1. 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

2. 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

3. GB: Context for the challenge
Nordpool
Single Electricity Market
Existing
Construction
Proposed
>10 GW
4 GW
2.5 GW
Central West Europe
10th FUI Stakeholder Group Meeting, 11/03/2011

4. 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

5. 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

6. Belgium: Context for the challenge
Existing
Proposed
10th FUI Stakeholder Group Meeting, 11/03/2011

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Thank you for your attention!