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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
  • 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

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 (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
  • 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

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

belgium current regulatory regime for national tso including interconnection
Belgium: Current regulatory regime(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
  • 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: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: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
  • 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 ...
  • 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
  • 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
  • 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
  • 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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