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

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

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  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 2.5 GW 4 GW >10 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 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!

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