The Anonymous Widower

Ofgem Enables National Grid To Make Early Payment Of Interconnector Revenues, Helping To Reduce Household Bills

The title of this post, is the same as that of this press release from National Grid.

These are the first three paragraphs.

National Grid has offered to pay £200m of interconnector revenues ahead of schedule rather than at the end of the standard five-year review period to play its part in reducing household energy bills.

Interconnectors, which are subsea electricity cables connecting the UK and Europe, enable the import of cheaper, cleaner energy from European neighbours, supporting security of supply and reducing carbon emissions.

It’s estimated that National Grid’s interconnector portfolio will help the UK avoid around 100 million tonnes of carbon emissions by 2030.

Ofgem has approved National Grid’s request to make early payments.

These are my thoughts.

What’s In It For Consumers?

National Grid is making a payment early, so they are not getting anything, they won’t eventually get.

But they are getting it early!

What’s In It For National Grid?

As National Grid is making a payment early, they are forgoing interest on the £200 million.

In New Electricity ‘Superhighways’ Needed To Cope With Surge In Wind Power, I talked about National Grid’s plan to build new North-South interconnectors, that would handle all the extra wind-power.

National Grid currently owns all or part of these operating or planned interconnectors.

National Grid would appear to have a substantial interest in the UK’s interconnectors and is the £200 million payment to ensure they get the contract to build and operate any new UK interconnectors? I’m not saying it’s a bribe, but it’s just operating the interconnectors in a manner that is an advantage to the UK and its electricity customers.

Surely, if the ultimate customers are happy, there will be less calls for the break-up of National Grid.

What Is A Cap And Floor Regime?

The press release explains a cap and floor regime like this.

Ofgem’s cap and floor regime sets a yearly maximum (cap) and minimum (floor) level for the revenues that the interconnector licensees can earn over a 25-year period. Usually, revenues generated by the interconnector are compared against the cap and floor levels over five-year periods. Top-up payments are made to the interconnector licensee if revenues are lower than the floor; and similarly, the licensee pays revenues in excess of the cap to consumers.

Ofgem’s approval enables National Grid to make payments of above cap revenues significantly earlier than originally planned, which will contribute to reducing consumer energy costs over the next two years. National Grid is now working with Ofgem to explore how to ensure the early payments can have the most impact for consumers.

I wonder if Ofgem and National Grid feel that a cap and floor regime is not only good for them, but for electricity consumers as well.

Cap And Floor Regimes And Energy Storage

There has been talk that cap and floor regimes should be used for energy storage.

This article on Current News is entitled Cap And Floor Mechanism The ‘Standout Solution’ For Long Duration Storage, KPMG Finds.

These are the first two paragraphs.

A cap and floor regime would be the most beneficial solution for supporting long duration energy storage, a KPMG report has found.

Commissioned by Drax, the report detailed how there is currently no appropriate investment mechanism for long duration storage. Examining four investment mechanisms – the Contracts for Difference (CfD) scheme, Regulated Asset Value (RAV) model, cap and floor regime and a reformed Capacity Market – it identified cap and floor as the best solution.

I also suspect that if the operator does a National Grid with the revenues, a cap and floor regime, must be even better.

I would not be surprised to see schemes like Coire Glas pumped hydro operating under a cap and floor regime.

Effect On Other Energy Companies

Wind farms seem to be operated under the Contracts for Difference scheme in many cases, but will we see cap and floor regimes being used in this market?

I can certainly see a new regime emerging, that is better for investors, wind farm builders, consumers and the Treasury.

In some ways keeping a happy relationship between the investors, Government and consumers is most important. So as National Grid, the Government and consumers don’t seem to be jumping up and down about their cap-and-floor regime, it must be working reasonably well!

Conclusion

Get the right regime and quality investors could be flocking to the UK’s energy generation and supply industry.

National Grid by their actions in paying up early, have thoroughly endorsed the system.

May 12, 2022 - Posted by | Energy, Energy Storage | , , , ,

9 Comments »

  1. Great through it is you do have to question how the regulators designed a system whereby NG benefitted to this level.

    Comment by Nicholas Lewis | May 12, 2022 | Reply

    • NG do seem to have delivered at least some of the interconnectors on time. In fact, much of our wind infrastructure seems on time. But then this is Round 2 of North Sea Engineering, with Oil and Gas being Round 1.

      Comment by AnonW | May 12, 2022 | Reply

  2. I think these schemes are all about government kick-starting a market, so that investors have confidence in long-term returns. It’s been very successful with wind, and the latest CfD round included tidal/marine power, where the hope is obviously to repeat that success and fulfil marine potential. Current wholesale prices make investment a bit of a no-brainer – even nuclear can make a return. It will be interesting to see what happens in the future when all the planned schemes are operational and wholesale prices fall again.

    NG is not involved in most of the planned interconnectors on Ofgem’s list – private investors seem to be confident they can make money. In recent weeks, interconnector supply has been strongly negative, i.e. GB is supplying other countries rather than the other way round which was the case over the winter.

    Comment by Peter Robins | May 15, 2022 | Reply

    • As to your last point, The latest North Sea Link to Norway was part financed by Nation Grid and I read somewhere, that it has been designed so that we can use excess wind power to bank energy in Norway’s pumped storage.

      In this post, I estimated that there could be as much as 8 TWh of pumped storage capacity at the Norwegian end of the North Sea Link.

      UK To Norway Sub-Sea Green Power Cable Operational

      Now that’s what I call energy storage.

      Comment by AnonW | May 15, 2022 | Reply

      • Norway has minimal pumped storage we’ve actually got more than them. It probably needs to urgently convert some plants as its hydrological capacity is shrinking year on year due to lower snowfall. Also big debate going on in Norway about whether its should be using its green energy so frivolously given the high rate of electrification of transport that is happening.

        Good to see us in full export mode again tonight with all four N.European i/c’s running at current max capacity. Good for the balance of payments to be selling our electricity and until Europe sorts out its substitute for Russian gas my take is this will become norm as one thing UK has going for it is the ability to regasify vast quantities of LNG.

        Comment by Nicholas Lewis | May 15, 2022

      • Yeah, I’ve just been looking at https://mdpi-res.com/d_attachment/energies/energies-13-04918/article_deploy/energies-13-04918-v2.pdf – an academic study from 2020. This states “Norway is currently the world’s sixth largest producer of renewable energy from hydropower, with approximately 125 TWh per year. … [It] has a large potential for expanding its pumped storage capacity and contribute with energy storage on a European scale”.

        Norway’s become rich on the back of N Sea fossils. Pumped storage looks like an obvious way to make use of its other greener resources.

        Comment by Peter Robins | May 15, 2022

  3. indeed, both sides can benefit by importing or exporting power as needed. NSL is still only at half capacity – should be fully operational on June 14 https://www.bmreports.com/bmrs/?q=remit/NSL202203221527G-ELXP-RMT-00000017/5/NGNSL

    Comment by Peter Robins | May 15, 2022 | Reply

    • Umm not so good for brand new kit

      Comment by Nicholas Lewis | May 15, 2022 | Reply

      • AIUI, there have been 2 problems since it went online at the end of last year. First was a problem at the Norwegian end. I read somewhere that they were supposed to start testing with reduced power but someone at the GB end put it on full power, which damaged equipment in Norway. That took a couple of months to fix. In March they ramped up the power, but couldn’t go beyond 1GW due to the reported valve issue in Cambois. Fortunately, the capacity is split in 2, so they turned off the half with the issue, and can run the other half without problem. Eventually …

        ElecLink, 1GW through the Chunnel, should be coming online shortly too.

        Comment by Peter Robins | May 15, 2022


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