National Grid could have done more to prevent delays to its Viking Link interconnector project linking the UK’s energy supply with Denmark, according to Ofgem.
Consequently, the regulator has ruled that the Viking Link project’s 25-year cap and floor regime start date will be backdated to January this year. That is despite construction of the 1,400MW electricity interconnector still taking place and the project’s developers estimating an earliest operational start date of January 2024.
When the project was granted a cap and floor regime in 2015, its regime start date was aligned with its originally slated operational start date of January 2021.
Setbacks in obtaining necessary planning permission as well as capacity issues within the cable market have subsequently pushed the construction timeline back by three years.
In October 2021, National Grid Viking Link Limited (NGVL) – an outshoot of National Grid Ventures – applied for the regime start date to be pushed back by 36 months to January 2024.
The application was made four months after a regulatory change which gave Ofgem the power to adjust regime start dates in the case of “events or circumstances of pre-operational force majeure”.
While partially accepting NGVL’s application, the regulator believes that the developer could have done more to mitigate delays and as such has only agreed to adjust the regime start date by two years, rather than the three requested.
In its application, NGVL applied for the regime start date to be adjusted by one year due to delays in obtaining onshore consents both in Britain and in Germany. The developer applied for a further two-year adjustment due to cable market constraints which it claims were unforeseeable.
In its ruling, Ofgem agreed that consenting delays were outside the developer’s control and agreed to the one year extension.
However, in relation to cable market constraints Ofgem ruled that a one-year adjustment would be more appropriate than the requested two year extension.
In particular, NGVL claimed that cable market congestion was primarily caused by the concurrent development of two other interconnector projects (NSL and Nordlink) taking up the available cable manufacturing capacity ahead of NGVL.
In response, Ofgem’s ruling accepts that NGVL “may not have had full visibility of the development of interconnector projects outside of the UK, such as the Nordlink interconnector”, however the regulator says that project developments in the UK, such as the NSL project, should “have been reasonably foreseeable”.
It adds: “We also consider it to have been foreseeable that this would have been likely to affect cable market capacity. We would therefore have expected NGVL to be prepared for cable market congestion caused by other projects”.
Ofgem’s ruling adds that while “NGVL took some steps to minimise the impact of congestion within the cable market”, the developer failed to implement mitigations to alleviate identified risks and “we have therefore concluded that the constraints in the cable market were only partly outside of NGVL’s control.”
It adds: “NGVL identified several risk items, including cable market capacity constraints and scarcity of manufacturing slots that could impact timely project delivery. We further note that NGVL set out a number of ‘levers’ at its disposal for managing the impact of these risks, including pre-booking capacity, tailored lotting strategies and the ability to delay or move the proposed connection dates for other National Grid Ventures interconnectors to optimise available manufacturing slots.
“Despite having identified a number of possible remedial strategies NGVL do not appear to have utilised any of these levers to proactively alleviate the identified risks of congestion within the cable market.”
Having a regime start date begin a year before its expected operational start date effectively means that the project’s cap and floor agreement will run for 24 years instead of the intended 25 years.
The cap and floor regime helps developers of interconnectors to secure finance by offering a minimum revenue allowance.
When operational revenues from auctioning cable capacity to traders fall below a specified floor level, they are topped up by consumers. Conversely, when revenues breach a cap, excess returns are passed on to consumers.
This mechanism incentivises developers to optimise their storage assets to generate the most value, as they are exposed to returns between the cap and the floor.
It also enables energy system users to share in the upside of projects and means they will not necessarily have to pay out a subsidy, depending on the economics of individual projects.
The need for more interconnectors between the UK and Europe was discussed during a Cross Channel Institute event last week, during which energy law specialist Silke Goldberg warned that time is running out to establish an EU-UK market coupling agreement to transfer energy more efficiently.
LionLink ‘a critical step’ to net zero
The UK government has also today (24 April) unveiled plans to build the world’s largest capacity interconnector between the UK and the Netherlands.
The new LionLink, which will carry 1.8GW of electricity, will be developed by National Grid Ventures and TenneT and is forecast to be operational by the early 2030s.
Responding to the announcement of the new LionLink power line, Emma Pinchbeck, Energy UK’s chief executive said: “Tapping the potential of the North Sea to generate and deliver clean energy is key to ensuring that we reach net zero in the quickest and cheapest way possible.
“The new LionLink interconnector will be a critical step in the journey to net zero, by bolstering the UK’s energy security and creating key export markets for homegrown energy sources. More interconnector capacity must go hand in hand with a relentless focus on rolling out the cheap low-carbon generation that will lower our emissions and energy bills.”