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Ofgem Introduces New Framework to Encourage New Electricity Interconnectors

28 May 2014

Ofgem has published proposals for a new regulated approach to help more electricity interconnectors to be built.

Electricity interconnectors are cables that allow electricity to flow from one country to another. They enable countries to import power at times of shortage and export when in surplus. They can help to lower electricity supply prices and cut the cost of delivering security of supply. Britain already has four interconnectors, with a capacity of 4GW, but more interconnection is needed.

Under Ofgem’s proposed ‘cap and floor’ framework, developers will identify, propose and build interconnectors. Ofgem’s role is to assess, approve or reject individual plans and regulate how much money a developer can earn from operating an interconnector. Ofgem’s rigorous assessment process will evaluate consumer benefits to help ensure that only projects that are in consumers’ interests are approved.

If an interconnector plan is successful Ofgem will place a cap on the revenue the developer can earn. Anything above this cap is returned to consumers. Conversely, if their revenue falls below the floor then consumers top up developers’ revenue to the level of the floor. The level of the cap and floor will be specific to individual interconnectors and be determined by assessment of the efficient costs of developing and operating the interconnector. We expect to start considering applications in the autumn.

Martin Crouch, Senior Partner, Transmission, said: “The current market-led approach has not encouraged sufficient investment in interconnection with our neighbouring countries. We are proposing a regulated framework that will deliver crucial energy infrastructure at a fair price for consumers. This sits alongside a range of reforms aimed at increasing energy resilience in Britain, including increasing charges for suppliers and generators when they fail to meet customers’ energy needs.”

Ofgem has also announced reforms to strengthen incentives on generators and suppliers to ensure they generate or buy the right amount of power to meet customers’ needs. When they fail to do so, National Grid incurs costs in taking action to meet demand, and the generators or suppliers who cause the imbalance are charged for their errors. Ofgem has reviewed these charges – known as ‘cash-out’ – so that they better reflect the costs that National Grid incurs in dealing with these imbalances. Our reforms mean that generators and suppliers will face stronger incentives to deliver security of supply. Our reforms will support the efficient flow of energy through interconnectors, in particular incentivising in-flows during times of system stress.

Story appears courtesy of Ofgem.