Ofgem changes Greenlink and NeuConnect cap and floor regime

In: Interconnectors
Ofgem has decided to change aspects of the electricity interconnector cap and floor regime for the Greenlink and NeuConnect interconnector projects to enable project finance solutions. This follows a October 2019 consultation in which Ofgem outlined its minded-to position on changes requested by the two projects' developers.

The decision includes approving the following key variations to the default cap and floor regime:
  • Reducing the default five-year revenue assessment period to one year.
  • Changing the principle and design underpinning its minimum availability threshold of 80%.
  • Broadening the definition of force majeure under the default regime to include some specific additional events.

Ofgem also decided to approve a key variation request to set the floor based on actual cost of debt and gearing achieved from a competitive market process. It will provide flexibility for developers by using either of the following options to set the floor:
  • Keep the default notional approach but replace the default cost of debt benchmark with a slightly different cost of debt index, with everything else remaining the same as in the default regime; or
  • Follow a competitive market approach and set the floor based on actual cost of debt and gearing (which is the developers’ request) with Ofgem to oversee the process. Under this approach, the floor will cover the debt-geared portion of the investment only (including provision for a reasonable debt service cover ratio). However, if the floor based on this approach is higher than the floor based on Approach 1 above, and higher floor payments from consumers are required, developers would reimburse consumers the difference from future revenues above the floor before they can recover equity investment and any dividends. This will ensure that the overall additional cost to consumers will be broadly the same as the notional approach or better from GB consumer point of view.

Ofgem will implement its decision by setting out the necessary changes in the special licence conditions issued to both Greenlink and NeuConnect. It plans to develop and consult on these licence conditions with the aim of amending the relevant licences alongside its Final Project Assessment and in advance of financial close for the respective projects.

NeuConnect is a proposed high voltage direct current subsea electricity interconnector between the UK and Germany. With an anticipated capacity of 1.4GW, the link will have a total cable length of 720 km. The project will see the first connection between the UK and Germany, linking Greystones in the UK and Conneforde in Germany. The cable route passes through UK, Netherlands and German territorial waters before making landfall at either end. It represents a significant £1.4bn / €1.6bn of private investment in UK infrastructure, led by an international consortium including Meridiam, Allianz Capital Partners and Kansai Electric Power.

NeuConnect CEO Christophe Vanhove said: “We welcome Ofgem’s decision which is another important step in the delivery of this vital new energy link. Work is continuing across the NeuConnect project and we continue to make good progress, keeping us firmly on track.”

The NeuConnect project continues to make progress with a major £1bn procurement programme well underway, local planning processes started in the UK and Germany, and 700km of seabed surveys completed. In March, NeuConnect also received Project of Common Interest (PCI) status from the European Commission, placing it on the list of Europe’s priority energy projects.

Greenlink is a 500 MW subsea interconnector which aims to connect the national grids of Ireland and the Ul. It will consist of 170km of submarine cabling, with 30km of cable on land linking County Wexford in Ireland and Pembrokeshire in Wales. Construction is currently planned for 2020, with completion expected by 2023.

Last month, (22 April)
Greenlink submitted three planning applications for the project’s onshore works in Wales, including underground cable installation and construction of a converter station. The applications for planning permission have been submitted to Pembrokeshire County Council and Pembrokeshire Coast National Park Authority. This follows a period of consultation on the draft planning applications, which ran from 18 December 2019 to 22 January 2020. The final applications once validated will be subject to a further 21-day period of statutory public consultation to be undertaken by the relevant local planning authorities.

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