interconnector:

10th FUI Stakeholder Group Meeting, 11/03/2011


Belgium current regulatory regime for national tso including interconnection
Belgium: Current regulatory regime Interconnector:(for national TSO, including interconnection)

  • Interconnections are integrated in the (national) transmission system

  • No separate interconnector licence

  • Fully regulated regime

  • Interconnection included in the Regulated Asset Base

    • Remuneration of the investment based neither on the level of revenues received from auctioning its capacity nor on the level of costs related to it

    • The yearly fair margin available for the TSO’s shareholders is guaranteed and based upon the RAB

  • Congestion recycled in order to decrease tariffs

10th FUI Stakeholder Group Meeting, 11/03/2011


Belgium drivers for change
Belgium: Drivers for change Interconnector:

  • Different risk profile of DC, subsea cables

    • Scale of investment

    • Complexity and risk of project

  • National TSO (Elia) requesting enhanced rate of return to reflect risks

  • In addition, project identified as bringing benefits for the security of supply, economic welfare and competition

  • Alternative regulatory approach envisaged to fill the regulatory gap BE-GB

10th FUI Stakeholder Group Meeting, 11/03/2011


Gb belgium interconnector project nemo
GB-Belgium interconnector: Interconnector:Project NEMO

  • Regulatory challenges:

    • Significant differences between current GB and Belgian regimes

    • With current national regimes, risk of asymmetric interests for investors involved in the shared interconnector project

  • Issues converge with “Project NEMO”

    • GB – Belgium interconnector

    • Press release from National Grid & Elia, Feb 2008

  • More on NEMO …

  • And on solving the regulatory challenges …

10th FUI Stakeholder Group Meeting, 11/03/2011


Gb belgium interconnector project nemo1
GB-Belgium interconnector: Interconnector:Project NEMO

  • 1 GW HVDC connection

  • Isle of Grain to Zeebrugge

  • Marine

    • Sub sea survey

    • MMO contact

    • Consents and permits (GB and Be Marine organisations)

    • Contact w. fisherman

  • Onshore work

    • Consents & permits (Planning, environmental surveys, etc)

    • Early preparation of landing site (GB)

10th FUI Stakeholder Group Meeting, 11/03/2011


High level principles for the new regime
High level principles for the new regime Interconnector:

  • Developers should be exposed to the market's valuation of interconnector capacity,

  • Consumers should be protected from the cost implications of excessive returns or market power that might accrue to interconnector owners,

  • Developers should be exposed to levels of investment risk that are commensurate with the level of regulatory intervention to mitigate excessive revenues and market power,

  • Regulatory treatment of developers should be coordinated between Regulatory Authorities at either end of the shared asset,

    and

  • (For GB and future IC developments) Treatment of potential interconnector developers should be impartial and unbiased between TSOs and non-TSO developers

10th FUI Stakeholder Group Meeting, 11/03/2011


What is a cap and floor
What is a cap and floor ... Interconnector:

  • Recoup profits within bounds of pre-set revenue cap and floor

  • Returns over cap – paid back to consumers

  • Returns fall below floor – triggers payment from consumers

  • Allows revenue regulation, protects consumers from market power

  • Maintains element of market valuation of interconnection

  • Moves closer to regulated regime favoured by Third Package

  • Can provide tailored incentives on top of regulated regime

10th FUI Stakeholder Group Meeting, 11/03/2011


Design of the cap and floor
Design of the cap and floor Interconnector:

  • What activates the cap and floor?

    • Profit or similar (e.g. revenue, IRR)

  • How often is it assessed?

    • > 1year, <lifetime of project

    • Cumulative perspective?

    • When is the cap paid back (or floor paid out)?

  • When is the cap/floor set?

    • Ex-ante, on forecast costs …

  • How long does the cap/floor persist?

    • Lifetime of investment? Lifetime of interconnector?

    • Should it be reassessed at any point?

  • Additional requirements/obligations:

    • standards for operational efficiency and IC availability

    • requirements for capacity allocation (e.g. price coupling)

10th FUI Stakeholder Group Meeting, 11/03/2011


Plans for joint consultation
Plans for joint consultation Interconnector:

  • The drivers for change in regulation of new interconnector investment

  • The high level principles behind the regime and rationale for option(s) considered

  • Design of the cap and floor - setting out the different parameters for the regime (e.g. what is the cap/floor levied on? How often is it assessed etc.)

  • Indicative levels for the cap and floor (not specific to NEMO)

  • Additional requirements/obligations on the developer/operator

  • List of requirements for application to NRAs for a cap and floor (relevant for GB)

10th FUI Stakeholder Group Meeting, 11/03/2011


Process next steps
Process & Next steps Interconnector:

  • Consultation

    • Launch: end of April / May 2011

    • Conclusions: Q3 2011

  • Work on integrating the cap and floor into the GB and Belgian regimes (ongoing):

    • GB (Licence amendments, integration into price control etc.)

    • Belgium (Necessary changes in current legal framework, transposition of Third Package still ongoing …)

  • Continue discussions with other NRAs (GB)

  • Links with other projects: North Seas Countries Offshore Grid Initiative, energy infrastructure package etc.

10th FUI Stakeholder Group Meeting, 11/03/2011



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