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National Grid to pay back £200m of interconnector revenue early due to energy crisis

Britain's IFA2 (pictured) interconnector is one of seven currently in operation. Image: National Grid.

Britain's IFA2 (pictured) interconnector is one of seven currently in operation. Image: National Grid.

National Grid is to pay back £200 million of interconnector revenues ahead of schedule amidst the energy crisis.

Interconnector revenues are governed by the cap and floor regime, with revenues assessed every five-years of the 25 year long licenses. At these times, top-up payments are made to interconnector licensees if revenues are lower than the floor, or the licensee makes payments to consumers if they have profited in excess of the cap.

Given the current high power price environment – with the energy price cap jumping 54% in April, significantly straining consumers across the country – National Grid requested the ability to pay back £200 million over the next two years to consumers.

Ofgem has now approved the request, and is working together with the grid operator to explore how to ensure the early payments have the most impact.

“While National Grid’s impact on customer bills is relatively small, we strive every day to keep our costs as low as possible. Given how challenging the current rise in overall energy costs is for people across the country, we want to play our part in helping reduce consumer bills,” said John Pettigrew, National Grid CEO.

“That’s why we have requested this change to our standard regulatory process and are working with Ofgem to accelerate payments over the next two years to make a difference now.”

National Grid is looking to expand Britain’s interconnector capacity, investing more than £2 billion in it, with almost 8GW of capacity expected to be operational by 2024.

Britain has seven operational interconnectors currently, which have a collective capacity of 7.4GW. These link the country to Ireland, France, Belgium, the Netherlands and Norway.

In October 2021, the world’s longest sub-sea interconnector – the North Sea Link – began operation. It connects Blyth in Northumberland and the Norwegian village of Kvilldal, near Stavanger, which in itself increased Britain’s interconnector capacity by 1,400MW.

Ofgem invited bids for new electricity interconnectors in December, announcing plans to hold a third investment round under its cap and floor revenue regime in 2022 in an effort to increase energy security in the UK.

Energy security has been of particular concern during the beginning of 2022 as power prices have hit record highs, in part due to the Russian invasion of Ukraine and the impact this has had on wholesale power markets.

In April, the price cap was increased by 54% to allow suppliers to pass on some of the increases in wholesale power costs to consumers, following 27 suppliers collapsing – as well as Bulb entering into special administration – in 2021.

The increase in bills is expected to push 6.3 million households into fuel stress, with concern growing around the forecast jump in the price cap for the winter period, which recent research from Cornwall Insight suggested would hit £2595.19.

It is amidst this crisis that Ofgem and National Grid have made the regulatory shift to enable excess revenue from interconnectors to be redistributed to consumers.

“Our regulatory approach for interconnectors not only protects the interests of consumers, but it also promotes new investment in affordable, modern energy infrastructure,” said Jonathan Brearley, Ofgem CEO.

“We’re now working at pace to ensure this money is returned to the consumer in the fastest and most impactful way.”

The move to capitalise on interconnector profits follows reports that renewable energy generators supported by the Contracts for Difference (CfD) scheme will be paying back excess revenue due to the high power prices. Analysis from the Energy and Climate Intelligence Unit in March suggested the CfD scheme will pay back £660 million between October 2021 to April 2023.

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