Update on Ofgem’s interconnector policy consultation

FUI IG, London, 13

th

September

Consultation scope & responses

• Seeking views on: – proposed models for the allocation of cross border transmission capacity and efficient use of electricity interconnectors – regulation of new investment. • We received 21 responses from interconnector owners, TSOs, energy companies and other organisations

IC owners TSOs Organisations

IUK Moyle Britned National Grid RTE Eirgrid Elia

Energy Companies

EON Centrica EDF RWE AEP APX Consumer Focus Statnett SSE Statkraft Mainstream Renewable Power Statoil ASA IPR

Consultation conclusions

• Published summary of responses – July – http://www.ofgem.gov.uk/Europe/Documents1/Summary%20 of%20Responses%20from%20Electricity%20Interconnector% 20policy.pdf

• Preparing “next steps” letter – for publication end September – Sets out our next steps in: • Market coupling in the FUI Region • Tackling barriers to market coupling in GB (TNUoS, Firmness, 2 power exchanges) • Developing a new regulatory regime for interconnector investment

Market coupling in the FUI Region

• Committed to implementation of the “enduring solution” for day ahead market coupling of the FUI to the NW Europe Region • Steps to achieve this: – Britned to implement its “embedded solution” as an interim step – Support for and participation in the NWE TSO and PX projects to develop a common algorithm to support price coupling across the region – GB to implement the enduring solution including both IFA and Britned – In the longer term, through cooperation of NRAs in the FUI region, support extension of market coupling to include SEM (All Ireland market)

Tackling barriers to market coupling in GB:

TNUoS Charging

• Problems highlighted by respondents: – TNUoS charges create a deadband that prevents price convergence in coupled markets – Avoidance of “Triad” charge (demand TNUoS) causes inefficient flows on interconnector • Solution proposed: – National Grid consulted over summer on complete removal of TNUoS charge on Interconnectors – Final conclusions published by National Grid 6 th September – Decision by Ofgem Authority expected by end of September – If approved, changes to charging methodology effective 1 st October 2010.

Tackling barriers to market coupling in GB:

Firmness

• Share view of many other NRAs that: – Implicit auctions require physical firmness as a prerequisite – Physical and financial firmness should work towards delivering the same outcome • Recognise that Britned will be offering physically firm products • Consistency with CWE’s approach to firmness i.e. financial firmness after nomination of capacity • Contributing to ERGEG work addressing firmness through the framework guideline / network code process – leading to a

common European approach

Tackling barriers to market coupling in GB:

2 power exchanges

• Respondent highlighted existence of 2 PXs in GB as a potential barrier to market coupling • We've been considering how market coupling could be implemented in GB..

• Possible solutions, already presented to IG...

• We believe it is technically possibly for two Pxs to deliver a single a coupling solution • TSOs, Pxs & IC owners should be part of a clear roadmap, for the implementation of the enduring coupling mechanism

LT Coordination

• Coordination of LT auctions, key priority for the FUI region.

• In our letter we highlight the next steps agreed by FUI IG...

Intraday timeframe

• The increased amount of intermittent generation expected in GB and SEM markets, places additional value to Intraday timeframe.

• Together with the Dutch NRAs, we are co-chairing, on behalf of FUI the Regulator’s group of the NW ID project: ID market coupling solution by 2012.

• In parallel, once SEM introduces ID trading, FUI will develop coordinated ID capacity products & work on the implementation of the ID coupling model

Developing a new regulatory regime for interconnectors

• Given that the preferred EU approach is a regulated model we are developing a regulated investment regime for non-exempt interconnectors, but remain open to the merchant route. • Fully regulated approach would be a significant departure from our current approach, requiring several changes to our regime and longer time to implement.

• As respondents highlighted, the Cap and Collar model: – maintains merchant investment whilst safeguarding consumers from taking undue levels of risk.

– is a good compromise between the advantages & disadvantages of the merchant and regulated models

Developing a new regulatory regime for interconnectors

• Project “NEMO”, is our “pilot” project in exploring how cap and collar model could be implemented in GB.

• Together with CREG, NG and Elia we aim to establish: – High level principles behind the new regime – – Explore options for cap& collar design , satisfying these principles Implementation mechanisms required to adopt a cap & collar (eg changes in the regimes on both sides) Timeline: • Proposal by the end of 2010 • Possible a joint consultation with CREG in 2011

Developing a new regulatory regime for interconnectors

• While, NEMO will be our pilot project to develop a regulated regime, we acknowledge that there are other ICs under discussion: e.g. links to France, Ireland, Norway..

• We envisage holding similar discussions with relevant TSOs and regulators to discuss if this approach could be seen as a high level solution for other non-exempt ICs..

• We also remain open to the merchant route.Under FUI workstream on IC investment, we intend to develop a coordinated approach towards exemptions with other regulators...