1. Regulating New Interconnector Investment Emmanouela Angelidaki Ofgem 16 th June 2010

2. Overview Background on Ofgem consultation and options proposed Consultation responses –Response to Options 1-4 –Developing an enduring regime Next steps

3. EWIS (European Wind Integration Study) High wind penetration scenario (2015): Cross border links where expansion would provide economic benefit Name Connects GB to Capacity (MW) Existing IFAFrance2000 MoyleN. Ireland 450 (to NI) 80 (from NI) Underway BritNedNetherlands1000 East West Interconnector Ireland500 Future East West 1 East West 2 Ireland2 x 350 MW Channel CableFrance800 NemoBelgium1000 IFA 2France1000 Norwegian interconnector Norway1000 BelbritBelgium1000 Up to 9GW of capacity by 2020

4. Options for regulating new Interconnectors Merchant…………to revenue controlled approach

5. Options for regulating new Interconnectors 1.Uncapped (“merchant approach”): returns determined by auction proceeds..Exemption is required 2.Regulated cap (Britned case) : cap on returns or revenues from auctions; excess revenues must be invested in increased capacity or returned to customers 3.Regulated cap and floor : returns within a range depend on auction revenues ; above or below they are returned to or supplemented from customers 4.Regulated Revenues (“regulated approach”): Equivalent to including IC in the transmission tariff mechanism. Assessment of required revenues and any auction revenues above/below is returned/supplemented from customers

6. The Consultation closed on 30 March 2010 and we received 20 responses : IC ownersTSOsEnergy Companies Organisations IUKNational GridEONAEP MoyleRTECentricaAPX BritnedEirgridEDFConsumer Focus EliaRWE StatnettStatkraft SSEMainstream Renewable Power Statoil ASA IPR

7. Option 1: Uncapped Merchant Approach  Many see benefits of risks and rewards being covered by the investor  Some highlight option 1 as providing the most efficient levels of interconnection  Some see pure merchant approach as increasingly infeasible due to need for exemptions  Others don‘t recognise this as a problem  Some highlight merchant investment as the way to provide timely investment  Others argue the opposite due to exemption requirements etc. Consultation Response

8. Option 2: Few have this as a preference Several believe that this option (and option 3) distort incentives to invest in IC, and if not correctly applied can result in inefficient use of IC capacity Some note that this deviation from the pure merchant approach causes delays in investment and often results in collapse of investment plans Consultation Response

9. Option 3: Several saw this as an option to maintain merchant investment in IC whilst harmonising to some extent with EU... but only if it could be compliant with EU legislation Several believe that this option (& option 2) distorts incentives to invest in IC, and if not correctly applied can result in inefficient use of IC capacity.. “Addition of a floor is an unacceptable risk for consumers, particularly as the risks associated with IC are not something that is well understood – makes setting of floor complicated“ Consultation Response

10. Option 4: Makes GB fully in line with Europe Efficiencies result from harmonisation of legislation (in terms of time taken for investments, considering cross-MS nature of IC investment) Others considered the introduction of TSOs slows the investment process Some concern that the regulated approach generates an inefficient number of ICs (i.e. Uncongested lines), and results in high costs to consumers GB IC different from elsewhere: DC, subsea / offshore, long distances – therefore needs diff erent approach re. incentives Consultation Response

11. Enduring regime for new interconnector investment Some support for mixture of different approaches But not imposed retrospectively on established projects Implement an aligned structure for both Britned & IFA Others consider that mixture of different approaches has less advantages; should be limited to existing ICs and a unified approach should be applied to all new ICs to provide correct investment signals Important for NRAs to coordinate in two sides of the border & agree on the access rules Some emphasize the difficulty to see how merchant ICs will compete with regulated ICs….. Consultation Response

12. We need to explore further Options 3&4: eg. how cap and collar should be applied, consistency with the CMGs and GB legal Framework We intend to collaborate with CREG on Project Nemo (GB- Belgium Interconnector).. Ongoing discussions with all stakeholders Report back to IG on progress Next Steps